SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HARLEYSVILLE GROUP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
HARLEYSVILLE GROUP INC.
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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.
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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
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Notes:
Walter R. Bateman
Chairman of the Board,
[LOGO OF HARLEYSVILLE GROUP INC.] President & CEO
355 Maple Ave.
Harleysville, PA
19438-2297
March 24, 2000
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 26, 2000, at 10:00 A.M.
At the meeting, stockholders will vote on three items of business. Those
items and the vote the Board of Directors recommends are:
Item Recommended Vote
---- ----------------
1. Election of three directors FOR
2. Approval of the Long Term Incentive Plan FOR
3. Approval of the Excess Stock Purchase Plan FOR
We will also review Harleysville Group Inc.'s 1999 performance and will be
pleased to answer your questions about the Company. Enclosed with this proxy
statement are your proxy card and the 1999 Annual Report.
We look forward to seeing you on April 26, 2000. 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
Walter R. Bateman
Roger A. Brown
[LOGO OF HARLEYSVILLE GROUP INC.] Secretary
355 Maple Ave.
Harleysville, PA
19438-2297
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 26, 2000
To the Stockholders of HARLEYSVILLE GROUP INC.
The Annual Meeting of Stockholders of HARLEYSVILLE GROUP INC. will be held
at 10:00 A.M., Wednesday, April 26, 2000 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 Long Term Incentive Plan;
3. To approve the Excess Stock Purchase Plan; and
4. To transact such other business as may properly be presented.
Your Board recommends a vote to elect the nominated directors and to
approve the Long Term Incentive and Excess Stock Purchase Plans.
The Board of Directors has fixed the close of business on March 8, 2000 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 1999 Annual
Report to Stockholders are being distributed to stockholders on or about March
24, 2000.
By Order of the Board of Directors,
/s/ Roger A. Brown
Roger A. Brown
March 24, 2000
Harleysville, Pennsylvania
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 5
Item 1. Election of Directors 6
Biographies of Director Nominees and Directors Continuing in Office 6
Board and Committee Meetings 8
Compensation of Directors 9
Stock Acquisition Programs 10
Item 2. Approval of the Long Term Incentive Plan 12
Operation of the Plan 12
Federal Income Tax Consequences 13
Estimated Benefits 14
Vote Required 14
Item 3. Approval of the Excess Stock Purchase Plan 15
Operation of the Plan 15
Federal Income Tax Consequences 16
Estimated Benefits 17
Vote Required 17
OWNERSHIP OF COMMON STOCK 18
Table I - 5% Stockholders 18
Table II - Beneficial Ownership of Directors & Executive Officers 19
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE 20
Compensation Philosophy 20
Compensation Methodology 20
Chief Executive Officer Compensation 23
Internal Revenue Code Impact 24
STOCK PERFORMANCE CHART 25
SUMMARY COMPENSATION TABLE 26
OPTION GRANTS IN 1999 28
OPTION EXERCISES & YEAR-END VALUES 29
LONG TERM INCENTIVE PLAN 29
PENSION PLANS 30
TRANSACTIONS WITH HARLEYSVILLE MUTUAL 32
SECTION 16 REPORTING COMPLIANCE 33
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 26, 2000 at the
headquarters of the Company. This proxy statement has been mailed to
stockholders on March 24, 2000.
Matters to be Voted Upon
At the Annual Meeting, stockholders will vote on the election of three
directors, Michael L. Browne, Frank E. Reed and Jerry S. Rosenbloom and
approvals of the Long Term Incentive Plan and Excess 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 and 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 8, 2000 (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
.In person at the meeting, or
.By mail by completing and returning the proxy card
Vote Needed for Election of Directors and Approval of Long Term Incentive Plan
and Excess Stock Purchase Plan
The three nominees for directors receiving the highest number of votes
will be elected. The Long Term Incentive Plan and the Excess Stock Purchase
Plan will each be approved if each 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 16,352,176 shares (or
approximately 56.6%) of Harleysville Group's outstanding 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 Long Term Incentive
Plan and the Excess Stock Purchase Plan. As a result, the nominated directors
will be elected and the Long Term Incentive Plan and the Excess 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 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,
28,890,846 shares of Harleysville
1
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.
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. However, 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 Long Term Incentive Plan or
Excess Stock Purchase Plan, your shares will be voted in favor of the election
of the three nominated directors and for approval of the two Plans. 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 Long Term
Incentive Plan or Excess Stock Purchase Plan will not be voted on that item,
but such a proxy will be included as present and entitled to vote for
determining whether the item 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
In addition to Harleysville Mutual, Dimensional Fund Advisers Inc., and
Capital Group International, Inc. each own 5% or more of Harleysville Group
common stock. Please see the chart on page 17 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 title to your shares is registered
differently or your shares are in more than one type of account maintained by
ChaseMellon Shareholder Services, the Company's transfer agent. To have all
your shares voted, please sign and return all proxy cards. If you wish to have
your accounts registered in the same name(s) and address, please call
ChaseMellon Shareholder Services at 1-800-851-9677, or contact ChaseMellon
through its website: www.chasemellon.com.
Other Information
Stockholder Proposals
An eligible stockholder who wants to have a qualified proposal considered
for inclusion in the proxy statement for the 2001 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 27, 2000. 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
2
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 2001 Annual
Meeting of Stockholders must provide notice of the matter to the Secretary of
the Company by February 6, 2001, or the persons authorized under management
proxies will have discretionary authority to vote and act according to their
best judgment on said matter.
Expenses of Solicitation
Harleysville Group pays the cost of preparing, assembling and mailing this
proxy-soliciting material. In addition to the use of the mail, proxies may be
solicited personally, by telephone or other electronic means by Harleysville
Group officers and employees without 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 1999 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.
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. 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 two Boards 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.
Qualifications of Directors
The Board is responsible for identifying candidates to be directors. The
Nominating Committee, with input from the Chairman and the Chief Executive
Officer, screens director candidates. In overseeing candidates for election,
the Committee, and subsequently the Board, looks for those with the skills,
time and motivation to serve as a director. The Committee seeks individuals
with integrity, mature and independent judgment, analytical
3
ability, objective and sound business judgment, familiarity with issues
important to the Company, absence of conflicts of interest, ability to work
with others and social consciousness, among other characteristics. There are
currently no relationships between a non-employee director and Harleysville
Group or any other entity that would be construed as compromising the
independence of any director.
Director Retirement
It is Board policy that an employee director should resign as a director
upon resignation or retirement from employment with Harleysville Group, unless
the Nominating Committee requests 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 is expected to have a significant investment in the
Company's common stock. To assist in this goal, the Company, with stockholder
approval, grants stock options and offers a stock purchase plan to directors.
(See pages 10 and 11 for details).
Leadership
The Board retains the right to exercise the 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.
Performance Evaluations
Each year the non-employee directors of the Company meet to 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 non-employee directors. The non-employee
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.
In addition, each year the Nominating Committee conducts an assessment of
the Board's effectiveness and makes a report on that subject to the Board,
along with any recommendations to modify the Company's Corporate Governance
Practices.
Director Compensation
Annually, Harleysville Group's management presents a report to the
Compensation and Personnel Development Committee that compares the compensation
of Harleysville Group's Board to compensation of directors at peer companies,
which are benchmarks for the Company's financial performance.
4
Board Agendas and Meetings
The Chairman and Chief Executive Officer establishes the agendas for Board
meetings but each director is free to suggest items for the agenda, and each
director is free to raise subjects at any Board meeting that are not on the
agenda for that meeting. The Executive Committee of 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 Outside Directors
The non-employee directors meet in executive sessions 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.
Audit Committee
The Audit Committee, which adopted a charter in 1999, 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 prescribed by the Nasdaq Stock
Market.
Audit Committee Report
Prior to the release of the Company's financial statements for 1999, which
are contained in the Company's Annual Report, the Audit Committee reviewed and
discussed the audited financial statements with management. The Committee also
discussed with KPMG LLP, the Company's independent auditors, the matters
required to be discussed by Statement on Auditing Standard No. 61. The
Committee has received from KPMG the written disclosures and the letter
required by Independence Standards Board Standard No. 1 and has discussed
KPMG's independence with KPMG. Based on the review of the financial statements
and discussions with management and KPMG as described above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for 1999.
Joseph E. McMenamin, Chairman
Lowell R. Beck
Michael L. Browne
5
Item 1. Election of Directors
Harleysville Group's Board of Directors currently consists of 9 directors,
but after the retirement of William E. Strasburg as of the Annual Meeting in
April 2000 will consist of 8 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 2001, 2000 and 2002, respectively.
Three Class B directors are to be elected at the 2000 Annual Meeting. The
nominees are:
Name Age Director Since Year Term will
Expire if Elected
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Michael L. Browne 53 1986 2003
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Frank E. Reed 65 1986 2003
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Jerry S. Rosenbloom 60 1999 2003
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
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Lowell R. Beck A 65 1996 2001
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Robert D. Buzzell A 66 1992 2001
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Joseph E. McMenamin A 68 1999 2001
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Walter R. Bateman C 52 1992 2002
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Mirian M. Graddick C 45 2000 2002
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 Reed, Smith, Shaw &
McClay in Philadelphia, Pennsylvania, as a partner. He has been a managing
partner since January 1993.
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.
6
Mr. Reed retired from that position in March 1995. Mr. Reed was Chairman of the
Board and a director of 360(degrees) 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 Mutual Risk
Management, Ltd., Terra Nova Holdings, Ltd., and Annuity and Life Re and a
trustee of Century Shares Trust (a mutual fund).
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.
Dr. Buzzell was elected a director of Harleysville Group in 1992 and
Harleysville Mutual in 1991. Dr. Buzzell is currently Distinguished Visiting
Professor of Marketing at Georgetown University where he began teaching in
1998. 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.
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. He served as a Board member of the Keystone Insurance
Companies until December 1998 when he joined the Harleysville boards.
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. 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.
Ms. Graddick was elected a director of Harleysville Group in February
2000. She is Executive Vice President of Human Resources of the AT&T Corp.,
Basking Ridge, New Jersey, a position she assumed in March 1999. Previously,
she had been Vice President with various Human Resource responsibilities since
1994. Prior to that, she held various executive positions with AT&T where she
commenced working in 1981.
7
Board and Committee Meetings
The Board met seven times in 1999. 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.
1999 BOARD COMMITTEE MEMBERS & MEETINGS
Name Audit Compensation Coordinating Executive Finance Nominating
&
Personnel
Development
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Walter R. Bateman X* X*
- ---------------------------------------------------------------------------------------
Lowell R. Beck X X X
- ---------------------------------------------------------------------------------------
Michael L. Browne X X X X X
- ---------------------------------------------------------------------------------------
Robert D. Buzzell X X*
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Joseph E. McMenamin X* X
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Frank E. Reed X* X X
- ---------------------------------------------------------------------------------------
Jerry S. Rosenbloom X X
- ---------------------------------------------------------------------------------------
William E. Strasburg X* X
- ---------------------------------------------------------------------------------------
Number of Meetings in
1999 4 9 1 2 6 3
*Denotes Chairperson of the Committee.
The Audit Committee:
. reviews and discusses the audited financial statements with management
and the Company's independent auditors and reports to the Board on
those statements;
. reviews the performance and independence of Harleysville Group's
independent auditors;
. makes an annual recommendation to the Board of Directors with respect
to the appointment of such auditing firm;
. approves the general nature of the services to be performed by such
auditing firm and solicits and reviews the auditing firm's
recommendations;
. consults with Harleysville Group's internal audit department; and
. reviews the relationships among that department, Harleysville Group's
management and Harleysville Group's independent auditors.
8
The Compensation and Personnel Development Committee:
. reviews and determines compensation policies;
. reviews and recommends executive compensation changes;
. establishes awards under and determines participants in the Equity
Incentive Plan, the Senior Management Incentive Bonus Plan, and the
Long Term Incentive Plan; and
. oversees Harleysville Group's management development and succession
program.
The Coordinating Committee:
. reviews material transactions between Harleysville Group and
Harleysville Mutual; and
. is currently composed of two individuals who are solely Harleysville
Group directors and three individuals who are solely Harleysville
Mutual directors plus a chairperson who is on the board of both
companies. No material inter-company transaction can occur until both
a majority of Harleysville Group directors and a majority of
Harleysville Mutual directors on the Committee approve a transaction.
The decisions of the Coordinating Committee are binding on
Harleysville Group and Harleysville Mutual.
The Executive Committee:
. 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.
The Finance Committee:
. establishes overall investment policies and guidelines; and
. reviews and approves investments made by Harleysville Group.
The Nominating Committee:
. considers and recommends nominees to the Board for election as a
director;
. assesses the effectiveness of the Board and corporate governance
practices; and
. will consider recommendations for nominees from stockholders, who
submit such recommendations in writing to the Secretary of
Harleysville Group.
Compensation of Directors
Employee directors receive no additional compensation for serving on the
Board or a Committee.
9
Non-employee directors receive the following fees:
Type of Compensation As of April 1999 As of April 2000
- -------------------------------------------------------------------------------
Annual Retainer $21,000 $21,000
- -------------------------------------------------------------------------------
Board Attendance Fee per Meeting $ 1,250 $ 1,250
- -------------------------------------------------------------------------------
Committee Attendance Fee per Meeting $ 1,000 $ 1,000
- -------------------------------------------------------------------------------
Attendance Fee for Additional Meetings per
Day $ 650 $ 650
- -------------------------------------------------------------------------------
Annual Retainer for Committee Chair $ 3,500 $ 4,000
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 case, the
retainer or attendance fee is allocated equally to Harleysville Group and
Harleysville Mutual.
Stock Acquisition Programs
Directors' Stock Option Programs
In 1990, Harleysville Group adopted the 1990 Directors' Stock Option
Program (the "1990 Program"), which provided for the issuance of an aggregate
of 94,500 shares of common stock, subject to adjustment for stock splits or
other changes. Under the 1990 Program, non-qualified stock options to purchase
6,300 shares were awarded to all non-employee directors of Harleysville Group
and Harleysville Mutual during the period 1990 through May 1994. The options
vested and became exercisable at the rate of 20% per year of active Board
service. The option price per share is 100% of the fair market value of a share
of common stock on the date of grant and the term of each option is ten years.
The 1990 Program is administered by the Compensation and Personnel Development
Committee of the Board of Directors of Harleysville Group. The Committee had no
discretion with regard to the eligibility or selection of directors to receive
options under the 1990 Program, the number of shares of stock subject to such
options under the 1990 Program, or the purchase price thereunder. On February
1, 2000, there were 18,900 shares subject to such options outstanding under
this program and the range of per share exercise prices was $7.50 to $14.00.
The 1990 Program does not provide for stock appreciation rights.
In 1994, Harleysville Group adopted the 1995 Directors' Stock Option
Program (the "1995 Program"), which provided for the issuance of an aggregate
of 130,000 shares of common stock subject to adjustment for stock splits or
other changes. Except for options already granted under the 1990 Program, the
1995 Program superseded the 1990 Program. Under the 1995 Program, on May 24,
1995, each non-employee director of Harleysville Group and Harleysville Mutual
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 on May 24, 1995 at
the then fair market value and option price of $12.50. A newly elected non-
employee director or an employee director who became a non-employee director of
Harleysville Group or Harleysville Mutual would also receive 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. The total options
granted to date are 122,440 with 88,740 still outstanding. The options vest at
the rate of 20% per year of active Board service with the first 20% vesting as
of the date of grant, although no option is exercisable
10
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. 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 an aggregate
of 123,500 shares of common stock subject to adjustment for stock splits or
other changes. Except for options already granted under the 1995 Program, the
Y2000 Program will supersede 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 current fair market
value. No options have been granted to date with all 123,500 options still
outstanding. The options will vest immediately, although no option is
exercisable until six months after the date of grant. The term of each option
will be ten years. The Y2000 Program will be 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
were awarded to eight directors who possess the right to vote the shares and
receive dividends thereon. Concurrently, the Board determined that it would no
longer elect any current or future director as a Director Emeritus. Formerly, a
director of Harleysville Group, upon ceasing to be a Board member as of the
annual meeting following attainment of age 72, in accordance with the by-laws,
was eligible to be elected a Director Emeritus for up to three one-year terms.
Director Emeriti were paid a retainer and attendance fees for attendance at the
Board meetings with re-election being contingent upon satisfactory attendance
at the Board meetings. Directors' current holdings of restricted stock are set
forth on the chart on page 19.
Directors' Stock Purchase Plan
In 1996, Harleysville Group adopted the Directors' Stock Purchase Plan,
which permits non-employee directors of Harleysville Group and Harleysville
Mutual to purchase Company 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. 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 seven
subscription periods since its inception, a total of 58,358 shares have been
purchased by directors. The Plan provides for up to 20 subscription periods.
11
Item 2. Approval of the Long Term Incentive Plan
On November 17, 1999, the Board of Directors adopted, subject to
stockholder approval at the 2000 Annual Meeting, a revised Long Term Incentive
Plan for senior officers of the Company. The purpose of the revision was to add
a stock component to the existing cash award to better align senior officers'
efforts with stockholders by providing that a significant portion of any Long
Term Incentive Plan award opportunity earned would be in Company stock. It is
intended that this Plan satisfy both the requirements under Section 162(m) of
the Internal Revenue Code of 1986 and Section 16(b) of the Securities Exchange
Act of 1934.
Operation of the Plan
The Plan will have rolling three-year performance periods commencing each
January 1 and ending on December 31 of the third year. The senior officers
selected to participate in the Plan by the Compensation and Personnel
Development Committee of the Board of Directors will receive individual award
opportunities based upon the Company's Total Shareholder Return ("TSR") over
that three-year period relative to a peer group of no less than 50 companies
that are primarily or wholly in the property/casualty industry. The size of the
award that each senior officer receives will depend upon a relative ranking of
TSR within that peer group. The target levels for the participants shall be
determined generally by the Committee for each three-year period prior to the
beginning of the period but in no event later than March 30 of the first year
of each three-year period.
For each three-year period the Committee shall determine a target award
for each participant. The target award will have both a cash component and a
stock component as determined for each participant by the Committee. No award
will be paid if the TSR is lower than the 35th percentile; 50% of the Target
Award shall be paid if TSR is at the 35th percentile; 100% of the Target Award
will be paid if the TSR is at the 50th percentile; and 150% of the Target Award
shall be paid if the TSR is at the 80th percentile or above. To the extent that
the TSR falls between the specified figures the Target Award shall be
interpolated.
The maximum cash amount paid to a participant for any three-year
performance period shall not be more than $750,000, and the maximum shares of
stock issued to any participant for any three-year performance period shall not
be more than 100,000 shares.
At the end of the three-year period and after determination of the
relative peer group ranking, but prior to payment of the awards, the Committee
shall review the TSR for the three-year period just completed and certify in
writing or in the minutes of the Committee meeting that the Company has
attained a TSR level entitling participants to a payout.
At the end of each three-year period the Committee may, for good reason,
prior to payment, increase or decrease the payouts by 10% of the Target Award,
provided that the maximum award payout shall never exceed 150% of the target
award. The Committee can also make an award of 10% of the Target Award if no
award is otherwise payable. Nevertheless, this discretion may not apply to any
award provided to the Chief Executive Officer or any other officer to the
extent it would adversely impact the tax status of the Plan or the deduction
for the Company.
After the amount of stock award is determined and any discretionary
adjustment has been made, the amount of stock delivered to a participant shall
be increased by imputing
12
dividends paid by the Company each quarter during the three-year period to such
number of shares with the immediate reinvestment of such dividends into
additional shares.
The payment of the cash component of the award shall be made as soon
practicable after the Committee's certification for each three-year period,
although a participant may elect to defer receipt of the award pursuant to the
Company's Non-qualified Deferred Compensation Plan in compliance with Internal
Revenue Service requirements. Payment of shares of stock so earned shall also
be made as soon as practicable after the Committee certification. A recipient
may satisfy his or her tax withholding on the shares so earned by having shares
withheld equal in fair market value to the withholding obligation or delivering
already owned shares of Company stock equal in fair market value to the amount
sought to be withheld or any combination of the two, so long as there is no
accounting charge to the Company's earnings as a result. Alternatively, in
conformance with IRS requirements, a participant may elect to defer delivery of
shares of stock for either three, five or ten years or until termination of
employment. If a participant elects to defer receipt of shares, there shall be
no imputed dividends during the period of deferral nor shall a participant
exercise any other rights of ownership.
Upon termination of employment of a participant for any reason other than
retirement, death or disability, all awards of such participant shall
immediately expire. If a participant retires, dies or becomes disabled, the
award shall be payable at the end of the performance period on a pro rata
month-completed basis.
The shares available under the Long Term Incentive Plan may be either
authorized but unissued shares or treasury shares reacquired by the Company.
Distribution of shares will be made only after the registration of such shares
with the Securities and Exchange Commission or pursuant to exemptions from
registration under applicable Securities and Exchange Commission rules and
regulations.
The Long Term Incentive Plan will be administered by the Committee, which
will have general authority to interpret provisions of the Long Term Incentive
Plan and enact such rules and regulations that it shall deem desirable for the
administration of the Plan; provided however, the Committee shall have no
discretion regarding the number of shares made available under this Plan. The
Board may amend the Plan for any reason, except that if stockholder approval is
required by federal or state laws or regulations or by the rules and
regulations of a national securities exchange or the Nasdaq Stock Market, the
amendment will not be effective until such approval.
In the event of a change in control of the Company or its Parent, the Plan
shall terminate and all Target Awards shall be paid out immediately on a pro
rata month-completed basis.
The Long Term Incentive Plan provides for adjustments in the number of
shares subject to target awards in the event of stock dividends, stock splits,
recapitalizations, consolidations, combination of shares or similar
occurrences.
Delivery of shares will be in book entry form, with no further
restrictions on the disposition of the stock subject, of course, to applicable
restrictions imposed by the Securities and Exchange Commission on sales of
stock by insiders and executive officers.
Federal Income Tax Consequences
A participant who receives a payout under this Plan will immediately
realize ordinary income and Harleysville Group will be entitled to a deduction
for federal income tax
13
purposes at the time of receipt in the same amount. The amount of income
realized and the amount of the deduction will be the sum of the cash component
of the award and the total fair market value of the stock so delivered.
If a participant disposes of shares of Company common stock acquired
under this Plan, any amount received in excess of the value of the shares of
common stock on which the participant has been previously taxed will be
treated as long-term or short-term capital gain depending upon the holding
period of the shares. If the amount received is less than that value, the loss
will be treated as long-term or short-term capital loss, depending upon the
holding period of the shares.
To the extent that any receipt of cash or shares of stock is deferred,
then there will be no income tax consequences to the participant or the
Company until the cash or the shares are paid.
If approved by the stockholders, these revisions will apply to a three-
year plan period commencing January 1, 2000 and to the last three years of the
four-year period that commenced January 1, 1999 under the then current plan
formula.
Estimated Benefits
The following table summarizes the estimated benefits available to the
current Named Executive Officers and the other identified groups under the
Long Term Incentive Plan Award Opportunity Targets for the three-year plan
period 2000-2003.
Name and Position Cash Target Share Target
- ----------------------------------------------------------------------
Walter R. Bateman
Chairman, President & CEO $224,640 54,299
- ----------------------------------------------------------------------
Mark R. Cummins
Executive Vice President $ 95,305 5,733
- ----------------------------------------------------------------------
Bruce J. Magee
Senior Vice President $ 74,165 3,718
- ----------------------------------------------------------------------
E. Wayne Ratz
Senior Vice President $ 28,785 4,713
- ----------------------------------------------------------------------
Dennis M. Hyland
Senior Vice President $ 28,185 4,615
- ----------------------------------------------------------------------
Executive Group (9) $688,820 90,655
- ----------------------------------------------------------------------
Non-Executive Directors $ 0 0
- ----------------------------------------------------------------------
Non-Executive Officer Employees $ 0 0
Vote Required
The affirmative vote of a majority of the shares of common stock present
and entitled to vote at the Annual Meeting is required for the adoption of the
Long Term Incentive Plan.
Your Board of Directors recommends a vote "FOR" the Long Term Incentive
Plan.
14
Item 3. Approval of the Excess Stock Purchase Plan
On November 17, 1999, the Board of Directors adopted, subject to
stockholder approval at the 2000 Annual Meeting, an Excess Stock Purchase Plan
for all employees of the Company whose purchases of stock under the Employee
Stock Purchase Plan are capped as a result of the purchase limitations found in
Section 423 of the Internal Revenue Code which governs the operation of the
Employee Stock Purchase Plan.
Section 423 of the Code places a limitation on purchases under the
Employee Stock Purchase Plan of $25,000 in fair market value per year. This
limit has not increased since 1964. Harleysville Group has had an Employee
Stock Purchase Plan in effect since it went public in 1986. It is a requirement
of Harleysville Group that officers at and above a certain paygrade own a
certain amount of Harleysville Group stock. Salaries have increased over the
years but the $25,000 fair market value limitation found in Section 423 has
not, and the ability of some officers to make purchases under the Plan to meet
their ownership goals is limited. Accordingly, the Board found it reasonable
and appropriate to approve an Excess Stock Purchase Plan to enable current and
future officers who are impacted by the limitations to purchase the shares they
need to meet Company ownership requirements. At present approximately fifteen
employees would be entitled to participate.
Operation of the Plan
The Plan is designed to run in tandem with the Employee Stock Purchase
Plan. As a result, employees may enroll in the Employee Stock Purchase Plan up
to the Plan's maximum purchase percentage of 15% of base salary. At the end of
each subscription period, purchases will first be made under the Employee Stock
Purchase Plan for an employee. However, to the extent that an employee is
prevented from purchasing the amount sought by the imposition of the $25,000
fair market value cap for one year, the amounts withheld from an employee's pay
will be used to purchase shares under the Excess Stock Purchase Plan at the
same price as applicable to the Employee Stock Purchase Plan. That price is the
lesser of 85% of the fair market value of a share of stock 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 but in
no event less than $1.00 per share, the par value of a share of Company common
stock. The fair market value of the stock will be the closing price of a share
on the Nasdaq Market System for the applicable date.
As with the Employee Stock Purchase Plan, shares will be issued in book
entry form. This means that at the end of the subscription period the employee
will be credited with the number of shares including fractional shares produced
by dividing the amount contributed during the subscription period by the
purchase price. If an employee chooses, he or she may withdraw contributions to
the Excess Stock Purchase Plan or the Employee Stock Purchase 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.
The shares available under the Excess Stock Purchase Plan may be either
authorized but unissued shares or treasury shares reacquired by the Company.
Distribution of shares will be made only after the registration of such shares
with the Securities and Exchange Commission or pursuant to exemptions from
registration under applicable Securities and Exchange Commission rules and
regulations.
15
The proceeds received by Harleysville Group from the purchase of shares
will be added to the general funds of the Company.
The Excess Stock Purchase Plan will be administered by the Compensation
and Personnel Development Committee of the Board of Directors of Harleysville
Group (see Page 8 for the current members of that Committee). The Committee
will have the general authority to interpret provisions of the Excess Stock
Purchase Plan and enact such rules and regulations that it shall deem desirable
for the administration of the Plan. The Committee will have no discretion
regarding the number of shares made available to this Plan or the purchase
price for the shares of stock. The Board may amend the Plan for any reason,
except that if stockholder approval is required by federal or state laws or
regulations or by the rules and regulations of a national securities exchange
or the Nasdaq stock market, the amendment will not be effective until such
approval.
The Excess Stock Purchase Plan provides for adjustments in the number of
shares allocated to it because of stock split, stock dividend, merger,
consolidation, combination of shares or similar occurrence.
Federal Income Tax Consequences
Unlike shares purchased under the Employee Stock Purchase Plan, an
employee who purchases shares under the Excess Stock Purchase Plan will
immediately realize income and the Company will be entitled to a deduction for
federal income tax purposes at the time of the purchase. The amount of income
realized and the amount of the deduction will be the difference between the
purchase price paid by an employee and the fair market value of a share of
stock on the day of purchase multiplied by the number of shares so purchased.
The Company will be entitled to a deduction equal to the amount that the
employee is required to treat as ordinary income.
If an employee disposes of shares of common stock acquired under the
Excess Stock Purchase Plan, any amount received in excess of the value of the
shares of common stock on which the employee has been previously taxed will be
treated as long-term or short-term capital gain depending upon the holding
period of the shares. If the amount received is less than that value, the loss
will be treated as long-term or short-term capital loss, depending upon the
holding period of the shares.
16
Estimated Benefits
The following table summarizes the estimated benefits that would have been
available to the current Named Executive Officers and the other identified
groups under the Excess Stock Purchase Plan if the Plan had existed in 1999.
Name and Position Total Value Number of
Shares
- -----------------------------------------------------------------------------------------
Walter R. Bateman
Chairman, President & CEO $14,262 2,671
- -----------------------------------------------------------------------------------------
Mark R. Cummins
Executive Vice President $ 5,840 992
- -----------------------------------------------------------------------------------------
Bruce J. Magee
Senior Vice President $ 3,068 521
- -----------------------------------------------------------------------------------------
E. Wayne Ratz
Senior Vice President $ 2,363 401
- -----------------------------------------------------------------------------------------
Dennis M. Hyland
Senior Vice President $ 1,921 326
- -----------------------------------------------------------------------------------------
Executive Group (10) $31,624 5,618
- -----------------------------------------------------------------------------------------
Non-Executive Directors $ 0 0
- -----------------------------------------------------------------------------------------
Non-Executive Officer Employees $21,161 919
Vote Required
The affirmative vote of a majority of the shares of common stock present
and entitled to vote at the Annual Meeting is required for the adoption of the
Excess Stock Purchase Plan.
Your Board of Directors recommends a vote "FOR" the Excess Stock Purchase
Plan.
17
OWNERSHIP OF COMMON STOCK
Table I - 5% Stockholders
Those persons owning more than 5% of Harleysville Group stock as of
December 31, 1999 are set forth below. On that date there were 28,812,086
shares of Harleysville Group stock held by stockholders.
Name and Address Voting Authority Dispositive Total Amount Percent
Authority of Beneficial of
-------------------------------- Ownership Class
Sole Shared Sole Shared
- -------------------------------------------------------------------------------------
Harleysville Mutual
Insurance Company
Harleysville, PA
19438 16,295,951 16,295,951 16,295,951 56.6%
- -------------------------------------------------------------------------------------
Dimensional Fund
Advisers, Inc.
1299 Ocean Ave.
Santa Monica, CA
90401 1,515,644 1,515,644 1,515,644 5.2%
- -------------------------------------------------------------------------------------
Capital Group
International, Inc.
11100 Santa Monica
Blvd., Suite 1500
Los Angeles, CA
90025 1,033,200 1,461,200 1,461,200 5.0%
18
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), and all executive officers as a group as of February 15,
2000. 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 Stock, please see the Directors' Equity Award
Program on page 11. On February 15, 2000, there were 28,939,921 shares of
Harleysville Group stock held by stockholders.
Name Aggregate Right to Number of Percent of
Number Acquire Shares of Shares
Of Shares w/in 60 Restricted (less than
Beneficially days Stock Owned 1% unless
Owned (number of indicated)
shares)
- ---------------------------------------------------------------------------
Walter R. Bateman 204,647 142,336 5,646
- ---------------------------------------------------------------------------
Lowell R. Beck 12,951 8,000 0
- ---------------------------------------------------------------------------
Michael L. Browne 25,344 16,300 5,646
- ---------------------------------------------------------------------------
Robert D. Buzzell 23,799 15,040 5,646
- ---------------------------------------------------------------------------
Mirian M. Graddick 0 0 0
- ---------------------------------------------------------------------------
Joseph E. McMenamin 4,000 4,000 0
- ---------------------------------------------------------------------------
Frank E. Reed 29,184 16,300 5,646
- ---------------------------------------------------------------------------
Jerry S. Rosenbloom 30,261 10,000 5,646
- ---------------------------------------------------------------------------
William E. Strasburg 35,017 10,000 5,646
- ---------------------------------------------------------------------------
Mark R. Cummins 74,652 66,717 0
- ---------------------------------------------------------------------------
Bruce J. Magee 66,911 52,505 0
- ---------------------------------------------------------------------------
E. Wayne Ratz 20,705 17,921 0
- ---------------------------------------------------------------------------
Dennis M. Hyland 60,641 50,559 0
- ---------------------------------------------------------------------------
All directors & executive
officers as a group (19) 748,672 535,440 33,876 3%
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.
19
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 outside
directors as defined in section 162(m) of the Internal Revenue Code, has
established 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 must:
. Attract, retain and motivate talented executives;
. Reward competencies and behaviors critical to the Company's success;
. 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;
. 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 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. Prior to 2000 in determining total compensation, Harleysville
Group targeted fixed compensation at the market median, while total target
compensation was targeted at the midpoint of the second quartile. For 2000, the
market was reviewed and total target compensation was retargeted at the 50th
percentile. 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 order that compensation policies benefit all companies in the
organization, a Harleysville Mutual-only non-employee director participates in
the determination of compensation philosophy, methodology and goals applicable
to executives. All decisions of the Compensation Committee regarding fixed and
variable compensation are currently subject to review by the Board of
Directors.
20
The individual components of total compensation and how they function are
described below:
. 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 then developed for that paygrade. An
individual officer's salary within his or her paygrade is determined each
November for the following year and is based on a combination of his or her
individual performance and that of the Company, 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 in terms of comparison of return on equity, combined ratio
and premium growth. The term combined ratio is a standard term of measurement
in the property/casualty insurance industry and 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 figure then is expressed as a percentage.
. 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 1999 Plan, the goals
included: combined ratio goals for the entire Harleysville organization's
property/casualty results; a return on equity goal; a premium growth goal; and
service and processing timeliness goals. The weightings for each factor were:
combined ratio 30%; return on equity 30%; premium growth 25%; and service and
processing goals 15%. The Plan is designed to pay a target award at a level of
15% to 30% of annual salary depending on position when the target goals are
achieved. Payouts may be as large as 200% of the target award if actual
performance exceeds 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. There is no payout under the Plan unless the combined after-tax
net income as reported on the Combined Annual Statement of Harleysville Mutual
Insurance Company and its affiliated property and casualty insurers plus after-
tax net income resulting to Harleysville Group from management agreements is at
least 2% of the combined net earned premium as shown on such statement. The
Combined Annual Statement is a financial statement required to be filed with
state insurance regulatory authorities. It includes financial information on a
combined basis for all property/casualty insurance companies owned by
Harleysville Group and Harleysville Mutual. The payouts for 1997, 1998 and 1999
reflect that all the target goals were not fully attained in those years. For
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 goals and the weightings for each are 10% for combined
ratio; 30% for return on equity; 50% for equity investment performance; and 10%
for fixed income investment performance.
21
. Long Term Incentive Compensation
The Company also established a Long Term Incentive Plan designed primarily
to reward those senior executive officers of Harleysville Group involved in
establishing the Company's strategy for the attainment of long term return on
equity goals. Since the Plan's inception in 1988 and up to and including the
Plan period beginning in 1999, target goals have been set each year for the
next four-year period. Awards are 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 are designed to
range from 15% to 45% of a participant's salary depending upon officer level. A
target amount is payable if Harleysville Group's average ROE exceeds certain
levels of targeted ROE. There is a maximum payment of 150% of target award if
Harleysville Group's ROE exceeds certain higher levels of targeted ROE. If ROE
falls between the target level and the maximum level, then the amount of the
award is prorated accordingly. Once an ROE of 8% is achieved, an additional
incentive award based on direct written premium growth takes effect. If less
than the targeted level of ROE is reached, a reduced percentage of the target
award may be granted. In the event that ROE falls below a stated level, a
negative percentage of the target award will be assessed, and previously
credited awards will be proportionately reduced. Under the terms of the Long
Term Incentive Plan, the Compensation Committee retains 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, are paid in cash at the end of the four-year performance period. Cash
payments made under awards for the four-year periods 1994-1997, 1995-1998 and
1996-1999 are reported in the Summary Compensation Table on page 26 under the
years 1997, 1998 and 1999 respectively, although paid in the following year.
For the period beginning in 1999, the target ROE goal is 12% per year, and, if
ROE is 8% or greater per year, an additional incentive may be paid if direct
written premium growth is at least 5% in that year. The target for the final
three years will change however if the revised Long Term Incentive Plan is
approved by the stockholders. The other Plan periods commenced in 1997 and 1998
will not be impacted by the revision to the Long Term Incentive Plan. The size
of the award opportunity is determined for the Chief Executive Officer
specifically and executive officers generally based on the same factors
referenced under Annual Incentive Compensation above. The actual payout under
the Plan for the four-year period ending in 1999 is 115% of target for Mr.
Bateman and the other Named Executive Officers who participate. This payout
level was based on the ROE being higher than the target return for two of the
four years, i.e., 1997 and 1998. See the chart on page 29 for further
information on payouts under this Plan. In 1999, the Committee, with the
assistance of an outside compensation and benefits consulting firm, recommended
to the Board, which so approved, a revised Plan that includes a stock component
and bases the award solely on relative total shareholder return compared to
other property/casualty industry stocks. See Page 12 for a full description of
this Plan which must be approved by shareholders.
. 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.
22
Because stock option grants are a component of a compensation target, these
awards do not take into account options already held by the officer. Awards are
based on an objective formula that seeks to achieve, in combination with the
other components of compensation, 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.
Additionally, in 1999, because of the volatility of the stock market, grants
were kept at the same level as in 1998 to maintain a competitive compensation
target. Based upon the recommendation of the CEO, an officer may not receive a
grant award in any one year or may receive a lesser grant if that officer's
performance for the prior year does not meet expectations. However, in order to
receive stock options at a level necessary to keep total compensation at the
target level, executive officers above a certain level, including Mr. Bateman
and all Named Executive Officers, must own an annually increasing number of
shares of Harleysville Group stock, which for Mr. Bateman and the Named
Executive Officers annually is the number of shares equal in value to 10% of a
figure equal to 90% of the salary grade midpoint for the Named Executive
Officer. In 1999, all such officers owned at least the required minimum number
of shares. The stock option grants to the Named Executive Officers in 1999 are
set out on the Summary Compensation Table on page 26 and the Option Grant Table
on page 28. All stock options granted under the Equity Incentive Plan in 1999,
as well as in 1998 and 1997, 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 2 years
after retirement and the options granted May 1997 and after within 5 years
after retirement if the options do not otherwise expire. 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 repriced stock options and has no current intention to do so.
Chief Executive Officer Compensation
Mr. Bateman's compensation for 1999 as set forth in the Summary
Compensation Table on page 26 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.
Mr. Bateman's base salary paid in 1999 was determined in November 1998
based upon a review of Mr. Bateman's and the Company's results in 1998. All the
key financial indicators were positive in 1998. Direct written premiums
increased 11.2% with total revenues increasing 7.6%, resulting in a 17.1% gain
in net income. The combined ratio decreased 0.3 points to 103.2% while ROE
increased to 14.8%, 0.4 points higher than
23
1997. Diluted operating earnings increased from $1.86 per share in 1997 to
$2.15 per share in 1998. Stockholders equity increased from $446.5 million to
$529.7 million, with book value increasing from $15.49 to $18.17 per share. The
total return on Company stock was 9.8%. On the qualitative side, the
Compensation Committee recognized Mr. Bateman's continued efforts in reducing
exposure to weather catastrophes, progress in the information technology area
and efforts in the market development area.
Mr. Bateman's annual incentive compensation plan payout of $128,267 for
1999 was based on a formula that reflected attainment of 46.5% of the ROE award
goal; 200% of the premium growth award goal; 85% of the service award goals;
and 40% of the combined ratio award goal. Likewise, the payout of $192,752 for
the long term incentive plan for the period 1996 to 1999 was based on the
attainment of higher than goal ROE targets in 1997 and 1998. Finally, the award
of stock options in May 1999 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 1999
and it is not expected to have any impact on the Company in 2000 inasmuch as
the compensation levels other than from stock option exercises are below the $1
million figure, and any income from stock option exercises is fully deductible
under the current requirements of Section 162(m). Upon approval by
stockholders, the revised Long Term Incentive Plan payouts for the periods
2000-2002 and after will also satisfy the requirements of Section 162(m).
Submitted by the Compensation & Personnel Development Committee of the Board of
Directors:
William E. Strasburg, Chairperson
Michael L. Browne
Robert D. Buzzell
Jerry S. Rosenbloom
24
STOCK PERFORMANCE CHART
The following graph shows changes over the past 5-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.
[GRAPH]
Comparison of 5-Year Cumulative Stockholder Return
YEARS Harleysville Peer
Group NASDAQ Group
------------------------------------------------------
1994 100 100 100
1995 137.09 141.34 140.04
1996 133.01 173.89 153.45
1997 214.15 213.07 232.11
1998 235.29 300.25 198.11
1999 133.70 542.43 149.24
The year-end values of each investment shown in the preceding graph is
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 NASDAQ
and the Peer Group index includes 72 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.
25
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, 1999 Awards Payouts
---------------------------------------------------------------
Salary Bonus Securities Long-
Underlying Term
Stock Options Incentive
(# of shares) Payouts
- ----------------------------------------------------------------------------------------
Walter R. Bateman 1999 $482,300 $128,267 37,648 $192,752 $28,938
Chairman, President & 1998 $414,600 $123,748 32,736 $227,159 $24,876
Chief Executive Officer 1997 $389,300 $ 96,728 32,736 $160,059 $22,858
- ----------------------------------------------------------------------------------------
Mark R. Cummins 1999 $263,100 $ 53,145 14,038 $ 61,019 $22,776
Executive Vice 1998 $239,338 $ 51,326 14,038 $ 71,897 $14,360
President, Chief 1997 $221,900 $ 36,872 14,038 $ 48,433 $13,314
Investment Officer &
Treasurer
- ----------------------------------------------------------------------------------------
Bruce J. Magee 1999 $204,700 $ 36,949 12,205 $ 47,626 $12,282
Senior Vice President & 1998 $183,600 $ 35,678 10,614 $ 54,340 $11,016
Chief Financial Officer 1997 $172,400 $ 27,885 10,614 $ 36,665 $10,326
- ----------------------------------------------------------------------------------------
E. Wayne Ratz 1999 $185,400 $ 32,162 10,614 0 $11,124
Senior Vice President & 1998 $174,900 $ 35,678 10,614 0 $10,494
Chief Information 1997 $134,260 $ 22,698 12,614 0 $24,985
Officer
- ----------------------------------------------------------------------------------------
Dennis M. Hyland 1999 $181,500 $ 32,162 10,614 0 $10,890
Senior Vice President 1998 $159,857 $ 33,036 9,230 0 $ 9,568
Home Office Operations 1997 $145,300 $ 24,248 9,230 0 $ 8,717
Cash bonuses under the Senior Management Incentive Bonus Plan for services
rendered in fiscal years 1999, 1998, and 1997, have been listed in the year
earned, but were actually paid in the following year. Cash bonuses under the
Long Term Incentive Plan for services rendered in fiscal years,1994-1997, 1995-
1998 and 1996-1999 have been listed in 1997, 1998 and 1999 respectively,
although paid in the subsequent year.
The terms of stock options granted in fiscal years 1997, 1998 and 1999 are
described in the Report of the Compensation and Personnel Development Committee
beginning on page 20.
Executive officers are eligible to participate in a tax-qualified Extra
Compensation Plan (a 401(k) plan) and an Unqualified Match Program ("Excess
Match") for executives whose benefits under the Extra Compensation Plan are
affected by participation limits imposed on higher-paid individuals by federal
tax law. Provided net income as a percentage of premium earned meets or exceeds
prescribed limits set by the Board of Directors each
26
year, there is a 25%, 50%, 75% or 100% match to the Extra Compensation Plan for
all employee participants and an allocation under the Excess Match for a
percentage of each higher-paid participant's salary up to 6%. The amounts shown
under "All Other Compensation" reflect contributions to the Extra Compensation
Plan (a) for 1999, of $10,000 on behalf of each of the Named Executive Officers
to match 1999 pre-tax elective deferral contributions made by each to the Extra
Compensation Plan; (b) for 1998, of $9,600 on behalf of each of the Named
Executive Officers to match 1998 pre-tax elective deferral contributions made
by each to the Extra Compensation Plan except for Mr. Hyland who received
$9,568; and for 1997, of $9,500 on behalf of each of the Named Executive
Officers to match 1997 pre-tax elective deferral contributions made by each to
the Extra Compensation Plan except for Mr. Ratz who received $3,300 and Mr.
Hyland who received $8,717; the remainder of each amount is the allocation for
each Named Executive Officer under the Excess Match, except the amount for Mr.
Ratz for 1997 also includes $21,685 in relocation expenses.
Severance Arrangements
In 1999 the Company 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 the Harleysville Group or
its parent Harleysville Mutual and a 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 the CEO is 2.99 times, and the
compensation to be paid to the other Named Executive Officers is 2 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 targets for
all plans in which the Named Executive Officer participates, and the value of
any stock options which may not legally be exercised at time of change of
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 receive
comparable welfare benefit plans for three years.
Spencer M. Roman, who would otherwise have been a Named Executive Officer,
terminated service with the Company in October 1999. In connection therewith,
he has continued to receive compensation at his annual rate of $224,700, which
may continue, at the latest, through October 2000. He will also receive $44,270
in lieu of the annual incentive compensation and $47,626 in lieu of the long
term incentive compensation payable for 1999.
27
OPTION GRANTS IN 1999
This table shows the number and value of stock options granted to the
Named Executive Officers in 1999.
Name Number of % of Total Exercise Price Expiration Grant Date
Securities Options Per Share Date Present Value
Underlying Granted to
Options Employees
Granted in Fiscal
Year
- ----------------------------------------------------------------------------------
Walter R. Bateman 37,648 11% $19.625 5/25/09 $214,970
- ----------------------------------------------------------------------------------
Mark R. Cummins 14,038 4% $19.625 5/25/09 $ 80,157
- ----------------------------------------------------------------------------------
Bruce J. Magee 12,205 4% $19.625 5/25/09 $ 69,691
- ----------------------------------------------------------------------------------
E. Wayne Ratz 10,614 3% $19.625 5/25/09 $ 60,606
- ----------------------------------------------------------------------------------
Dennis M. Hyland 10,614 3% $19.625 5/25/09 $ 60,606
In calendar year 1999, Harleysville Group granted a total of 357,293
options representing the right to purchase 357,293 shares of common stock to
146 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 SEC 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 option plan, please see page 22.
28
OPTION EXERCISES & YEAR-END VALUES
This table shows the number and value of stock options exercised in 1999
and the value of unexercised options as of the end of 1999 for the Named
Executive Officers during 1999. Year-end value is calculated using the
difference between the option exercise price and $14.25 (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 Unexercised In-the-Money Options
Acquired Options at at Year-End
on Fiscal Year-End
Exercise ---------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------
Walter R. Bateman 16,000 $259,552 142,336 54,016 $143,725 $ 0
- ------------------------------------------------------------------------------------------
Mark R. Cummins 0 $0 66,717 21,057 $ 68,260 $ 0
- ------------------------------------------------------------------------------------------
Bruce J. Magee 0 $0 52,505 17,512 $ 82,675 $ 0
- ------------------------------------------------------------------------------------------
E. Wayne Ratz 0 $0 17,921 15,921 $0 $ 0
- ------------------------------------------------------------------------------------------
Dennis M. Hyland 0 $0 50,559 15,229 $ 88,828 $ 0
LONG TERM INCENTIVE PLAN
PERFORMANCE OPPORTUNITY AWARDS IN LAST FISCAL YEAR
The table shows the range of potential payouts under the Plan for a four-
year performance period commencing in 1999. Four-year performance periods under
the Plan were completed in 1997, 1998 and 1999 and actual payments thereunder
are shown in the Summary Compensation Table on page 26 for those years.
Name Performance Target Estimated Future Payments Under
or Other Award Non-Stock Price Based Plans
Period Until Percent of ------------------------------------
Maturation 1/1/99 Salary Threshold Target Maximum
or Payout
- -----------------------------------------------------------------------------------
Walter R. Bateman 4 years 45% $0 $ 217,035 $325,553
- -----------------------------------------------------------------------------------
Mark R. Cummins 4 years 35% $0 $ 92,085 $138,127
- -----------------------------------------------------------------------------------
Bruce J. Magee 4 years 35% $0 $ 71,645 $107,468
- -----------------------------------------------------------------------------------
E. Wayne Ratz N/A 0 $0 $0 $0
- -----------------------------------------------------------------------------------
Dennis M. Hyland 4 years 15% $0 $ 27,225 $ 40,838
For a description of the current long term incentive compensation plan,
please see page 22.
29
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, Mr. Hyland and Mr. Magee,
who were first employed prior to January 1, 1989.
TABLE I
Average 5 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Year
Base Salary
plus
Annual
Incentive @
12/31/99
- --------------------------------------------------------------------------------
$600,000 $109,205 $163,807 $218,410 $273,012 $273,012 $273,012
- --------------------------------------------------------------------------------
$550,000 $ 99,830 $149,745 $199,660 $249,575 $249,575 $249,575
- --------------------------------------------------------------------------------
$500,000 $ 90,455 $135,682 $180,910 $226,137 $226,137 $226,137
- --------------------------------------------------------------------------------
$450,000 $ 81,080 $121,620 $162,160 $202,700 $202,700 $202,700
- --------------------------------------------------------------------------------
$400,000 $ 71,705 $107,557 $143,410 $179,262 $179,262 $179,262
- --------------------------------------------------------------------------------
$350,000 $ 62,330 $ 93,495 $124,660 $155,825 $155,825 $158,825
- --------------------------------------------------------------------------------
$300,000 $ 52,955 $ 79,432 $105,910 $132,837 $132,837 $132,837
- --------------------------------------------------------------------------------
$250,000 $ 43,580 $ 65,370 $ 87,160 $108,950 $108,950 $108,950
- --------------------------------------------------------------------------------
$200,000 $ 34,205 $ 51,307 $ 68,410 $ 85,512 $ 85,512 $ 85,512
- --------------------------------------------------------------------------------
$175,000 $ 29,517 $ 44,276 $ 59,035 $ 73,793 $ 73,793 $ 73,793
- --------------------------------------------------------------------------------
$150,000 $ 24,830 $ 37,245 $ 49,660 $ 62,075 $ 62,075 $ 62,075
30
Pension Plan Table II shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Cummins and Mr. Ratz, who were first
employed after January 1, 1989.
TABLE II
Average 5 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Year
Base Salary
Plus Annual
Incentive @
12/31/99
- --------------------------------------------------------------------------------
$600,000 $95,847 $150,024 $205,524 $261,024 $261,024 $261,024
- --------------------------------------------------------------------------------
$550,000 $87,722 $136,149 $187,024 $273,899 $273,899 $273,899
- --------------------------------------------------------------------------------
$500,000 $79,597 $122,274 $168,524 $214,744 $214,744 $214,744
- --------------------------------------------------------------------------------
$450,000 $71,472 $108,399 $150,024 $191,649 $191,649 $191,649
- --------------------------------------------------------------------------------
$400,000 $63,347 $ 95,021 $131,524 $168,524 $168,524 $168,524
- --------------------------------------------------------------------------------
$350,000 $55,222 $ 82,833 $113,024 $145,399 $145,399 $145,399
- --------------------------------------------------------------------------------
$300,000 $47,097 $ 70,646 $ 94,524 $122,274 $122,274 $122,274
- --------------------------------------------------------------------------------
$250,000 $38,972 $ 58,458 $ 77,944 $ 99,149 $ 99,149 $ 99,149
- --------------------------------------------------------------------------------
$200,000 $30,847 $ 46,271 $ 61,694 $ 77,118 $ 77,118 $ 77,118
- --------------------------------------------------------------------------------
$175,000 $26,785 $ 40,177 $ 53,569 $ 66,961 $ 69,961 $ 69,961
- --------------------------------------------------------------------------------
$150,000 $22,722 $ 34,083 $ 45,444 $ 56,805 $ 56,805 $ 56,805
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, 12 years; Mr. Cummins, 8 years; Mr. Magee, 14 years; Mr.
Ratz, 3 years; and Mr. Hyland, 25 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.
31
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%. 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 and
equal to those terms that could have been negotiated with an independent third
party.
Under a lease effective January 1, 1995, Harleysville Mutual rents the
home office property from a partnership owned by Harleysville Group for a five-
year term at a base rent of $2.75 million. Harleysville Mutual may also pay
additional rent, based on a formula, for any additions, improvements or
renovations. There was an additional rental payment of $62 thousand made in
1999. 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 thereof are allocated
according to an intercompany allocation agreement. A new five year lease was
effective January 1, 2000 at a base rent of $3.42 million.
Harleysville Group provides certain management services to Harleysville
Mutual and its property/casualty affiliates. 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 1999 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
New York Casualty Insurance Company 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 1999 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 1999 Annual Report to
Stockholders.
32
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,
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 1999
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 1999 was $6.9 million. Further information about the reinsurance agreement
is contained in Harleysville Group's 1999 Annual Report to Stockholders.
SECTION 16 REPORTING COMPLIANCE
Harleysville Group believes that for 1999 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.
33
XPU-056 (ED: 3-00)
HARLEYSVILLE GROUP INC.
EXCESS STOCK PURCHASE PLAN
ADOPTED BY BOARD OF DIRECTORS: NOVEMBER 17, 1999
TABLE OF CONTENTS
ARTICLE NO. ARTICLE TITLE PAGE NO.
- ----------- ------------- --------
I. PURPOSE 1
II. ELIGIBLE EMPLOYEES 1
III. ENROLLMENT AND ENROLLMENT PERIODS 1
IV. DURATION OF OFFER AND SUBSCRIPTION PERIODS 2
V. NUMBER OF SHARES TO BE OFFERED 2
VI. SUBSCRIPTION PRICE 2
VII. AMOUNT OF CONTRIBUTION AND METHOD OF PAYMENT 3
VIII. PURCHASE OF SHARES 3
IX. WITHDRAWAL FROM THE PLAN 4
X. TAX WITHHOLDING 4
XI. SEPARATION FROM EMPLOYMENT 4
XII. ASSIGNMENT 4
XIII. ADJUSTMENT OF AND CHANGES IN THE STOCK 4
XIV. AMENDMENT OR DISCONTINUANCE OF THE PLAN 5
XV. ADMINISTRATION 5
XVI. EMPLOYEE'S RIGHTS 5
XVII. TITLES 5
XVIII. APPLICABLE LAW 5
-1-
HARLEYSVILLE GROUP INC.
EXCESS STOCK PURCHASE PLAN
--------------------------
ARTICLE 1 - PURPOSE
-------------------
The Harleysville Group Inc. Excess Stock Purchase Plan (the "Plan") is
established by the Harleysville Group Inc. (the "Company") for the benefit of
the Eligible Employees of the Company. 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 available only to those employees who
purchase the maximum number of shares allowable under the Harleysville Group
Inc. Employee Stock Purchase Plan ("ESPP"). It will permit them to purchase
additional shares, on a non-tax free basis, under the rules that apply to the
ESPP.
ARTICLE II - ELIGIBLE EMPLOYEES
-------------------------------
(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 and who,
in any year, purchases the $25,000 in fair market value permitted under
the ESPP ("Eligible Employee").
(b) 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 twelve 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
-2-
until the beginning of the first Subscription Period following the
completion of the twelve month period.
ARTICLE III - ENROLLMENT AND ENROLLMENT PERIODS
-----------------------------------------------
Separate enrollment for this Plan is not necessary. Enrollment in the
ESPP shall enable an Eligible Employee to participate in this Plan. Actual
participation shall not occur until (a) a Participant has purchased $25,000 in
fair market value of Company stock under the ESPP in any year, and (b) the
Participant has contributed to the ESPP an amount in excess of the amount
required to purchase $25,000 in fair market value under the ESPP. Any person who
is an Eligible Employee and desires to subscribe for the purchase of stock for
the following Subscription Period must file a subscription agreement during the
Enrollment Period or otherwise have a Subscription Agreement on file. Once
enrolled, an Eligible 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.
ARTICLE IV - DURATION OF OFFER AND SUBSCRIPTION PERIODS
-------------------------------------------------------
This plan shall be in effect from July 1, 2000 through and including
July 31, 2005. During the duration of the Plan there will be ten (10)
"Subscription Periods". Each Subscription Period runs from January 15 through
July 14 or from July 15 through January 14.
ARTICLE V - NUMBER OF SHARES TO BE OFFERED
------------------------------------------
The total number of shares to be made available under the Plan is
50,000 shares of common stock of the Company ("Stock"). The shares issued
hereunder may either be authorized but unissued shares or treasury shares
reacquired by the Company. In the event this amount of Stock is subscribed prior
to the expiration of the Plan, the Plan may be terminated in accordance with
Article XII of the Plan.
-3-
ARTICLE VI - SUBSCRIPTION PRICE
-------------------------------
The "Subscription Price" for each share of 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. The fair market value of a share shall
be the Closing Price as reported on the NASDAQ National Market System for the
applicable date.
ARTICLE VII - AMOUNT OF CONTRIBUTION AND METHOD OF PAYMENT
----------------------------------------------------------
Except as otherwise provided herein, the Subscription Price will be
payable as set forth in the ESPP. The combined maximum deduction under the ESPP
and this Plan shall be no more than fifteen percent (15%) of a Participant's
Base Pay. "Base Pay" means the regular compensation paid to an Eligible Employee
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 administering the Plan pursuant to Article XV. 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 Eligible Employee receives no compensation (i.e.,
uncompensated personal leave, leave of absence, etc.).
ARTICLE VIII- PURCHASE OF SHARES
--------------------------------
The Company will maintain on its books an ESPP "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
-4-
Subscription Period and the participant's Plan Account will be credited with the
number of whole and fractional shares which results. If there is an amount in
the Plan account remaining after application of the $25,000 cap sufficient to
purchase additional shares, then the remaining amounts shall be used to purchase
additional shares under this Plan pursuant to the procedures applicable to the
ESPP, up to a maximum of 15% of pay under both Plans. 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.
In the event that the number of shares which would be credited to any
participant's Plan Account in any Subscription Period exceeds the limit
specified in Article VII, the participant's account will be credited with the
maximum number of shares permissible, and the remaining amounts will be refunded
in cash without interest.
ARTICLE IX - WITHDRAWAL FROM THE PLAN
-------------------------------------
Withdrawal from the ESPP shall constitute withdrawal from this Plan. At
the time of withdrawal the amount credited to the participant's Plan Account
will be refunded in cash without interest.
ARTICLE X - TAX WITHHOLDING
---------------------------
The Company shall require withholding tax to be collected on the
difference between the purchase price and the fair market value at closing on
the day prior to purchase, in accordance with IRS regulations; provided,
however, that a Participant may satisfy his or her withholding obligation by
having withheld from delivery shares equal in fair market value to the
-5-
withholding obligation or deliver shares of Company stock previously owned by
Participant for more than six months equal in fair market value to the amount
sought to be withheld, or any combination thereof, so long as there is no
accounting charge to earnings resulting therefrom.
ARTICLE XI - SEPARATION FROM EMPLOYMENT
---------------------------------------
Separation from employment with Company for any reason including death,
disability or retirement shall be treated as an automatic withdrawal as set
forth in Article IX.
ARTICLE XII - ASSIGNMENT
------------------------
No participant may assign his or her subscription or rights to
subscribe to any other person and any attempted assignment shall be void.
ARTICLE XIII - ADJUSTMENT OF AND CHANGES IN THE STOCK
-----------------------------------------------------
In the event that the shares of Stock shall be changed into or
exchanged for a different number or kind of shares of Stock or other securities
of the Company or of another corporation (whether by reason of merger,
consolidation, recapitalization, split-up, combination of shares, or otherwise),
or if the number of shares of Stock shall be increased through a Stock split or
the payment of a Stock dividend, then there shall be substituted for or added to
each share of Stock theretofore reserved for sale under the Plan, the number and
kind of shares of Stock or other securities into which each outstanding share of
Stock shall be so changed, or for which each such share shall be exchanged, or
to which each such share shall be entitled, as the case may be.
ARTICLE XIV - AMENDMENT OR DISCONTINUANCE OF THE 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
-6-
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.
ARTICLE XV - ADMINISTRATION
---------------------------
The Plan shall be administered by a committee to be appointed by the
Board of Directors consisting of three employees of the Company. The committee
may from time to time adopt rules and regulations for carrying out the Plan.
Interpretation or construction of any provision of the Plan by the committee
shall be final and conclusive on all persons absent contrary action by the Board
of Directors.
ARTICLE XVI - EMPLOYEE'S RIGHTS
-------------------------------
Nothing in the Plan shall prevent the Company, its parent or any
subsidiary from terminating any employee's employment. No employee shall have
any rights as a shareholder until full payment has been made for the shares for
which he has subscribed.
ARTICLE XVII - TITLES
---------------------
Titles are provided herein for convenience only and are not to serve as
a basis for interpretation or construction of this Agreement.
ARTICLE XVIII - APPLICABLE LAW
------------------------------
The Plan shall be construed, administered and governed in all respects
under the laws of the Commonwealth of Pennsylvania.
-7-
TO RECORD THE AMENDMENT AND RESTATEMENT OF THIS PLAN, THE COMPANY HAS
CAUSED ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE NAME AND SEAL HERETO THIS
17th DAY OF NOVEMBER , 1999.
HARLEYSVILLE GROUP INC.
BY: /s/ Walter R. Bateman
------------------------------------------------
Walter R. Bateman, II, Chairman, President & CEO
ATTEST:
/s/ R. A. Brown
- --------------------------------------
Roger A. Brown, Senior Vice President,
Secretary & General Counsel
-8-
HARLEYSVILLE GROUP INC.
LONG TERM INCENTIVE PLAN
AMENDED AND RESTATED: NOVEMBER 17, 1999
TABLE OF CONTENTS
-----------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ----------- ---------------- --------
I. INTRODUCTION..................................................1
A. Purpose of the Plan......................................1
B. Definitions..............................................1
II. PLAN ADMINISTRATION...........................................4
A. Administration...........................................4
B. Eligibility .............................................4
C. Maximum Number of Shares Available.......................4
D. Adjustments..............................................5
E. Registration Conditions..................................5
G. Rights Upon a Change in Control..........................5
III. TARGET AWARDS.................................................5
A. Performance Measures.....................................5
B. Performance Measure Period...............................5
C. Target Award Levels......................................6
D. Performance Standards....................................6
E. Maximum Compensation Paid................................6
F. Committee Certification..................................6
G. Discretionary Adjustments................................6
H. Imputed Dividend Reinvestment Plan Participation.........6
I. Payment of Awards........................................6
J. Rights upon Termination of Employment....................7
K. Rights upon Retirement, Death or Disability..............7
IV. MISCELLANEOUS PROVISIONS......................................7
A. Amendment, Suspension and Termination of the Plan........7
B. Government and Other Regulations.........................7
C. Other Compensation Plans and Programs....................7
D. Withholding Taxes........................................7
E. Single or Multiple Documents.............................7
F. Non-Uniform Determinations...............................7
G. Construction of Plan.....................................8
H. Pronouns, Singular and Plural............................8
I. Limitation of Rights.....................................8
J. Duration of the Plan.....................................8
K. Stockholder Approval.....................................8
-i-
HARLEYSVILLE GROUP INC.
LONG TERM INCENTIVE PLAN
AMENDED AND RESTATED: NOVEMBER 17, 1999
I. INTRODUCTION
------------
A. PURPOSE OF THE PLAN: Harleysville Group Inc. (the "Company") has
-------------------
established the Long Term Incentive Plan ("Plan") to further the
growth, development and success of the Company by providing
additional incentives to those senior officers who are responsible
for the management of the Company's business affairs which enable
them to participate directly in the growth of the capital stock of
the Company. The Company intends that the Plan will facilitate
securing, retaining, and motivating senior management employees of
high caliber and potential. It is intended that the Plan shall
satisfy the requirements for transactions pursuant hereto to be
exempt from Section 16(b) of the Securities Exchange Act of 1934
("Exchange Act") and for compensation paid hereunder to be fully
deductible to the Company to the extent permitted under Section
162(m) of the Internal Revenue Code of 1986.
B. DEFINITIONS: When used in the Plan, the following terms shall
-----------
have the meanings set forth below:
1. "Change in Control" shall mean if any of the following have
occurred: (i) there shall be consummated (a) any
consolidation or merger of the Company or the Parent in
which they are not the continuing or survivor corporation or
pursuant to which shares of the Company's stock would be
converted in whole or in part into cash, securities or other
property, other than a merger of the Company in which the
holders of the Company's stock immediately prior to the
merger have substantially the same proportionate ownership
of Common Stock of the surviving corporation immediately
after the merger or (b) any sale, lease, exchange or
transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the
Company or the Parent or (ii) the stockholders of the
Company or policyholders of the Parent shall approve any
plan or proposal for the liquidation or dissolution of the
Company or the Parent or (iii) any "person" (as such term is
used in Sections 13(d) and 14(d) (2) of the Exchange Act,
other than the
-1-
Company, the Parent, or a subsidiary thereof or any employee
benefit plan sponsored by the Company, the Parent, or a
subsidiary thereof, shall become the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of securities
of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities ordinarily
(and apart from special circumstances) having the right to vote
in the election of Directors, as a result of a tender or
exchange offer, open market purchases, privately negotiated
purchases or otherwise, or (iv) at any time during a period of
two consecutive years, individuals who at the beginning of such
period constituted the Board of the Company or the Parent shall
cease for any reason to constitute at least a majority thereof,
unless the election or the nomination for election of each new
Director during such two-year period was approved by a vote of
at least two-thirds of the Directors then still in office who
were Directors at the beginning of such two-year period or (v)
any other event shall occur that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Exchange Act or (vi) any other change
in the power to direct or cause the direction of management and
policies of the Company or the Parent, by contract or
otherwise.
2. "Company" shall mean Harleysville Group Inc., a Delaware
corporation, and any successor in a reorganization or
similar transaction.
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 Compensation & Personnel
Development Committee of the Board of Directors of
Harleysville Group Inc. The Committee shall consist of two
or more directors selected by the Board of Directors who:
(i) are not current employees of the Company, the Parent or
a subsidiary of the Company;
(ii) are not former employees of the Company, the Parent or a
subsidiary who receive compensation for prior services
(other than benefits under a tax-qualified retirement
plan) during the taxable year;
-2-
(iii) have not been officers of the Company and is not
currently an officer of the Company, the Parent or
subsidiary of the Company;
(iv) do not receive remuneration from the Company, the Parent
or a subsidiary of the Company either directly or
indirectly for services rendered in any capacity other
than as a director, except for an amount that is de
minimis remuneration within the meaning of Treasury
Regulation (S).1.162.27(e)(iii) and does not exceed the
dollar amount for which disclosure would be required
pursuant to Item 404 (a) of Regulation S-K;
(v) do not possess an interest in any other transaction for
which disclosure would be required pursuant to Item
404(a) of Regulation S-K; and
(vi) are not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of
Regulation S-K.
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. "Director" shall mean a member of the Board of Directors of
the Company.
8. "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
Committee on the basis of appropriate medical evidence, and
that results in the Participant's cessation of active
employment with the Company.
9. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
10. "Fair Market Value" shall mean the last existing closing price
of Common Stock on the NASDAQ NMS. The foregoing
notwithstanding, the Committee may determine the Fair Market
Value in such other manner as it may deem more appropriate for
Plan purposes or as is required by applicable laws or
regulations.
11. "Named Executive Officers" shall be those persons covered by
Item 402(a)(3) of Regulation S-K pursuant to the Exchange Act.
-3-
12. "Parent" shall mean Harleysville Mutual Insurance Company.
13. "Participant" shall mean those eligible officers and other key
employees of the Company who receive Awards under the Plan.
14. "Plan" shall mean the Company's Long Term Incentive Plan.
15. "Retirement" shall mean cessation of a Participant's employment
after age 55 if an employee is entitled to a benefit under the
Company's qualified defined benefit Pension Plan.
16. "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.
17. "Total Shareholder Return" ("TSR") shall mean the change in
value of a share of Common Stock during any three year
period based on share price appreciation plus dividends,
with the dividends re-invested as of the day such dividends
were ex-dividend. The Committee may adopt any reasonable
method of calculating total shareholder return that is
consistent with the requirements of Item 402(l) of
Regulation S-K promulgated by the Securities and Exchange
Commission.
18. "Withholding Obligation" shall mean the mandatory federal rate
of 28% plus any applicable state and local withholding tax.
II. 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 determine additional employees, if any, to whom awards
should be made under the Plan;
(iii) to determine the nature, size and terms of each such award;
-4-
(iv) to determine the time when the awards are granted and the
duration of any applicable restriction period, including the
criteria for acceleration thereof;
(v) to certify that the TSR goals were met prior to payment;
(vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; and
(vii) 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, including
those laws and regulations regarding deductibility from income
under the Code and exemption from Section 16 of the Exchange
Act, or by rules and regulations of a national securities
exchange or the NASDAQ NMS.
The determination 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. The Secretary of the Company shall be authorized to
implement the Plan in accordance with its terms and to take such
action of a ministerial nature, including the preparation of award
documents provided to participants, as shall be necessary to
effectuate the intent and purposes hereof.
B. ELIGIBILITY: Persons eligible to receive Awards under the Plan shall
-----------
be the Chief Executive Officer and the Senior Vice Presidents and
Executive Vice Presidents that report to the Chief Executive Officer,
and such others as are determined by the Committee. The Directors of
the Company who are not otherwise officers or employees of the
Company, its Parent or its subsidiaries shall not be eligible to
participate in the Plan.
C. MAXIMUM NUMBER OF SHARES AVAILABLE: Subject to adjustment as
----------------------------------
specified in Section II.E. below, the aggregate number of shares
of common stock that may be issued under the Plan is 600,000
shares, which 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. Except as
provided herein, any shares subject to an award which for any
reason are not issued shall again be available under the Plan.
D. ADJUSTMENTS: In the event of stock dividends, stock splits,
-----------
re-capitalizations, mergers, consolidations, combinations,
exchanges of shares, spin-offs, liquidations,
-5-
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 unless the
Participant represents and agrees with the Company that such
shares are being acquired for investment and not with a view
to the resale or distribution thereof, or such other
documentation as may be required by the Company, unless in
the opinion of counsel to the Company such representation,
agreement or documentation is not necessary to comply with
such Act.
2. Any restriction on the resale of shares shall be evidenced
by an appropriate legend on the stock certificate.
3. 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.
F. RIGHTS UPON A CHANGE IN CONTROL: In the event of a Change in
-------------------------------
Control, notwithstanding any other provisions herein, the Plan
shall terminate and all target awards shall be paid out
immediately on a month completed pro-rata basis.
III. TARGET AWARDS
-------------
A. PERFORMANCE MEASURES: Determination of payouts shall be based on
--------------------
Company's Total Shareholder Return ("TSR") relative to a peer
group of no less than 50 companies that are primarily or wholly in
the property/casualty insurance industry as selected from time to
time by the Committee.
B. PERFORMANCE MEASURE PERIOD: The period for determining
--------------------------
performance shall be a three year period that will commence
-6-
each January 1st and terminate on the third December 31st thereafter.
C. TARGET AWARD LEVELS: Subject to Paragraph III. D. below, the
-------------------
target levels for the Participants shall be determined by the
Committee for each three-year period no later than March 30th of
the first year of the plan period.
D. PERFORMANCE STANDARDS: Prior to each three-year period, the
---------------------
Committee shall determine a target award and award range for each
Participant which target award and award range may have both a
cash component and a stock component as determined by the
Committee. The award range shall provide that: no award shall be
paid if the TSR is lower than the 35th percentile; 50% of the
target award shall be paid if the TSR is at the 35th percentile;
100% of the target award shall be paid if the TSR is at the 50th
percentile; and 150% of the target award shall be made if the TSR
is at the 80th percentile or above. If the TSR falls between the
35th and 50th percentiles and the 50th or 80th percentiles, the
percent of the target award paid shall be interpolated.
E. MAXIMUM COMPENSATION PAID: The maximum paid in cash to any
-------------------------
Participant for any performance period shall not be more than
$750,000, and the maximum shares of stock issued to any
Participant for any performance period shall not be more than
100,000.
F. COMMITTEE CERTIFICATION: Prior to payment of the Awards, the
-----------------------
Committee shall review the TSR for the three-year period just
completed and certify, in writing or as reflected in the minutes
of the Committee Meeting, that the Company has attained the TSR
levels entitling Participants to a payout.
G. DISCRETIONARY ADJUSTMENTS: At the end of each three-year period,
-------------------------
the Committee may, in its discretion, but for good reason, prior
to payment, except as to the President and/or Chief Executive
Officer, or any other officer to the extent it would adversely
affect the operation of the plan, or the deduction for the Company
(I) increase or decrease the awards determined by Paragraph III.
D. by 10% of the target award, provided that the maximum award
paid shall never exceed 150% of the target award, or (ii) make an
award of 10% of the target award if no award is otherwise payable.
H. IMPUTED DIVIDEND REINVESTMENT PLAN PARTICIPATION: After the
------------------------------------------------
amount of stock to be issued is determined pursuant to Paragraph
III. G. and any discretionary adjustment thereof made pursuant to
Paragraph III. E., then the amount so determined and delivered to
a Participant shall be increased by imputing dividends paid by the
Company during the period to
-7-
such number of shares and the immediate reinvestment thereof for each
quarter throughout the full three-year period.
I. PAYMENT OF AWARDS: The payment of the cash element of the award
-----------------
shall be made as soon as practicable after the completion of the
three-year period; provided, however, that a Participant may elect
to defer receipt of the award pursuant to the Company's
Non-Qualified Deferred Compensation Plan. Such election shall be
made by December 31st of the second year of the performance
period. Payment of shares of stock shall also be made as soon as
practicable; provided, however, that a Participant may satisfy his
or her tax withholding obligation by having shares withheld equal
in Fair Market Value to the Withholding Obligation or deliver
already owned shares of Company stock equal in Fair Market Value
to the amount sought to be withheld, or any combination thereof,
so long as there is no accounting charge to earnings resulting
therefrom. Payment by shares may be made by attestation.
Alternatively, prior to December 31st of the second year of the
three-year period, the Participant may elect to defer delivery of
shares of stock for (I) five years, (ii) ten years, or (iii) until
Termination of Employment. If receipt of the share of stock is
deferred, there shall be no imputed dividends during the period of
deferral; nor shall a Participant exercise any other rights of
ownership
J. RIGHTS UPON TERMINATION OF EMPLOYMENT: Upon the Termination of
-------------------------------------
Employment of a Participant for any reason other than retirement,
death or disability, all awards to such Participant shall
immediately expire.
K. RIGHTS UPON RETIREMENT, DEATH OR DISABILITY: If a Participant
-------------------------------------------
ceases to be an employee because of retirement, death or
disability, the award shall be payable at the end of the
performance period on a pro-rata month completed basis. In the
event of death, the award shall be made to the beneficiary
designated by the Participant.
IV. 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 Awards under the Plan shall be subject to all
-8-
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. Any awards 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.
D. WITHHOLDING TAXES: The Company shall have the right to require a
-----------------
payment from a Participant to cover applicable withholding for any
federal, state or local taxes. The Company reserves the right to
offset such tax payment from any other funds which may be due the
Participant by the Company.
E. SINGLE OR MULTIPLE DOCUMENTS: Multiple forms of awards or
----------------------------
combinations thereof may be evidenced by a single document or
multiple documents, as determined by the Committee.
F. NON-UNIFORM DETERMINATIONS: The Committee's determinations under the
--------------------------
Plan (including without limitation determinations of the persons to
receive awards, the form, amount and timing of such awards, the terms
and provisions of such awards, and the documents evidencing same)
need not be uniform and may be made selectively among persons who
receive, or are eligible to receive, awards under the Plan whether or
not such persons are similarly situated.
G. 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.
H. 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.
I. LIMITATION OF RIGHTS:
--------------------
1. No Right to Continue as an Employee: Neither the Plan, nor the
-----------------------------------
granting of an option 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
-9-
of the Company for any period of time, or at any particular
rate of compensation.
2. No Shareholder's Rights: A Participant shall have no rights as
-----------------------
a shareholder with respect to the shares covered by awards
granted hereunder until the date of the issuance of a stock
certificate therefor, and no adjustment will be made for
dividends or other rights for which the record date is prior to
the date such certificate is issued.
J. DURATION OF THE PLAN: The Plan shall remain in effect
--------------------
indefinitely, but, in any event, at least until all awards have
been issued or paid.
K. STOCKHOLDER APPROVAL: The initial adoption of this Plan shall be
--------------------
subject to stockholder approval.
TO RECORD THE AMENDMENT AND RESTATEMENT OF THIS PLAN, THE COMPANY HAS
CAUSED ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE NAME AND SEAL HERETO THIS
17TH DAY OF NOVEMBER, 1999.
HARLEYSVILLE GROUP INC.
BY: /s/ Walter R. Bateman
--------------------------------
Walter R. Bateman, II, Chairman,
ATTEST: President & CEO
/s/ R.A. Brown
- --------------------------------------
Roger A. Brown, Senior Vice President,
Secretary & General Counsel
-10-
[HARLEYSVILLE LOGO]
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 26, 2000
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 26, 2000, at 10:00 A.M.,
local time, and at any adjournment thereof, as follows:
(Continued, and to be marked, dated and signed on reverse side)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE.
MAP HERE
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 AND FOR
EACH PROPOSAL STATED ABOVE.
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 NAME BELOW.)
listed. the nominees
listed. Michael L. Browne Frank E. Reed Jerry S. Rosenbloom
[ ] [ ]
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
2. APPROVAL OF THE LONG TERM INCENTIVE PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
3. APPROVAL OF THE EXCESS STOCK PURCHASE PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS
4. In their discretion, the proxies are authorized to vote upon such
other
business as may properly come before the meeting and any adjournment
thereof.
[ [Name & Address] ]
[ ]
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.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
[HARLEYSVILLE LOGO]
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 26, 2000
10:00 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