<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 0-14697
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ X ] Definitive Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Harleysville Group Inc.
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(Name of Registrant as Specified in its Charter)
Roger A. Brown, General Counsel
----------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-
6(i)(2), or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each part to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which the transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
--------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
--------------------------------------------------------------
[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule, or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
[LOGO OF HARLEYSVILLE GROUP INC. APPEARS HERE]
HARLEYSVILLE GROUP INC.
March 22, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of the Stockholders
of Harleysville Group Inc. which will be held at the Home Office of the
Company at 355 Maple Avenue, Harleysville, Pennsylvania on Wednesday, April
24, 1996, at 10:00 A.M.
Stockholders will elect a class of directors and will act upon proposals to
approve the adoption of the 1996 Directors' Stock Purchase Plan and to approve
an amendment of the Certificate of Incorporation to increase the number of
authorized shares of Common Stock of the Company.
Whether or not you plan to attend the meeting in person, please complete and
return the enclosed proxy card in the envelope provided so that your shares
can be voted at the meeting in accordance with your instructions.
Sincerely,
/s/ B.W. Mitchell
Bradford W. Mitchell
CHAIRMAN OF THE BOARD
<PAGE>
HARLEYSVILLE GROUP INC.
GENERAL. This Proxy Statement and the form of proxy enclosed herewith, which
are first being mailed to stockholders on or about March 22, 1996 are being
furnished in connection with the solicitation by the Board of Directors of
Harleysville Group Inc. ("Harleysville Group") of proxies to be voted at the
Annual Meeting of Stockholders (the "Annual Meeting") to be held at 10:00
A.M., local time, on April 24, 1996 and at any adjournment thereof, at
Harleysville Group's principal executive offices, which are located at 355
Maple Avenue, Harleysville, Pennsylvania.
VOTING. Shares represented by proxies in the accompanying form, if properly
signed and returned, will be voted in accordance with the specifications made
thereon by the stockholders. Any proxy not specifying to the contrary will be
voted for the election of the nominees for director named below, for the
adoption of the 1996 Directors' Stock Purchase Plan and for the approval of an
amendment to the Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock.
Holders of Common Stock of record at the close of business on March 13, 1996
will be entitled to receive notice of and to vote at the Annual Meeting. Every
stockholder entitled to vote at the meeting shall have the right to one vote
for every share having voting power standing in his or her name on the record
date fixed for the meeting. Cumulative voting rights do not exist with respect
to the election of Directors.
Under Section 216 of the Delaware General Corporation Law and Harleysville
Group's By-Laws, a majority of the shares of Harleysville Group's Common
Stock, present in person or represented by proxy, constitute a quorum for
purposes of the Annual Meeting. The affirmative vote of the majority of shares
present in person or represented by proxy at the Annual Meeting and entitled
to vote on the subject matter is required for stockholder action. In the
election of Directors, stockholders may cast votes for, or withhold votes
from, any nominee; votes that are withheld will not be included in the vote,
and will have no effect on the outcome. Stockholders may abstain from voting
on any proposal (except as to the election of Directors); abstentions are
included in the total number of shares represented in determining the presence
or absence of a quorum for that proposal. Because approval of the proposal
requires an affirmative vote of a majority of shares present (in person or by
proxy) and entitled to vote, abstentions will have the effect of a negative
vote. A "non-vote" occurs when a broker-dealer holding customer securities in
"street name": has not received voting instructions from the beneficial owner
of the shares; is barred from exercising discretionary authority to vote under
applicable rules of a national stock exchange or of the National Association
of Securities Dealers; and has indicated on the proxy card or otherwise
notified an issuer that it does not have the authority to vote such securities
on a specified matter. Under Delaware law, a broker non-vote will have no
effect on the outcome of the election of directors or the approval of the
proposal.
As of the close of business on March 13, 1996, Harleysville Group had
outstanding 13,770,310 shares of Common Stock, $1.00 par value (the "Common
Stock"). As of March 13, 1996, Harleysville Mutual Insurance Company
("Harleysville Mutual") owned 7,641,354 shares of Harleysville Group's
outstanding Common Stock, or approximately 56% of Harleysville Group's
outstanding Common Stock. Harleysville Mutual has advised Harleysville Group
that Harleysville Mutual will vote its shares in favor of the election of
Messrs. Bateman, Johnson and Strasburg, to approve the adoption of the 1996
Directors' Stock Purchase Plan and to approve the proposal to amend the
Certificate of Incorporation to increase the number of authorized shares of
Common Stock. Accordingly, Messrs. Bateman, Johnson and Strasburg will be
elected regardless of the votes of Harleysville Group's stockholders other
than Harleysville Mutual and the adoption of the 1996 Directors' Stock
Purchase Plan and amendment of the Certificate of Incorporation will be
approved regardless of the votes of Harleysville Group's stockholders other
than Harleysville Mutual.
SOLICITATION OF PROXIES. The cost of solicitation of proxies in the
accompanying form will be borne by Harleysville Group, including expenses in
connection with preparing and mailing this Proxy Statement. Such solicitation
will be made by mail and may also be made on behalf of Harleysville Group by
Harleysville Group's regular officers and employees in person or by telephone
or telegram for which they will receive no additional
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compensation. Harleysville Group, upon request therefor, will also reimburse
brokers or banks or persons holding shares in their names or in the names of
nominees for their reasonable expenses in sending proxies and proxy material
to beneficial owners.
REVOCABILITY OF PROXIES. A stockholder who signs and returns a proxy in the
accompanying form may revoke it at any time before it is voted by giving
written notice thereof to the Secretary of Harleysville Group, by a duly
executed proxy bearing a later date, or by voting by ballot at the Annual
Meeting.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of December 31, 1995, the amount and
percentage of Harleysville Group's outstanding Common Stock beneficially owned
by each person who is known by Harleysville Group to own beneficially more
than five percent of its Common Stock. The table also lists beneficial
ownership, as of February 1, 1996, of (i) each director and nominee for
director; (ii) each of the executive officers of Harleysville Group named in
the Summary Compensation Table beginning on page 8 (the "Summary Compensation
Table"); and (iii) all executive officers and directors of Harleysville Group
as a group.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF AMOUNT OF BENEFICIAL CLASS OF
BENEFICIAL OWNER OWNERSHIP COMMON STOCK (1)(2)
------------------- -------------------- -------------------
<S> <C> <C>
Harleysville Mutual Insurance Com-
pany
Harleysville, PA 19438-2297....... 7,641,354 56%
The Capital Group Companies Inc.
("Capital Group")
333 South Hope Street
Los Angeles, CA 90071............. 1,054,500(3) 8%
Putnam Investments, Inc. ("Putnam")
One Post Office Square
Boston, MA 02109.................. 704,300(4) 5%
<CAPTION>
DIRECTORS AND NAMED EXECUTIVE
OFFICERS
-----------------------------
<S> <C> <C>
Bradford W. Mitchell............... 27,997(5)
Walter R. Bateman, II.............. 44,501(6)
Michael L. Browne.................. 4,554(5)(7)
Robert D. Buzzell.................. 3,894(5)
Gerard G. Johnson.................. 3,038(5)
H. Bryce Jordan.................... 4,719(5)
John J. Keenan..................... 13,390(5)
Frank E. Reed...................... 4,937(5)
William E. Strasburg............... 6,725(5)
James C. O'Neill................... 52,999(8)
Thomas E. Roden.................... 23,430(9)
Mark R. Cummins.................... 18,983(10)
Bruce J. Magee..................... 18,021(11)
All directors and executive
officers as a group (16
persons).......................... 254,836(5)(12) 2%
</TABLE>
- --------
(1) At December 31, 1995 and February 1, 1996, Harleysville Group had
13,718,086 and 13,764,590 shares of Common Stock outstanding,
respectively.
(2) Less than 1% unless otherwise indicated.
(3) Capital Group is the parent company of several investment management and
advisory companies, including Capital Guardian Trust Company ("Capital
Guardian") and Capital Research and Management Company ("Capital
Research"). In a Schedule 13G, dated February 9, 1996, filed with the
Securities and Exchange Commission ("SEC"), Capital Group reported that as
of December 29, 1995 its operating subsidiaries,
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Capital Guardian and Capital Research, held 679,500 shares and 375,000
shares, respectively, for the accounts of clients for whom it exercised
investment discretion. Capital Group also reported sole voting power as to
564,500 of these shares and sole dispositive power as to all 1,054,500.
Capital Group disclaims beneficial ownership as to all 1,054,500 such
shares. No client account individually holds 5% or more of this class of
security. Capital Group has also represented that the shares reported were
acquired in the ordinary course of business, and were not acquired for the
purpose of, and do not have the effect of, changing or influencing control
of Harleysville Group.
(4) Putnam which is a wholly owned subsidiary of Marsh and McLennan Companies,
Inc., is the parent company of several investment management and advisory
companies, including Putnam Advisory Company, Inc. ("PAC"). Putnam filed a
Schedule 13G, dated February 2, 1996, with the SEC, and reported that as
of December 31, 1995, PAC held a total of 704,300 shares, for the accounts
of clients. Putnam also reported sole voting power as to none of these
shares, shared voting power as to 212,200 of these shares and shared
dispositive power as to all of the shares. Putnam has also represented
that the shares reported were acquired in the ordinary course of business,
and were not acquired for the purpose of, and do not have the effect of,
changing or influencing control of Harleysville Group.
(5) Includes shares of Common Stock which the non-employee directors have the
option to purchase within sixty days under the 1990 and 1995 Directors'
Stock Option Programs respectively, as follows: Bradford W. Mitchell--
1,882; Michael L. Browne--4,150; Robert D. Buzzell--3,394; Gerard G.
Johnson--2,638; H. Bryce Jordan--4,150; John J. Keenan--1,000; Frank E.
Reed--4,150; and William E. Strasburg--4,150.
(6) Includes 34,338 shares of Common Stock which Mr. Bateman has the right to
acquire within sixty days under the Equity Incentive Plan.
(7) Includes 65 shares held by Mr. Browne as custodian for a minor child, as
to which shares Mr. Browne disclaims beneficial ownership.
(8) Includes 44,207 shares of Common Stock which Mr. O'Neill has the right to
acquire within sixty days under the Equity Incentive Plan.
(9) Includes 19,423 shares of Common Stock which Mr. Roden has the right to
acquire within sixty days under the Equity Incentive Plan. Also includes
37 shares held by Mr. Roden as custodian for a minor child, as to which
shares Mr. Roden disclaims beneficial ownership.
(10) Includes 16,825 shares of Common Stock which Mr. Cummins has the right to
acquire within sixty days under the Equity Incentive Plan. Also includes
1,144 shares held by Mr. Cummins' spouse, as to which shares Mr. Cummins
disclaims beneficial ownership.
(11) Includes 14,177 shares of Common Stock which Mr. Magee has the right to
acquire within sixty days under the Equity Incentive Plan.
(12) Includes 148,554 of Common Stock which all the executive officers as a
group have the right to acquire within sixty days under the Equity
Incentive Plan.
ELECTION OF DIRECTORS
Harleysville Group's Board of Directors currently consists of nine members
but will consist of eight directors following the Annual Meeting because of
John J. Keenan's retirement. Each director is elected for a three-year term
and until his successor has been duly elected, 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 attainment of age 72. The current three-year terms of Class A, B and
C directors expire in the years 1998, 1997 and 1996 respectively.
Three Class C directors are to be elected at the Annual Meeting. Unless
otherwise instructed, proxy holders will vote the proxies received by them for
the election of the nominees named below. If any nominee becomes unavailable
for any reason, it is intended that the proxies will be voted for a substitute
nominee designated by the Board of Directors or the number of directors to be
elected at the meeting will be reduced accordingly. The
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Board of Directors has no reason to believe the nominees named will be unable
to serve if elected. Any vacancy occurring on the Board of Directors for any
reason may be filled by a majority of the directors then in office until the
expiration of the term of the class of directors in which the vacancy exists.
The names of the nominees for Class C directors and the Class A and B
directors who will continue in office after the Annual Meeting until the
expiration of their respective terms, together with certain information
regarding them, are as follows:
NOMINEES FOR CLASS C DIRECTOR
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
---- --- -------- -----------
<S> <C> <C> <C>
Walter R. Bateman, II............................. 48 1992 1999*
Gerard G. Johnson................................. 55 1993 1999*
William E. Strasburg.............................. 68 1986 1999*
</TABLE>
- --------
* If elected at the Annual Meeting.
DIRECTORS CONTINUING IN OFFICE
CLASS A DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
---- --- -------- -----------
<S> <C> <C> <C>
Bradford W. Mitchell.............................. 68 1979 1998
Robert D. Buzzell................................. 62 1992 1998
</TABLE>
CLASS B DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
---- --- -------- -----------
<S> <C> <C> <C>
Michael L. Browne................................. 49 1986 1997
H. Bryce Jordan................................... 71 1986 1997
Frank E. Reed..................................... 61 1986 1997
</TABLE>
Mr. Bateman has served as a director of Harleysville Group and Harleysville
Mutual since November 1992 when he was also elected President and Chief
Operating Officer of both companies. Mr. Bateman was elected President and
Chief Executive Officer of Harleysville Group and Harleysville Mutual,
effective January 1, 1994. Prior thereto, from July 1988 to July 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 July 1991 to November 1992. Mr.
Bateman is a member of the Executive Committee and the Finance Committee.
Mr. Johnson was elected a director of Harleysville Group in April 1993. Mr.
Johnson is Vice President--Finance and Chief Financial Officer of VF
Corporation, Wyomissing, Pennsylvania, a position he has held since 1988. Mr.
Johnson is Chairperson of the Audit Committee and serves on the Coordinating
Committee.
Mr. Strasburg became a director of Harleysville Group in February 1986. Mr.
Strasburg is also a director of Harleysville Mutual, a position he has held
since 1975. In 1989, Mr. Strasburg became Publisher Emeritus of Montgomery
Publishing Company, a newspaper publishing firm located in Fort Washington,
Pennsylvania. In 1991 Mr. Strasburg retired as Vice President of Independent
Publications, Inc., and retired as a member of its Board of Directors in
December 1994. Mr. Strasburg serves on the Executive Committee and the
Compensation & Personnel Development Committee, and is Chairperson of the
Nominating Committee.
Mr. Mitchell has been a director of Harleysville Group since its formation
in 1979, and its Chairman since 1986. He served as President from 1979 to 1988
and from 1991 to November 1992, and as Chief Executive
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Officer from April 1988 until his retirement on December 31, 1993. Mr.
Mitchell is also the Chairman of the Board and a director of Harleysville
Mutual and has served in various capacities, including President and Chief
Executive Officer, since 1976. He retired as Chief Executive Officer of
Harleysville Mutual on December 31, 1993. He is also a director of
Harleysville National Corporation, a bank holding company located in
Harleysville, Pennsylvania. Mr. Mitchell is the Chairperson of the Finance
Committee and the Executive Committee, and serves on the Nominating Committee.
Dr. Buzzell was elected a director of Harleysville Group and Harleysville
Mutual in April 1992. Dr. Buzzell is currently Distinguished Professor of
Marketing, George Mason University, School of Business Administration,
Fairfax, Virginia, a position he has held since September 1, 1993. Prior
thereto, 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. He serves on the
Compensation & Personnel Development Committee and the Nominating Committee.
Mr. Browne was elected a director of Harleysville Group in February 1986. In
1983, Mr. Browne joined the law firm of Reed, Smith, Shaw & McClay in
Philadelphia, Pennsylvania, as a partner. He became managing partner in
January 1993. From 1980 to 1983, Mr. Browne was the Insurance Commissioner of
the Commonwealth of Pennsylvania. He is a member of the Executive Committee,
Finance Committee, Nominating Committee, Audit Committee, and Coordinating
Committee.
Dr. Jordan has been a director of Harleysville Group since February 1986 and
a director of Harleysville Mutual since April 1984. Dr. Jordan is President
Emeritus of Pennsylvania State University. From 1983 to August 1990, Dr.
Jordan was the President of Pennsylvania State University. He also served
until August 1990 as the President, Chief Executive Officer and a director of
The Corporation for Penn State, a non-profit corporation located in State
College, Pennsylvania. Dr. Jordan serves as an advisory director of Mellon
Bank Corporation, a Pennsylvania bank holding company headquartered in
Pittsburgh, Pennsylvania, and of Mellon Bank NA, a subsidiary of Mellon Bank
Corporation. He is also a director of Quaker State Corporation. He serves on
the Executive Committee and the Finance Committee, and he is Chairperson of
the Compensation & Personnel Development Committee.
Mr. Reed was elected a director of Harleysville Group in February 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, Mr. Reed became, as a result of a
merger between First Pennsylvania Corporation and CoreStates Financial Corp.,
President and Chief Executive Officer of CoreStates Philadelphia National
Bank. Mr. Reed retired from that position in March 1995. Mr. Reed was a
director of Centel Corporation until March 1993 when it merged with Sprint
Corporation. He served as a director of Sprint Corporation until March 1996,
at which time he became Chairman of the Board and a director of 360(degrees)
Communications Company. He is a member of the Executive Committee and the
Finance Committee and serves as Chairperson of the Coordinating Committee,
representing both Harleysville Group and Harleysville Mutual.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The full Board of Directors met five times during 1995. During 1995, the
Board of Directors had an Executive Committee, a Finance Committee, a
Compensation & Personnel Development Committee, a Nominating Committee, an
Audit Committee, and a Coordinating Committee. These Committees met as
described below.
Harleysville Group's Executive Committee met eight times in 1995. Messrs.
Mitchell, Bateman, Browne, Jordan, Keenan, Reed, and Strasburg are the current
members of the Executive Committee. 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.
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<PAGE>
The Finance Committee, on which Messrs. Mitchell, Bateman, Reed, Jordan, and
Browne serve, met twelve times in 1995. This Committee establishes overall
investment policies and guidelines, and also reviews and approves investments
made by Harleysville Group.
The Compensation & Personnel Development Committee of Harleysville Group
consists of Messrs. Jordan, Buzzell, and Strasburg. The Committee met three
times in 1995 to determine compensation policies; to review and recommend
compensation plans; to approve certain compensation changes; and to establish
awards under and determine participants in the Equity Incentive Plan, the
Senior Management Incentive Bonus Plan, and the Long-Term Incentive Plan.
Harleysville Group's Nominating Committee met two times in 1995. The persons
nominated for Class C Directors by the Board of Directors were recommended by
the Nominating Committee. Messrs. Strasburg, Mitchell, Browne, and Buzzell
serve on the Committee. The Nominating Committee will consider written
nominations from stockholders, who should submit them to the Secretary of
Harleysville Group.
The Audit Committee met three times in 1995. The Audit Committee reviews the
performance and independence of Harleysville Group's independent accounting
firm, makes an annual recommendation to the Board of Directors with respect to
the appointment of such accounting firm, approves the general nature of the
services to be performed by such accounting firm and solicits and reviews the
accounting firm's recommendations. The Audit Committee also consults with
Harleysville Group's internal audit group and periodically reviews the
relationships among that group, Harleysville Group's management and
Harleysville Group's independent accountants. The members of the Audit
Committee are Chairperson Gerard G. Johnson, Michael L. Browne, and John J.
Keenan.
The Coordinating Committee met two times in 1995. It is generally
responsible for reviewing matters involving actual or potential conflicts
between Harleysville Group and Harleysville Mutual. The decisions of the
Coordinating Committee are binding on Harleysville Group and Harleysville
Mutual. No intercompany transaction between Harleysville Group Inc. and
Harleysville Mutual Insurance Company can be authorized by the Coordinating
Committee unless Harleysville Group's Committee members conclude that such
transaction is fair and equitable to Harleysville Group. The Coordinating
Committee is composed of Gerard G. Johnson, Michael L. Browne, and John J.
Keenan representing Harleysville Group, and Muriel Fox, W. Thacher Brown and
Jerry S. Rosenbloom representing Harleysville Mutual. It is chaired by Frank
E. Reed.
COMPENSATION OF DIRECTORS. Directors of Harleysville Group who are also
officers of Harleysville Group or Harleysville Mutual receive no fees for
services as directors. Outside directors are currently paid an annual retainer
of $16,000 and are paid $1,000 for each Board meeting attended and $900 for
each committee meeting attended, plus travel expenses. Outside directors who
chair committees of the Board of Directors receive annual retainers of $3,500.
Effective at the Annual Meeting, the annual retainers paid to outside
directors will be increased to $17,000 and the annual retainer paid to
Bradford W. Mitchell as non-employee Chairman will be increased to $34,000. If
a director serves on the Board of Directors of both Harleysville Mutual and
Harleysville Group he or she receives only one annual retainer; and if the
Boards of Directors of both companies meet on the same day, he or she receives
only one Board meeting fee. In such event, the cost of the retainers, meeting
fees and expense reimbursements are allocated 50% to Harleysville Mutual and
50% to Harleysville Group. If a Board meeting and a committee meeting, or two
committee meetings, are held on the same day, a director receives $600 for the
second meeting attended.
Harleysville Group entered into a one-year agreement with Bradford W.
Mitchell, its Chairman and former Chief Executive Officer, for consultant and
advisory services, effective January 1, 1994 which was renewed January 1, 1995
for an additional one-year period. Under the agreement, Mr. Mitchell assisted
with the transition in management of Harleysville Group, and advised
management on corporate matters, as requested. In 1995, Harleysville Group
paid Mr. Mitchell a monthly consulting fee of $22,916.67 plus reasonable,
verified expenses. The agreement was terminable at the option of the Board of
Directors of Harleysville Group. Although this agreement was not extended for
1996, a new one-year agreement was entered into with Mr. Mitchell to perform
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selected consulting services to management on corporate matters as requested
at a per diem rate of $5,000 plus reasonable verified expenses. It is
anticipated that management will utilize Mr. Mitchell's services under this
Agreement on a limited basis in 1996.
DIRECTORS' STOCK OPTION PROGRAMS. In 1990, Harleysville Group adopted the
1990 Directors' Stock Option Program (the "1990 Program") which provides for
the issuance of an aggregate of 47,250 shares of Common Stock, subject to
adjustment for stock splits or other changes. Under the 1990 Program non-
qualified stock options to purchase 3,150 shares were awarded to all non-
employee directors of Harleysville Group and Harleysville Mutual during the
period 1990 through May 1994. The options vest and become 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.
The 1990 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 1990 Program, the number of shares of stock subject
to such options or the 1990 Program, or the purchase price thereunder. On
February 1, 1996, there were 24,570 shares subject to such options remaining
under this program and the range of per share exercise prices was $15.00 to
$28.00. 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 provides for the issuance of an aggregate of
65,000 shares subject to adjustment for stock splits or other changes. Except
for options already granted as described above, the 1995 Program will entirely
supersede the 1990 Program. Under the 1995 Program, each existing non-employee
director of Harleysville Group and Harleysville Mutual received a one-time
grant of 5,000 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 of $25.00. Accordingly, a total of 46,220 options were granted.
Thereafter, a newly elected non-employee director or an employee director who
becomes a non-employee director of Harleysville Group or Harleysville Mutual
will receive a one-time grant of 5,000 non-qualified stock options at the
first May Board meeting following his or her election or becoming a non-
employee director. The options vest at the rate of 20% per year of active
Board service with the first 20% vesting as of the date of grant although no
option is exercisable until six months after the date of grant. The option
price per share is 100% of the fair market value of a share of Common Stock on
the date of grant. The 1995 Program is administered by the Compensation and
Personnel Development Committee of the Board of Directors of Harleysville
Group. The Committee has no discretion with regard to the eligibility or
selection of directors to receive options under the 1995 Program, the number
of shares of stock subject to such options or the 1995 Program, or the
purchase price thereunder. The 1995 Program does not provide for stock
appreciation rights.
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EXECUTIVE COMPENSATION AND
OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table provides
certain information concerning compensation received by Harleysville Group's
Chief Executive Officer and the four remaining most highly paid executive
officers (hereinafter "Named Executive Officers") as of the last fiscal year,
for the three fiscal years ended December 31, 1995, 1994 and 1993. All bonuses
and salaries are paid by Harleysville Group, and Harleysville Mutual is
charged for its proportional share pursuant to the terms of an intercompany
allocation agreement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION LONG-TERM COMPENSATION COMPENSATION ($)(5)
-------------------------- ------------------------------- -------------------
AWARDS PAYOUTS
------------- -----------------
SECURITIES
UNDERLYING
STOCK LONG-TERM
OPTIONS(3) INCENTIVE PAYOUTS
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($)(2) (# OF SHARES) ($)(4)
- ------------------------------ ---- --------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman, II... 1995 $340,000 $126,516 15,679 $77,375 $15,300
President & 1994 $300,000 $ -0- 8,500 $33,661 $ 4,500
Chief Executive Officer 1993 $195,800 $ 40,918 6,100 $42,140 $ 8,811
James C. O'Neill ....... 1995 $231,300 $ 68,596 7,734 $82,781 $10,409
Executive Vice Presi- 1994 $218,200 $ -0- 6,100 $43,693 $ 3,273
dent 1993 $193,100 $ 30,921 4,550 $54,180 $ 8,690
Corporate Services &
Subsidiary Operations
Thomas E. Roden......... 1995 $196,500 $ 68,596 7,734 $43,779 $ 8,843
Executive Vice 1994 $163,400 $ -0- 4,550 $ -0- $ 2,451
President 1993 $142,300 $ 19,602 2,070 $ -0- $ 6,406
Insurance Operations &
Branch Operations
Mark R. Cummins......... 1995 $193,700 $ 47,196 6,725 $45,434 $ 8,717
Senior Vice President 1994 $163,400 $ -0- 4,550 $ -0- $ 2,451
Chief Investment 1993 $152,600 $ 25,906 4,550 $ -0- $ 6,867
Officer
& Treasurer
Bruce J. Magee.......... 1995 $146,400 $ 35,682 5,084 $ -0- $ 6,588
Senior Vice President & 1994 $123,700 $ -0- 3,950 $ -0- $ 1,855
Chief Financial Officer 1993 $112,700 $ 12,112 910 $ -0- $ 5,071
</TABLE>
- --------
(1) Principal position as of December 31, 1995.
(2) Cash bonuses under the Senior Management Incentive Bonus Plan (the "SMIP")
for services rendered in fiscal years 1995, 1994, and 1993, have been
listed in the year earned, but were actually paid in the following year.
(3) The terms of stock options granted in fiscal years 1995, 1994 and 1993 are
described in Footnote (1) to the "Option Grants in Last Fiscal Year" Table
on page 9.
(4) Cash bonuses under the Long-Term Incentive Plan (the "LTIP") for services
rendered in fiscal years 1990-1993, 1991-1994 and 1992-1995 have been
listed in 1993, 1994, and 1995, respectively, the years in which earned,
although paid in the subsequent year.
(5) 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 year, there is a 25%, 50%, or 75% match to the Extra
Compensation Plan for all employee participants and an allocation under
the Excess Match for a percentage of each higher paid
8
<PAGE>
participant's salary up to 6%. The amounts shown reflect contributions to
the Extra Compensation Plan: a) for 1995, of $6,750 on behalf of each of
the Named Executive Officers to match 1995 pre-tax elective deferral
contributions made by each to such plan, except Mr. Magee who received
$6,588; b) for 1994, of $2,250 on behalf of each of the Named Executive
Officers to match 1994 pre-tax elective deferral contributions made by each
to such plan, except Mr. Magee who received $1,855; and c) for 1993, of
$6,746 on behalf of each of the Named Executive Officers, to match 1993
pre-tax elective deferral contributions made by each to such plan, except
for Mr. Roden who received $6,406, and Mr. Magee who received $5,071. The
remainder of each amount is the allocation for each Named Executive Officer
under the Excess Match.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The following table shows, as
to the Named Executive Officers in the Summary Compensation Table, certain
information concerning stock options granted during the 1995 year under
Harleysville Group's Equity Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR(1)
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE GRANT DATE
OPTIONS IN FISCAL PRICE EXPIRATION PRESENT
NAME GRANTED(#) YEAR (2) PER SHARE ($/SH) DATE VALUE ($)(3)
- ---- ---------- ---------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman, II... 15,679 10% $25.00 05/23/05 $152,880
James C. O'Neill........ 7,734 5% $25.00 05/23/05 $ 75,412
Thomas E. Roden......... 7,734 5% $25.00 05/23/05 $ 75,412
Mark R. Cummins......... 6,725 4% $25.00 05/23/05 $ 65,573
Bruce J. Magee.......... 5,084 3% $25.00 05/23/05 $ 49,572
</TABLE>
- --------
(1) All stock options granted under the Harleysville Group Equity Incentive
Plan in fiscal years 1995, 1994, 1993, are non-qualified options receiving
no special tax benefit, have an exercise price equal to the fair market
value of the Common Stock on the date of grant, have a term of ten years,
and vest at the rate of 50 percent each on the first and second
anniversary dates of award, except that options become immediately
exercisable upon an optionee's retirement, death or disability (but not
prior to six months from the date of grant). Retired optionees, age 61 and
younger, may exercise non-qualified options within one year of retirement
and retired optionees, age 62 and older, may exercise non-qualified
options within two years of retirement, if the options have not otherwise
expired. The exercise price may be paid by delivery of already-owned
shares. No stock appreciation rights ("SARs") were granted in 1995, 1994,
or 1993. The option agreements provide that the Compensation Committee
may, in its absolute discretion and upon such terms and conditions as it
deems appropriate, provide for the acceleration of exercisability of
options in the event of the merger or consolidation of Harleysville Group
into another corporation or the acquisition by another corporation of all
or substantially all of Harleysville Group's assets or of a controlling
interest in Harleysville Group by means of stock acquisition, or in the
event of its liquidation or dissolution.
(2) In calendar year 1995, Harleysville Group granted a total of 149,990
options representing the right to purchase 149,990 shares of Common Stock
to 136 officers and key employees under the Equity Incentive Plan.
(3) The grant date present value was determined using an option pricing model
that is other than the Black-Scholes or binomial model. The model used
assumes the rate of return of the Common Stock is 15%, less the dividend
yield at the time of issue. It assumes the option will be exercised five
years into its ten-year term, and the value at that time is discounted at
15% per year to determine its present value at time of grant. 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.
9
<PAGE>
OPTION/SAR EXERCISES AND HOLDINGS. The following table provides information,
with respect to the Named Executive Officers, concerning the exercise of
options and/or SARs during 1995 and unexercised options and SARs held as of
fiscal year-end, December 31, 1995, under Harleysville Group's Equity
Incentive Plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SECURITIES OPTIONS/SARS AT OPTIONS/SARS AT
UNDERLYING FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
OPTIONS/SARS VALUE ------------------------- -------------------------
NAME EXERCISED(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman,
II(2).................. 7,482 148,293 34,388 19,929 1,111,864 645,301
James C. O'Neill........ 7,482 136,023 44,207 10,784 1,431,423 349,186
Thomas E. Roden......... 1,244 19,195 19,423 10,009 628,917 324,091
Mark R. Cummins......... -0- -0- 16,825 9,000 544,794 291,420
Bruce J. Magee.......... 850 16,141 14,177 7,059 459,052 228,570
</TABLE>
- --------
(1) Market value of Common Stock at year-end 1995 was $32.38 per share. Value
reflects, as to both options and SARs, if any, the fair market value of
the underlying security less the option exercise price.
(2) On September 27, 1995 the Company purchased 1,613 shares of Common Stock
from Mr. Bateman at a price of $29.75 being the fair market value of the
Company's Common Stock on the NASDAQ National Market System as of the date
of the purchase to defray tax liabilities.
LONG-TERM INCENTIVE PLAN. The following table provides information
concerning awards made during the last fiscal year to the Named Executive
Officers under the Long-Term Incentive Plan. Subject to the fulfillment of
certain conditions, awards are designed to provide payments at the end of each
successive four-year performance period in amounts approximating a percentage
of each participant's salary at January 1st of the first year of each period.
Subject to the satisfaction of the Plan's conditions, each award represents
the right to receive an amount in cash on the date of payout, the amount of
which depends on Harleysville Group's average annual rate of return on equity
("ROE") from the time of the award until the payout date. The target amount is
payable if Harleysville Group's average ROE exceeds certain levels of targeted
ROE. The maximum payment is payable if Harleysville Group's average ROE
exceeds certain higher levels of targeted ROE. If ROE falls between the target
level and the maximum level then the amount of award is prorated accordingly.
Once an ROE resulting in a 40% of Target Award is achieved, an additional
incentive award based on written premium growth takes effect. If less than the
targeted level is reached, a reduced percentage of 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 1990-1993, 1991-
1994, and 1992-1995, are reported in the Summary Compensation Table under the
years 1993, 1994, and 1995 respectively, although paid in the following year.
10
<PAGE>
LONG-TERM INCENTIVE PLANS--PERFORMANCE OPPORTUNITY
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYMENTS UNDER
NON-STOCK PRICE-BASED PLANS
-----------------------------------
PERFORMANCE OR
OTHER PERIOD TARGET AWARD
UNTIL MATURATION PERCENT OF THRESHOLD TARGET MAXIMUM
OR PAYOUT(1) 1/1/95 SALARY ($) ($) ($)(2)
---------------- ------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman, II... 4 years 45% 0 153,000 229,500
James C. O'Neill........ 4 years 35% 0 80,995 121,493
Thomas E. Roden......... 4 years 35% 0 68,775 103,163
Mark R. Cummins......... 4 years 25% 0 48,425 72,638
Bruce J. Magee.......... 4 years 25% 0 36,600 54,900
</TABLE>
- --------
(1) The table shows the range of potential payouts under the Plan for a four-
year performance period commencing in 1995. Four-year performance periods
under the LTIP were completed in 1993, 1994 and 1995 and actual payments
thereunder are shown in the Summary Compensation Table for those years.
Since the Plan's inception in 1988, successive four-year performance
periods have begun in each fiscal year, and it is intended that additional
four-year performance periods will commence each year.
(2) The Maximum Award is set at 150% of the Target Award; if performance
computations would result in a higher award, it will be reduced to the
Maximum Award amount.
11
<PAGE>
PENSION PLANS. The tables below show certain estimated annual benefits
payable upon retirement to the Named Executive Officers under the Pension Plan
in conjunction with a Supplemental Pension Plan. (The Pension Plan and the
Supplemental Pension Plan are together referred to as the "Pension Plans").
Pension Plan Table I shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Bateman, Mr. O'Neill, Mr. Roden, and
Mr. Magee, who were first employed prior to January 1, 1989.
PENSION PLAN TABLE I
<TABLE>
<CAPTION>
AVERAGE
5 YEAR ESTIMATED AMOUNT OF ANNUAL PENSION BENEFIT
CREDITED -----------------------------------------------------
SALARY 10 15 20 25 30 35
@ 12/31/95 YEARS YEARS YEARS YEARS YEARS YEARS
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$600,000................. $132,120 $198,180 $264,240 $330,300 $330,300 $330,300
$550,000................. $120,870 $181,305 $241,740 $302,175 $302,175 $302,175
$500,000................. $109,620 $164,430 $219,240 $274,050 $274,050 $274,050
$450,000................. $ 98,370 $147,555 $196,740 $245,925 $245,925 $245,925
$400,000................. $ 87,120 $130,680 $174,240 $217,800 $217,800 $217,800
$350,000................. $ 75,870 $113,805 $151,740 $189,675 $189,675 $189,675
$300,000................. $ 64,620 $ 96,930 $129,240 $161,550 $161,550 $161,550
$250,000................. $ 53,370 $ 80,055 $106,740 $133,425 $133,425 $133,425
$200,000................. $ 42,120 $ 63,180 $ 84,240 $105,300 $105,300 $105,300
$150,000................. $ 30,870 $ 46,305 $ 61,740 $ 77,175 $ 77,175 $ 77,175
$125,000................. $ 25,245 $ 37,868 $ 50,490 $ 63,113 $ 63,113 $ 63,113
</TABLE>
Pension Plan Table II shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Cummins, who was first employed
after January 1, 1989.
PENSION PLAN TABLE II
<TABLE>
<CAPTION>
AVERAGE
5 YEAR ESTIMATED AMOUNT OF ANNUAL PENSION BENEFIT
CREDITED -----------------------------------------------------
SALARY 10 15 20 25 30 35
@ 12/31/95 YEARS YEARS YEARS YEARS YEARS YEARS
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$600,000................. $115,704 $173,556 $231,408 $289,260 $289,260 $289,260
$550,000................. $105,954 $158,931 $211,908 $264,885 $264,885 $264,885
$500,000................. $ 96,204 $144,306 $192,408 $240,510 $240,510 $240,510
$450,000................. $ 86,454 $129,681 $172,908 $216,135 $216,135 $216,135
$400,000................. $ 76,704 $115,056 $153,408 $191,760 $191,760 $191,760
$350,000................. $ 66,954 $100,431 $133,908 $167,385 $167,385 $167,385
$300,000................. $ 57,204 $ 85,806 $114,408 $143,010 $143,010 $143,010
$250,000................. $ 47,454 $ 71,181 $ 94,908 $118,635 $118,635 $118,635
$200,000................. $ 37,704 $ 56,556 $ 75,408 $ 94,260 $ 94,260 $ 94,260
$150,000................. $ 27,954 $ 41,931 $ 55,908 $ 69,885 $ 69,885 $ 69,885
$125,000................. $ 23,079 $ 34,619 $ 46,158 $ 57,698 $ 57,698 $ 57,698
</TABLE>
Covered compensation is the highest five-year average of the amounts shown
in the "Salary" column of the Summary Compensation Table.
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, 8 years; Mr. O'Neill, 22 years; Mr. Roden, 12 years; Mr.
Cummins, 4 years; and Mr. Magee, 10 years.
12
<PAGE>
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.
----------------
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF HARLEYSVILLE
GROUP'S PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS
PROXY STATEMENT, IN WHOLE OR IN PART, THE FOLLOWING REPORT AND PERFORMANCE
GRAPHS ON PAGES 16 AND 17 SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH
FILINGS.
REPORT OF THE COMPENSATION
& PERSONNEL DEVELOPMENT COMMITTEE
The Compensation & Personnel Development Committee (the "Compensation
Committee") is charged generally with the review and development of
compensation and personnel practices regarding Harleysville Group and its
employees, including executive officers. In addition to setting compensation
policies, the Compensation Committee oversees Harleysville Group's management
development and succession programs.
The Compensation Committee bases its compensation recommendations upon
information derived from multiple sources including the personnel department
of Harleysville Group; outside compensation consultants; industry surveys; and
recommendations of management. The Committee believes that consideration of
these diverse sources of information helps to create a balanced and
appropriate compensation program.
The Compensation Committee considers factors such as the following in
establishing executive compensation:
. the personal performance of the executive officer;
. the achievement by Harleysville Group of annual corporate goals;
. the achievement by Harleysville Group of an acceptable return on equity;
. the performance of Harleysville Group contrasted with the performance of
certain of its competitors;
. the need of Harleysville Group to attract, retain and motivate superior
management.
The consideration of these different factors permits the encouragement of
corporate goals including but not limited to sustained and consistent
management; enhancement of stockholder value; and the completion of strategic
initiatives. Reflecting these different factors, the compensation program for
executive officers contains several components:
1. BASE SALARY--Base salary is based upon a general competitive review and
a review of industry-specific data in which the peer group is determined
primarily by size of company. This group is unrelated to the performance
graph peer group although each peer group may contain some of the same
companies. Harleysville Group believes size of company is more useful in
determining salary than using the performance graph peer group which
includes companies of various sizes and substantially different
characteristics, e.g., distribution system and geographical locale. Base
salary reflects corporate performance as measured against the industry
and always reflects an evaluation of the executive officer's performance
of his or her duties. The corporate performance measures include return
on equity, combined ratio and premium growth. Combined ratio as used in
this report is a standard measurement in the property/casualty insurance
industry and means the ratio produced by adding the ratio of losses,
loss adjustment expenses and policyholders' dividends to net earned
premiums, and the ratio of underwriting expenses to net written premium.
Working with the advice of its outside compensation consultants,
Harleysville Group generally sets its competitive salary midpoint for an
executive officer position at the median level compared to those
companies which it surveys. A salary range based on this midpoint is
then developed.
13
<PAGE>
2. SENIOR MANAGEMENT INCENTIVE BONUS PLAN--This plan is designed to direct
executive officer attention to the attainment of certain annual
corporate goals. For 1995, the goals included: return on equity; direct
written premium growth; combined ratio; service and processing
timeliness; and peer group standing on the basis of combined ratio. The
weightings for each factor are: return on equity--20%; premium growth--
15%; combined ratio--25%; service and processing goals--15%; and peer
group ranking--25%. The peer group is a group of thirteen
property/casualty insurance companies sharing comparable size and
characteristics with the Company. The plan is designed to pay bonuses at
a level of 20% to 30% of annual salary when the target goals are
achieved. Payouts may range from 50% to 150% of the target award based
upon performance falling within a stated range of the target. 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 with similar characteristics. There is no payout if all minimum
targets are not met and there is no payout unless the combined after-tax
net income as reported on the Combined Annual Statement 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 and
includes financial information on a combined basis for all
property/casualty insurance companies owned by Harleysville Group and
Harleysville Mutual Insurance Company. Additionally, for years prior to
1996 payouts were subject to reduction on account of the failure of the
executive officer to achieve personal, discretionary goals. Commencing
in 1996, all payouts will be based solely on objective criteria. The
payouts since 1992 reflect that the target goals were not fully attained
in all instances. There was no payout earned for 1994 because combined
after-tax net income did not equal or exceed the aforementioned
threshold requirement of 2% of combined net earned premium.
The peer group for the Senior Management Incentive Bonus Plan consists of
companies chosen according to various factors of comparability including
size, method of operations, and type of distribution system and is
unrelated to the performance graph peer group, although both peer groups
may contain some of the same companies.
3. LONG TERM INCENTIVE PLAN--This plan has been designed to reward certain
executive officers of Harleysville Group primarily for the attainment of
long-term return on equity goals. Under the plan covering the four-year
period beginning in 1995, the target return on equity goal is 11%, and,
if return on equity is 7% or greater, an additional incentive is payable
so long as written premium growth is at least 8%. Again, 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 Senior Management Incentive Bonus Plan above. In the
event that return on equity falls below a stated level, a negative
percentage of the target award will be assessed. Potential target awards
for each year are designed to range from 25% to 45% of a participant's
salary. The actual payout under the Plan for the four-year period ending
in 1995, is 128% of target for Mr. Bateman and the other Named Executive
Officers who participate. These results are due to the return on equity
being higher than the target return for three of the four years, i.e.,
1992, 1993 and 1995.
4. EQUITY INCENTIVE PLAN--This plan is designed to encourage stock
ownership in Harleysville Group by officers and certain key employees
and to provide additional incentives to work to maximize stockholder
value. Harleysville Group typically grants stock options annually to
officers and key employees of Harleysville Group, its parent and its
designated subsidiaries. For awards in 1995, the Compensation Committee
acted upon the advice of Harleysville Group's outside compensation
consultants to increase awards above those existing in 1994 and 1993 for
Named Executive Officers. The determination was made by the Compensation
Committee in order to maintain executive officer total compensation,
i.e., the total amount of cash compensation available to an executive
officer in any one year, closer to the market average. The companies
surveyed in determining the market average are those used for
determining base salary. In order to receive stock options at a level
necessary to keep the total cash compensation available at the market
average, executive officers above a certain level,
14
<PAGE>
including Mr. Bateman and all Named Executive Officers, must own a
minimum number of shares of Harleysville Group Common Stock. In 1995 all
such officers owned at least the required minimum number of shares.
Mr. Bateman's compensation was determined by the Compensation Committee
following the factors set forth above. His total compensation, composed of base
salary, Senior Management Incentive Bonus Plan award, Long-Term Incentive Plan
award, and stock option grants was compared with compensation packages of
similar officers within the insurance industry. His awards under the Senior
Management Incentive Bonus Plan, Long-Term Incentive Plan and Equity Incentive
Plan were made pursuant to those plans and pursuant to the normal
considerations by the Compensation Committee. In determining Mr. Bateman's base
salary in 1995, the Committee evaluated his personal and company performance on
both a qualitative and quantitative level. Harleysville Group enjoyed an
excellent year in 1995. The return on equity in 1995 rebounded from 6.7% in
1994 to 13.6% in 1995, and the combined ratio declined to 103.4% from 1994's
111.4%. During 1995 direct written premium grew to $504.7 Million from $448.6
Million in 1994, while net written premium growth (i.e., all premiums written
net of reinsurance premiums paid) increased to $505.5 Million compared to
$449.4 Million in 1994, and earned premium grew from $447.7 Million in 1994 to
$477.0 Million in 1995. Operating earnings per share were $2.95 in 1995
compared to $1.23 in 1994, and net income per share for the year was $3.06, a
118% increase over 1994 net income per share of $1.40. Stockholders' equity
increased from $276.9 Million to $345.0 Million with book value per share
increasing from $20.72 to $25.15. The Committee further took into consideration
Mr. Bateman's results in continuing to manage successfully his succession as
Chief Executive Officer, continued geographical expansion into the mid-south
and upper mid-west areas, new product initiatives, expense reduction including
enhanced agency/company interface automation, and implementation of an agency
stock purchase plan to better align the interests of the Harleysville Group and
its superior independent agencies. Based on the foregoing factors, with all
being considered equally, the Committee determined the appropriate base salary
compensation level for Mr. Bateman.
The limits on full deductibility of compensation for Harleysville Group posed
by Section 162(m) are not currently a problem for Harleysville Group inasmuch
as compensation levels for the Named Executive Officers (not including any
compensation derived through exercise of options granted pursuant to the Equity
Incentive Plan) do not currently approach the $1,000,000 threshold figure and
any compensation derived from exercise of stock options is fully deductible
under current requirements for exemption from inclusion in income. Harleysville
Group will, of course, continue to monitor this situation and intends to take
any action required to maintain the full deductibility of compensation,
specifically including future amendment to the Equity Incentive Plan.
COMPENSATION & PERSONNEL DEVELOPMENT COMMITTEE
H. Bryce Jordan, Chairperson
Robert D. Buzzell
William E. Strasburg
15
<PAGE>
STOCK PERFORMANCE GRAPHS
The following graphs(/1/) show changes over the past nine-year period and
five-year period (all full calendar year periods since the Company's initial
public offering in May 1986) in the value of $100 invested in (1) Harleysville
Group Common Stock; (2) the NASDAQ Stock Market index(/2/); and (3) the Peer
Group index(/3/). The stock price performance shown on the graphs below is not
necessarily indicative of future price performance. All values are as of the
last trading day of each year.
COMPARISON OF NINE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harleysville Group 100.00 95.00 133.90 209.50 188.20 268.70 365.90 400.30 330.40 452.90
NASDAQ Stock Market 100.00 95.50 113.30 137.30 116.60 187.20 217.90 250.10 244.50 345.50
Peer Group 100.00 96.50 103.00 145.10 138.70 196.90 264.80 273.70 263.80 369.50
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(A)/ The lines represent annual index levels derived from compounded daily
returns that include all dividends.
/(B)/ The indexes are reweighted daily, using the market capitalization on the
previous trading day.
/(C)/ The index level for all series was set to 100.00 on 12/29/90.
16
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Harleysville Group 100.00 142.80 194.40 212.70 175.50 240.70
NASDAQ 100.00 160.60 186.90 214.50 209.70 296.30
Peer Group 100.00 142.00 190.90 197.40 190.20 266.40
- --------------------------------------------------------------------------------------
</TABLE>
/(A)/ The lines represent annual index levels derived from compounded daily
returns that include all dividends.
/(B)/ The indexes are reweighted daily, using the market capitalization on the
previous trading day.
/(C)/ The index level for all series was set to 100.00 on 12/29/90.
The year-end values of each investment shown in the preceding graphs are
based on share price appreciation plus dividends, with the dividends
reinvested as of the day such dividends were ex-dividend. The calculations
exclude trading commissions and taxes. Total stockholder returns from each
investment, whether measured in dollars or percentages, can be calculated from
the year-end investment values shown beneath each graph.
- --------
(1) Prepared by the Center for Research in Security Prices ("CRSP").
(2) Based on CRSP Index for NASDAQ Stock Market (U.S. Companies).
(3) The Peer Group Index includes all the 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; (312) 702-7467.
17
<PAGE>
APPROVAL OF THE 1996 DIRECTORS' STOCK PURCHASE PLAN
PROPOSAL
At the Annual Meeting the stockholders are being asked to approve the
adoption of the 1996 Directors' Stock Purchase Plan ("1996 Plan") which the
Board of Directors adopted on February 28, 1996. A total of 100,000 shares are
reserved for issuance under the 1996 Plan. No shares have been purchased under
the 1996 Plan. Approval of the 1996 Plan requires the affirmative vote of a
majority of votes represented at the meeting in person or by proxy. THE BOARD
OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL OF THE PLAN.
The 1996 Plan is summarized below.
PURPOSE
The purpose of the 1996 Plan is to provide outside directors of Harleysville
Group and its parent, Harleysville Mutual including Directors Emeriti
("Directors") with an opportunity to increase their proprietary interest in
the Company. A director is an outside director if he or she is not also a
common law employee of Harleysville Group or its parent. The 1996 Plan is
designed to qualify for exemption from Section 16(b) of the Securities
Exchange Act of 1934 pursuant to Rule 16b-3(c) of the Securities and Exchange
Commission.
SUMMARY OF THE PLAN
ELIGIBILITY AND ENROLLMENT. All Directors of Harleysville Group and
Harleysville Mutual are eligible to participate in the 1996 Plan. At present
there are eleven Directors and three Directors Emeriti of Harleysville Group
Inc. and Harleysville Mutual Insurance Company. There will be twenty (20)
subscription periods, with the first subscription period commencing July 15,
1996 and the last one scheduled to commence January 15, 2006. Directors may
enroll during a two-week enrollment period immediately preceding each
subscription period. No Director may assign his or her rights to participate
in the 1996 Plan to anyone else.
PURCHASE PRICE. The purchase price of a share will be the lesser of 85% of
the fair market value of such share on the last trading day before the first
day of the subscription period or 85% of the fair market value of such share
on the last trading day of the subscription period 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
National Market System for the applicable date.
PAYMENT OF PURCHASE PRICE. Contributions may be made through either (1)
deductions from retainer and attendance fees ("Fees"), or (2) lump sum
contribution, or (3) both. Contributions are subject to the limitations that a
Director may deduct from 5% to 100% of his or her Fees with a minimum
deduction of $500 per subscription period, and the total amount that can be
contributed from Fees and lump sum contribution in any subscription period
shall be $20,000. At the close of each subscription period, the amount of
contributions will be determined and credited to the Directors' Plan Account.
A Director may discontinue his or her participation in the 1996 Plan at any
time or may change the rate of deduction from Fees effective for the next
subscription period. If at any time the number of shares subscribed for
exceeds the number of shares available, the shares available will be allocated
to participating Directors in proportion to existing 1996 Plan Account
balances.
ISSUANCE OF SHARES. Shares will be issued in book entry form. As a result,
at the end of each subscription period, a Director will be credited with the
number of shares, including fractional shares to four decimal places, produced
by dividing the amount contributed during the subscription period by the
purchase price.
HOLDING PERIOD. Directors must hold all stock acquired under the 1996 Plan
for a period of at least six months from the date of acquisition.
WITHDRAWAL. If a Director chooses, he or she may withdraw participation in
the 1996 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.
Cessation of Director status for any reason is an automatic withdrawal.
18
<PAGE>
SOURCE OF SHARES
The shares available under the 1996 Plan may be either authorized but
unissued shares or treasury shares re-acquired by Harleysville Group.
Distribution of shares will be made only after the registration of such shares
with the SEC or pursuant to exemptions from registration under applicable SEC
rules and regulations.
ADMINISTRATION
The 1996 Plan will be administered by the Compensation and Personnel
Committee of the Board of Directors of Harleysville Group. The Committee will
have the general authority to interpret the provisions of the 1996 Plan and
adopt such rules and regulations as it deems necessary or desirable for the
administration of the Plan; provided, however, that the Committee will have no
discretion with respect to eligibility of Directors to participate, the number
of shares of stock subject to the 1996 Plan, or the purchase price thereunder.
FEDERAL INCOME TAX CONSEQUENCES
Income will be realized for federal income tax purposes by a Director upon
the purchase of shares under the 1996 Plan. At the time of purchase, a
Director will be treated as having received ordinary income in an amount equal
to the difference between the fair market value of the shares purchased and
the price paid for such shares. Such difference will be deductible by the
Company for federal income tax purposes.
A Director's basis in the Common Stock purchased is equal to the purchase
price plus the amount of ordinary income recognized. When a Director disposes
of shares of Common Stock acquired under the 1996 Plan, any amount received in
excess of the value of the shares of Common Stock on which the Director was
previously taxed will be treated as long-term or short-term 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 loss,
depending upon the holding period of the shares.
The foregoing is only a summary of federal income tax consequences, and does
not purport to be complete.
ADJUSTMENTS
The 1996 Plan provides for adjustments in the shares reserved and available
for the 1996 Plan, by reason of a stock split, stock dividend, merger,
consolidation, combination of shares or similar occurrence.
TERMINATION AND AMENDMENTS
The 1996 Plan may be suspended or terminated by the Board at any time. The
Board may amend the 1996 Plan for any reason, except that it may not, without
stockholder approval, change the eligibility to participate in the 1996 Plan,
the number of shares of stock subject to purchase or the purchase price
thereunder, or materially increase the benefits accruing to participants under
the 1996 Plan.
PARTICIPATION IN THE PLAN
Participation in the 1996 Plan is voluntary and is dependent upon each
Director's election to participate and his or her determination of the level
of contribution. Accordingly, future purchases under the Plan are not
determinable. Nevertheless, the following table sets forth an estimate of the
shares that would have been purchased during the subscription periods
commencing in 1995 had the Plan been in existence and each director
contributed the maximum amount of $20,000 per subscription period.
<TABLE>
<CAPTION>
DOLLAR NUMBER OF
GROUP(1) VALUE ($)(2) UNITS (#)
-------- ------------ ---------
<S> <C> <C>
Non-Executive Directors Group (14).................... $560,000 26,490
</TABLE>
- --------
(1) None of the Executive Officers (including those named in the Summary
Compensation Table) or other officers and employees of the Company are
eligible to participate in the Plan.
(2) The dollar value of the shares that could have been purchased is based on
a purchase price of $20.83 per share for the January 15 to July 14, 1995
subscription period and $21.46 per share for the July 15 to January 14,
1996 subscription period.
19
<PAGE>
APPROVAL OF AMENDMENT OF CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
PROPOSAL
At the Annual Meeting, the stockholders are also being asked to approve an
Amendment of the Certificate of Incorporation to increase the authorized
Common Stock of the Corporation from 23,000,000 shares of the par value of
$1.00 per share to 80,000,000 shares of the par value of $1.00 per share. The
Board of Directors approved the Amendment on February 28, 1996. Approval of
the increase in number of authorized shares requires the affirmative vote of a
majority of votes represented at the meeting in person or by proxy. THE BOARD
OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
Article Four, Paragraph (a) as proposed to be amended reads in its entirety
as follows:
"(a) The aggregate number of shares which the Corporation has authority
to issue is: Eighty Million (80,000,000) shares of Common Stock of the par
value of One Dollar ($1.00) per share (the "Common Stock") and One Million
(1,000,000) shares of Series Preferred Stock of the par value of One Dollar
($1.00) per share (the "Preferred Stock")."
The stockholders of Harleysville Group last approved an increase in the
authorized Common Stock in April 1992. Since that time, the number of
outstanding shares of Common Stock has increased from 12,484,791 outstanding
shares as of February 10, 1992 to 13,770,310 shares as of March 13, 1996.
Additional shares are reserved for issuance under benefit plans and the
Dividend Reinvestment and Stock Purchase Plan.
PURPOSE
The Board of Directors believes that it is desirable to have the additional
authorized Common Stock available for issuance from time to time for stock
splits, stock dividends or other distributions, financings, investment
opportunities, acquisitions, employee benefit plans and other corporate
purposes. In particular, in order to increase investor interest in Company
Stock, Management may recommend to, and the Board of Directors may consider, a
split of the Company's Stock. The timing of such recommendation and
consideration will depend upon the trading price of a share of Common Stock
and market conditions. Furthermore, although the increase in authorized Common
Stock will facilitate the issuance of stock in connection with an acquisition,
the Company currently has no plans to issue shares of stock for such purposes.
In addition to the proposed Directors' Stock Purchase Plan described herein,
which provides for the reservation of 100,000 shares and for which sufficient
authorized shares currently exist, while the Company has no agreements or
commitments at this time with respect to additional shares, the Company is
considering other ways to increase Directors' ownership of Company stock, in
order to better align their interests with those of stockholders, including a
one-time grant of restricted stock and payment of directors' fees, in whole or
in part, in Company stock. Having such additional authorized shares of Common
Stock available for issuance in the future would give Harleysville Group
greater flexibility and allow such shares to be issued without the expense and
delay of a special stockholders' meeting. No further action or authorization
by the stockholders would be necessary prior to the issuance of additional
shares of Common Stock unless such action is required for a particular
transaction by applicable law, regulatory agencies or rules of any stock
exchange on which Harleysville Group's Common Stock may then be listed. The
issuance of such additional shares in the future could result in a dilution of
the equity of and earnings on the presently outstanding shares of Common
Stock.
It should be noted that the increased availability for issuance of shares of
Common Stock could enable the Board of Directors to render more difficult or
discourage an attempt to obtain control of Harleysville Group by means of a
merger, tender offer or other business combination transaction directed at the
Company. For example, the issuance of shares of common stock in a public or
private sale, merger or similar transaction would increase the number of a
company's outstanding shares, thereby diluting the interest of a party
attempting to obtain
20
<PAGE>
control of the company. Furthermore, some companies have issued warrants or
other rights to acquire additional shares of common stock to the holders of
common stock to discourage or defeat unsolicited stock accumulation programs
and acquisition proposals, which program or proposals may be viewed by the
board of directors as not being in the best interests of the company and its
stockholders. Given the controlling interest of Harleysville Mutual,
Harleysville Group is not aware of any attempt, whether formal or informal, to
acquire a controlling interest in the Company; moreover, Harleysville Group
has no present plan or intention to utilize the additional shares of Common
Stock as an anti-takeover device.
Stockholders have no preemptive right to purchase additional shares when
issued.
CERTAIN TRANSACTIONS
Harleysville Group was formed by Harleysville Mutual in 1979 and was a
wholly-owned subsidiary of Harleysville Mutual until June 1986, when shares of
Harleysville Group's Common Stock were sold in a public offering, thereby
reducing Harleysville Mutual's ownership of Harleysville Group's outstanding
Common Stock 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, some of which are summarized
herein, have been on terms no less favorable to Harleysville Group than the
terms that could have been negotiated with an independent third party.
Under the terms of 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 $2,754,000. Harleysville Mutual may
also pay additional rent, based on a formula, for any additions, improvements
or renovations. There was no additional rental payment for 1995. 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.
Since January 1, 1993, Harleysville Group has provided certain management to
Harleysville Mutual and certain other 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 $6,994,000 in 1995 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. The loan bears interest at LIBOR
plus 1%, with no penalty for prepayment. It is a demand loan with a stated
maturity in 1998.
Harleysville Group's property and casualty insurance subsidiaries (except
for Lake States Insurance Company), 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 expenses 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 1995
was 60%. On January 1, 1996, Harleysville Group's pool participation was
increased to 65%. The pooling agreement may be amended or terminated by
agreement of the parties. Information describing the pooling arrangement is
contained in Harleysville Group's 1995 Annual Report to Stockholders, a copy
of which is enclosed with this Proxy Statement and to which reference is
hereby made.
21
<PAGE>
Mr. Mitchell will receive in 1996 a payout of $258,248 for the four-year
period 1992-1995 under the Long-Term Incentive Plan for his services as Chief
Executive Officer during 1992 and 1993.
Mr. O'Neill, who retired effective February 16, 1996, entered into a
retirement and consulting agreement with the Company for consulting services
through 1997. Under said agreement Mr. O'Neill will receive approximately
$118,000 in 1996 and $110,000 in 1997 plus expenses which figures include
payment for 46 days of consulting services. In the event the number of days of
consulting services at the request of the Company exceeds 46, Mr. O'Neill will
receive $2,000 a day for each such additional day of consulting services, plus
expenses.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG Peat Marwick, LLP, the independent public
accountants who audited Harleysville Group's 1995 financial statements, will
attend the Annual Meeting, will have the opportunity to make a statement, if
they desire to do so, and will be available to respond to any appropriate
questions presented by stockholders at the Annual Meeting.
ANNUAL REPORT
A copy of Harleysville Group's Annual Report for its fiscal year ended
December 31, 1995 is being mailed to Harleysville Group's stockholders with
this Proxy Statement.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions of the
proxy rules of the SEC, wishes to submit a proposal for inclusion in
Harleysville Group's proxy statement for its 1997 Annual Meeting of
Stockholders must deliver such proposal in writing to Harleysville Group's
Secretary at Harleysville Group's principal executive offices at 355 Maple
Avenue, Harleysville, Pennsylvania 19438, not later than November 13, 1996.
OTHER PROPOSALS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the Notice of Annual
Meeting, but if any matters are properly presented, it is the intention of the
persons named in the accompanying proxy to vote on such matters in accordance
with their judgment.
Date: March 22, 1996
22
<PAGE>
XPU-056 (Ed. 3-96)
<PAGE>
APPENDIX 1
HARLEYSVILLE GROUP INC.
1996 DIRECTORS' STOCK PURCHASE PLAN
-----------------------------------
As approved by the Board of Directors
on February 28, 1996
Section I - Purpose
-------------------
The Harleysville Group Inc. Directors' Stock Purchase Plan (the "Plan") is
established by the Harleysville Group Inc. (the "Company") for the benefit of
the outside directors of the Company and its parent, Harleysville Mutual
Insurance Company, including Directors Emeriti ("Directors"). A Director shall
be an outside Director if he or she is also not a common law employee of the
Company or its parent. The purpose of the Plan is to provide each Director an
opportunity to increase his or her proprietary interest in the Company. The
Plan is designed to qualify for exemption from Section 16(b) of the Securities
Exchange Act of 1934 pursuant to Rule 16b-3(c) of the Securities and Exchange
Commission.
Section II - Eligible Directors
-------------------------------
All Directors are eligible to participate.
Section III - Duration of Offer and Subscription Periods
--------------------------------------------------------
This plan shall be in effect from July 1, 1996 through and including
July 31, 2006. During the duration of the Plan there will be twenty (20)
"Subscription Periods". Each Subscription Period runs from January 15 through
July 14 or from July 15 through January 14.
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 2
Section IV - Number of Shares to be Offered
-------------------------------------------
The total number of shares to be made available under the Plan is 100,000
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 Section
XIV of the Plan.
Section V - 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 a 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.
Section VI - Amount of Stock Available to be Purchased
-------------------------------------------------------
and Methods of Payment
----------------------
Directors shall have the option to purchase Stock of the Company at the end
of each Subscription Period. The amount available for purchase by each Director
shall be
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 3
the amount of stock that can be purchased at the Subscription Price by the
amount of contributions ("Contribution Amount") made during each Subscription
Period by a Director. The Contribution Amount may be paid through either (1)
deduction from retainer and attendance fees ("Fees"), or (2) lump sum
contribution or (3) both and is subject to the limitations that (a) a Director
may deduct from 5% to 100% of his or her Fees, provided that the minimum
deduction shall be $500 per Subscription Period, and (b) the total amount that
can be contributed from Fees and lump sum contributions in any Subscription
Period shall be $20,000. A lump sum contribution must be received by the
Company not later than December 31 or June 30 of the applicable Subscription
Period.
Section VII - Enrollment
------------------------
A Director who desires to exercise his or her option to purchase stock
during a Subscription Period through deduction from Fees must file a
subscription agreement prior to the start of such Subscription Period. Once
enrolled, a Director will continue to participate in the Plan for each
succeeding Subscription Period until he or she ceases to be a Director or
withdraws from the Plan. If a Director desires to change his or her rate of
deduction he or she may do so effective for the next Subscription Period by
filing a new subscription agreement prior to the start of the next Subscription
Period.
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 4
Section VIII - Procedure for Purchase of Shares
-----------------------------------------------
The Company will maintain on its books a "Plan Account" in the name of each
participating Director. At the close of each Subscription Period, the
Contribution Amount will be determined and credited to the Director's Plan
Account. As of the last day of each Subscription Period, the Contribution Amount
will be divided by the Subscription Price for such Subscription Period and the
Director's Plan Account will be credited with the number of whole and fractional
shares which results. Shares will be issued in a book entry form with the
Company's stock transfer agent. Each participating Director will receive a
statement of account in a timely fashion 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 participating
Directors in proportion to their Plan Account balances.
Section IX - Withdrawal from the Plan
-------------------------------------
A Director may withdraw from the Plan at any time. At the time of
withdrawal the amount credited to the Director's Plan Account will be refunded
in cash without interest.
Section X - Holding Period
--------------------------
Directors must hold all Stock acquired under the Plan for a period of at
least six (6) months from the date of acquisition, i.e., the end of each
Subscription Period. The
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 5
transfer agent shall not be permitted to transfer such shares until the
expiration of such six (6) month period.
Section XI - Cessation of Directorship
--------------------------------------
Cessation of Director status for any reason including death, disability or
retirement shall be treated as an automatic withdrawal as set forth in Section
IX.
Section XII - Assignment
------------------------
No Director may assign his or her subscription or rights to subscribe to
any other person and any attempted assignment shall be void.
Section 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.
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 6
Section XIV - Amendment or Discontinuance of the Plan
-----------------------------------------------------
The Board of Directors of the Company shall have the right to amend,
modify or terminate the Plan at any time without notice provided that no
participant's existing rights are adversely affected thereby and provided
further that without the approval of the holders of a majority of the issued and
outstanding shares of Stock no such amendment shall increase the total number of
shares subject to the Plan, change the formula by which the price at which the
shares shall be sold is determined, change eligibility to participate in the
Plan, or materially increase the benefits accruing to participants under the
Plan. The provisions of the Plan may not be amended more than once every six
months other than to conform to changes in the Internal Revenue Code of 1986 or
Rules thereunder.
Section XV - Administration
---------------------------
The Plan shall be administered by the Compensation and Personnel
Development Committee of the Board of Directors 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.
Section XVI - Titles
--------------------
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
<PAGE>
1996 Directors Stock Purchase Plan
Page No. 7
Section XVII - Applicable Law
-----------------------------
The Plan shall be construed, administered and governed in all respects
under the laws of the Commonwealth of Pennsylvania.
<PAGE>
APPENDIX 2
HARLEYSVILLE LOGO
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Robert Simpson, Jr., Bruce
J. Magee, and Roger A. Brown, 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 24, 1996, 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.
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 24, 1996
10:00 A.M.
355 Maple Avenue
Harleysville, PA 19438
<PAGE>
1. ELECTION OF CLASS C 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. Walter R. Bateman, II Gerard G. Johnson
William E. Strasburg
[ ] [ ]
2. Approval of adoption of the 1996
Directors' Stock Purchase Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of Amendment of Certificate
of Incorporation to increase the
authorized number of Shares of Common
Stock from 23,000,000 to 80,000,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
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.
[ ] This proxy will be voted as specified. If a
choice is not specified, the proxy will be
voted FOR each proposal stated above.
This proxy should be dated, signed by the
[Name & Address] stockholder exactly as his name appears
herein and returned promptly in the enclosed
envelope. Persons signing in a fiduciary
capacity should so indicate.
_____________________________________ (SEAL)
Signature of Stockholder(s)
[ ] _____________________________________ (SEAL)
Signature of Stockholder(s)
Date: _______________________________, 1996
Please sign, date and return the proxy card using the enclosed envelope.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Fold and detach here.
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 24, 1996
10:00 A.M.
355 Maple Avenue
Harleysville, PA 19438
