SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Harleysville Group Inc.
-------------------------------
(Name of Registrant as Specified In Its Charter)
-------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
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4) Date Filed:
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<PAGE>
[HARLEYSVILLE GROUP INC. LOGO]
HARLEYSVILLE GROUP INC.
A National Network of Regional Insurers
Bradford W. Mitchell
Chairman of the Board
355 Maple Ave.
Harleysville, PA 19438-2297
March 20, 1998
Dear Harleysville Group Inc. Stockholder:
You are cordially invited to attend the Annual Meeting of the Stockholders
of Harleysville Group Inc. at the Home Office of the Company, 355 Maple Avenue,
Harleysville, Pennsylvania on Wednesday, April 22, 1998, at 10:00 A.M.
At the Meeting, stockholders will elect a class of directors. We will also
review Harleysville Group Inc.'s 1997 performance and will be pleased to answer
your questions about the Company. Enclosed with this proxy statement are your
proxy card and the 1997 Annual Report.
To assist our stockholders in better understanding the Company, we have
written the proxy statement in plain English. We are one of the first companies
to adopt this format and we hope you enjoy it. We welcome your comments.
We look forward to seeing you on April 22, 1998. Whether or not you plan
to attend the meeting in person, it is important that you complete and return
the enclosed proxy card in the envelope provided so that your shares can be
voted at the meeting as you have instructed.
Sincerely,
/s/ Bradford W. Mitchell
--------------------------------
Bradford W. Mitchell
<PAGE>
[HARLEYSVILLE GROUP INC. LOGO]
HARLEYSVILLE GROUP INC.
A National Network of Regional Insurers
Roger A. Brown
Secretary
355 Maple Ave.
Harleysville, PA 19438-2297
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1998
To the Stockholders of
HARLEYSVILLE GROUP INC.
The Annual Meeting of Stockholders of HARLEYSVILLE GROUP INC. will be held
at 10:00 A.M., Wednesday, April 22, 1998 at its headquarters at 355 Maple
Avenue, Harleysville, Pennsylvania 19438, for the following purposes:
1. To elect three Class A directors; and
2. To transact such other business as may properly be presented.
YOUR BOARD RECOMMENDS A VOTE IN FAVOR OF THE NOMINATED DIRECTORS.
The Board of Directors has fixed the close of business on March 6, 1998 as
the record date for determining the stockholders entitled to vote at the Annual
Meeting.
For further information on the individuals nominated as directors, you are
urged to read the proxy statement that follows.
This notice, the proxy statement, the proxy card and the 1997 Annual
Report to Stockholders are being distributed on or about March 20, 1998.
By Order of the Board of Directors,
/s/ Roger A. Brown
-----------------------------------
Roger A. Brown
Secretary
March 20, 1998
Harleysville, Pennsylvania
<PAGE>
Table of Contents
ANNUAL MEETING OF STOCKHOLDERS 1
PURPOSE OF PROXY STATEMENT 1
BUSINESS TO BE TRANSACTED 1
VOTING PROCEDURES 1
OTHER INFORMATION 2
BOARD OF DIRECTORS 3
ELECTION OF DIRECTORS 3
BIOGRAPHIES OF DIRECTORS AND NOMINEES 4
BOARD AND COMMITTEE MEETINGS 5
COMPENSATION OF DIRECTORS 6
OWNERSHIP OF COMMON STOCK 8
TABLE I - 5% STOCKHOLDERS 8
TABLE II - BENEFICIAL OWNERSHIP OF DIRECTORS & EXECUTIVE
OFFICERS 9
DISCLAIMER OF BENEFICIAL OWNERSHIP 9
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE 10
COMPENSATION PHILOSOPHY 10
COMPENSATION METHODOLOGY 10
CHIEF EXECUTIVE OFFICER COMPENSATION 13
INTERNAL REVENUE CODE IMPACT 13
STOCK PERFORMANCE CHARTS 14
TEN-YEAR GRAPH 14
FIVE-YEAR GRAPH 15
SUMMARY COMPENSATION TABLE 16
OPTION GRANTS IN 1997 18
OPTION EXERCISES & YEAR-END VALUES 19
LONG-TERM INCENTIVE PLAN 19
PENSION PLANS 20
TRANSACTIONS WITH HARLEYSVILLE MUTUAL 22
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 23
<PAGE>
ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF PROXY STATEMENT
The Board of Directors of Harleysville Group is soliciting your proxy for
voting at the Annual Meeting of Stockholders to be held April 22, 1998 at the
Home Office of the Company. This proxy statement has been mailed to stockholders
on March 20, 1998.
BUSINESS TO BE TRANSACTED
At the Annual Meeting, stockholders will vote for the election of three
directors: Bradford Mitchell, Robert Buzzell, and Lowell Beck. No other items
are scheduled to be voted upon.
VOTING PROCEDURES
Who May Vote
Stockholders as of the close of business on March 6, 1998 (the Record
Date) are entitled to vote at the Annual Meeting. Each share of common stock is
entitled to one vote.
How to Vote
Stockholders may vote
o In person
o By mail via the proxy card
Quorum to Transact Business
A quorum for the transaction of business at the Annual Meeting consists of
the majority of the issued and outstanding shares of the Company's common stock,
present in person or represented by proxy. As of the Record Date, 28,922,449
shares of Harleysville Group's common stock were issued and outstanding. If you
attend in person and indicate your presence, or mail in a properly dated proxy
card, you will be part of the quorum.
Voting of Shares via Proxy
If you have submitted a properly executed proxy via the mail and are part
of the quorum, your shares will be voted as you indicate. However, if you mail
in your proxy card and sign and date your card, but do not mark it, your shares
will be voted in favor of the election of the three nominated directors. If you
sign and date your proxy card and withhold voting for any or all of the
nominated directors (as explained on the proxy card), your vote will be recorded
as being withheld but it will have no effect on the outcome of the election. As
there is no other business scheduled to be transacted, broker non-votes will
have no effect on the transaction of business. A broker non-vote occurs when a
broker votes on some matters on the proxy card but not on others because the
broker does not have authority to do so.
Revocation of Proxy
If you later decide to revoke or change your proxy, you may do so by: (1)
sending a written statement to that effect to the Secretary of the Company; or
(2) submitting a properly signed proxy with a later date; or (3) voting in
person at the Annual Meeting.
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<PAGE>
Vote Needed for Election of Directors
The three nominees for directors receiving the highest number of votes
will be elected. As of the Record Date, Harleysville Mutual Insurance Company
owned 15,609,386 shares (or approximately 54%) of Harleysville Group's
outstanding stock. Harleysville Mutual has advised Harleysville Group that it
will vote in favor of the election of the nominated directors. As a result, the
nominated directors will be elected regardless of the votes of the other
stockholders.
Substantial Owners of Stock
In addition to Harleysville Mutual, other stockholders that own more than
5% of Harleysville Group common stock are The Capital Group Companies which owns
7%. Please see the chart on page 8 for more details.
Duplicate Proxy Statements and Cards
You may receive more than one proxy statement, proxy card or Annual
Report. This duplication will occur if title to your shares is registered
differently or your shares are in more than one type of account maintained by
ChaseMellon Shareholder Services, our transfer agent. To have all your shares
voted, please sign and return all proxy cards. If you wish to have your accounts
registered in the same name(s) and address, please call ChaseMellon Shareholder
Services at 1-800-851-9677, or contact ChaseMellon through its website:
www.chasemellon.com.
Other Business
The Board of Directors knows of no other matters to be presented for
stockholder action at the meeting. If other matters are properly presented at
the meeting, your signed and dated proxy card gives authority to Roger A. Brown,
Bruce J. Magee and Robert Simpson, Jr. to vote your shares in accordance with
their best judgement.
Confidential Voting Policy
Harleysville Group maintains a policy of keeping stockholder votes
confidential.
OTHER INFORMATION
Stockholder Proposals
An eligible stockholder who wants to have a qualified proposal considered
for inclusion in the proxy statement for the 1999 Annual Meeting of Stockholders
must notify the Secretary of the Company. The proposal must be received at the
Company's offices no later than November 20, 1998. A stockholder must have been
a registered or beneficial owner of at least one percent of the Company's
outstanding common stock or stock with a market value of $1,000 for at least one
year prior to submitting the proposal, and the stockholder must continue to own
such stock through the date on which the meeting is held.
Expenses of Solicitation
Harleysville Group pays the cost of preparing, assembling and mailing this
proxy-soliciting material. In addition to the use of the mail, proxies may be
solicited personally, or by telephone or telegraph, by Harleysville Group
officers and employees without
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additional compensation. Harleysville Group pays all costs of solicitation,
including certain expenses of brokers and nominees who mail proxy material to
their customers or principals.
Independent Public Accountants
Representatives of KPMG Peat Marwick, LLP, the independent public
accountants that audited Harleysville Group's 1997 financial statements, will
attend the Annual Meeting. They will have the opportunity to make a statement,
if they desire to do so, and will respond to any appropriate questions presented
by stockholders.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
Harleysville Group's Board of Directors currently consists of eight
directors. Each director is elected for a three-year term, except that if a
nominee will attain the age of 72 within the next two years following such
nominee's election, such nominee will be nominated for a term of one or two
years, as the case may be, to expire on the first Annual Meeting date following
the nominee's reaching age 72. The Board of Directors is divided into three
classes. The current three-year terms of Class A, B and C directors expire in
the years 1998, 2000 and 1999 respectively.
Three Class A directors are to be elected at the Annual Meeting. The
nominees are:
CLASS A
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE IF ELECTED
- ---- --- -------------- --------------------------------
<S> <C> <C> <C>
Bradford W. Mitchell 70 1979 2000
Lowell R. Beck 63 1996 2001
Robert D. Buzzell 64 1992 2001
</TABLE>
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE NOMINATED DIRECTORS.
If a nominee is unavailable for election, stockholders will vote for another
nominee proposed by the Board or the Board may reduce the number of directors to
be elected at the meeting.
Directors continuing in office are:
CLASS B
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
- ---- --- -------------- ---------------------
<S> <C> <C> <C>
Michael L. Browne 51 1986 2000
Frank E. Reed 63 1986 2000
</TABLE>
CLASS C
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
- ---- --- -------------- ---------------------
<S> <C> <C> <C>
Walter R. Bateman, II 50 1992 1999
Gerard G. Johnson 57 1993 1999
William E. Strasburg 70 1986 1999
</TABLE>
3
<PAGE>
BIOGRAPHIES OF DIRECTORS AND NOMINEES
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 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. Beck was elected a director of Harleysville Group in August 1996. From
1982 until his retirement in 1996, Mr. Beck was President of the National
Association of Independent Insurers, an insurance industry trade group
headquartered in Des Plaines, Illinois. Prior to 1982 he served in various
executive capacities with the American Bar Association in Chicago, Illinois.
Dr. Buzzell was elected a director of Harleysville Group 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 1993. Prior to that position,
he was Sebastian S. Kresge Professor of Business Administration at Harvard
University, Graduate School of Business Administration. Dr. Buzzell currently
serves on the board of directors of VF Corporation.
Mr. Browne was elected a director of Harleysville Group in February 1986.
From 1980 to 1983, Mr. Browne was the Insurance Commissioner of the Commonwealth
of Pennsylvania. In 1983, Mr. Browne joined the law firm of Reed, Smith, Shaw &
McClay in Philadelphia, Pennsylvania, as a partner. He became managing partner
in January 1993.
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 currently is Chairman of the Board
and a director of 360(degrees) Communications Company.
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. 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. 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. Previously, from
1985 to 1988, he was Vice
4
<PAGE>
President of Finance and Chief Financial Officer of General Instrument Corp.,
New York, New York.
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.
BOARD AND COMMITTEE MEETINGS
The Board met six times in 1997. A description of the Committees follows
the table of memberships and meetings.
BOARD COMMITTEE MEMBERSHIPS & MEETINGS
<TABLE>
<CAPTION>
| AUDIT | COMPENSATION | COORDINATING | EXECUTIVE |
| ------| -------------| -------------| ----------|
| | & | | |
| | -------------| | |
| | PERSONNEL | | |
| | -------------| | |
| | DEVELOPMENT | | |
| | -------------| | |
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
|Bradford W. Mitchell | | | | X* |
- ----------------------------------------------------------------------------
|Walter R. Bateman, II | | | | X |
- ----------------------------------------------------------------------------
|Lowell R. Beck | X | | X | |
- ----------------------------------------------------------------------------
|Michael L. Browne | X | | X | X |
- ----------------------------------------------------------------------------
|Robert D. Buzzell | | X | | |
- ----------------------------------------------------------------------------
|Gerard G. Johnson | X* | | X | |
- ----------------------------------------------------------------------------
|Frank E. Reed | | | X* | X |
- ----------------------------------------------------------------------------
|William E. Strasburg | | X* | | X |
- ----------------------------------------------------------------------------
|Number of Meetings | | | | |
|in 1997 | 3 | 3 | 2 | 9 |
- ----------------------------------------------------------------------------
</TABLE>
* Denotes Chairperson of the Committee
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
5
<PAGE>
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 Compensation and Personnel Development Committee reviews and determines
compensation policies; reviews and recommends executive compensation changes;
establishes awards under and determines participants in the Equity Incentive
Plan, the Senior Management Incentive Bonus Plan, and the Long-Term Incentive
Plan; and oversees Harleysville Group's management development and succession
program.
The Coordinating Committee is generally responsible for reviewing material
transactions between Harleysville Group and Harleysville Mutual. It is composed
of three individuals who are solely Harleysville Group directors and three
individuals who are solely Harleysville Mutual directors plus a chairperson who
is on the board of both companies. No material inter-company transaction can
occur until a majority of both Harleysville Group directors and Harleysville
Mutual directors approve a transaction. The decisions of the Coordinating
Committee are binding on Harleysville Group and Harleysville Mutual.
The Executive Committee meets during the intervals between meetings of the
Board of Directors and has the right and authority to exercise the full powers
of the Board of Directors.
The Finance Committee establishes overall investment policies and
guidelines and reviews and approves investments made by Harleysville Group.
The Nominating Committee considers and recommends nominees to the Board for
election as director as well as assessing the effectiveness of the Board and
corporate government practices. The Nominating Committee will consider
recommendations for nominees from stockholders, who should submit such
recommendations in writing to the Secretary of Harleysville Group.
COMPENSATION OF DIRECTORS
Fees
Employee directors receive no compensation in addition to their normal
salary for serving on the Board or a Committee.
Non-employee directors receive an annual retainer of $18,000 and receive
$1,000 for the first Board or Committee meeting attended each day and $650 for
any other Committee meeting attended on the same day. Commencing April 1998,
non-employee directors will receive an annual retainer of $19,000. In addition
to the annual retainer, the non-employee chairman receives an annual retainer of
$17,000 which will be increased to $18,000 in April 1998. Non-employee directors
are also paid $3,500 for chairing a Committee and are reimbursed for
out-of-pocket expenses. A non-employee director who serves on both the
Harleysville Group and Harleysville Mutual Boards receives only one retainer
and, if the Boards or the same Committees of Harleysville Group and Harleysville
Mutual meet on the same day, the non-employee director receives only one fee. In
either case, the retainer or fee is allocated equally to Harleysville Group and
Harleysville Mutual.
Harleysville Group entered into a one-year agreement with Bradford W.
Mitchell, for consultant and advisory services, effective January 1, 1997. Under
the agreement, Mr. Mitchell advised management on corporate matters, as
requested, at a per diem rate of $5,000 plus
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<PAGE>
reasonable expenses. Mr. Mitchell earned $65,000 under the agreement in
1997. The agreement was not continued for 1998.
Stock Acquisition Programs
All numbers reflect the effect of the 2 for 1 stock split in October, 1997.
Directors' Stock Option Programs
In 1990, Harleysville Group adopted the 1990 Directors' Stock Option
Program (the "1990 Program") which provided for the issuance of an aggregate of
94,500 shares of common stock, subject to adjustment for stock splits or other
changes. Under the 1990 Program, non-qualified stock options to purchase 6,300
shares were awarded to all non-employee directors of Harleysville Group and
Harleysville Mutual during the period 1990 through May 1994. The options 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 under the 1990 Program, or the purchase
price thereunder. On February 1, 1998, there were 50,400 shares subject to such
options outstanding under this program and the range of per share exercise
prices was $7.50 to $14.00. The 1990 Program does not provide for stock
appreciation rights.
In 1994, Harleysville Group adopted the 1995 Directors' Stock Option
Program (the "1995 Program"), which provided for the issuance of an aggregate of
130,000 shares of common stock subject to adjustment for stock splits or other
changes. Except for options already granted under the 1990 Program, the 1995
Program superseded the 1990 Program. Under the 1995 Program, on May 24, 1995,
each non-employee director of Harleysville Group and Harleysville Mutual
received a one-time grant of 10,000 non-qualified stock options, less the amount
of non-vested options, if any, under the 1990 Program, on May 24, 1995 at the
then fair market value and option price of $12.50. A newly elected non-employee
director or an employee director who becomes a non-employee director of
Harleysville Group or Harleysville Mutual will also receive a one-time grant of
10,000 non-qualified stock options at the first May Board meeting following his
or her election or becoming a non-employee director. Ten thousand options were
granted to a newly elected director in May 1997 at the then fair market value of
$17.94. The total options granted to date are 112,440 and 108,240 are still
outstanding. The options vest at the rate of 20% per year of active Board
service with the first 20% vesting as of the date of grant, although no option
is exercisable until six months after 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 under the
1995 Program, or the purchase price thereunder. The 1995 Program does not
provide for stock appreciation rights.
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<PAGE>
Directors' Equity Award Program
Each Harleysville Group Board member who was a Board member on April 25,
1996 and remained an active Board member on August 28, 1996 received a grant of
5,646 shares of Harleysville Group common stock restricted against transfer
until the first to occur of his or her retirement from the Board after attaining
age 72, death or disability. A total of 45,168 shares were awarded to eight
directors who possess the right to vote the shares and receive dividends
thereon. Concurrently, the Board determined that it would no longer elect any
current or future director as a Director Emeritus. Formerly, a director of
Harleysville Group, upon ceasing to be a Board member as of the annual meeting
following attainment of age 72, in accordance with the by-laws, was eligible to
be elected a Director Emeritus for up to three one-year terms. Director Emeriti
were paid a retainer and attendance fees for attendance at the Board meetings
with re-election being contingent upon satisfactory attendance at the Board
meetings. In 1997, H. Bryce Jordan retired from the Board and received his
shares without restriction.
Directors' Stock Purchase Plan
In 1996, Harleysville Group adopted the Directors' Stock Purchase Plan,
which permits non-employee directors of Harleysville Group and Harleysville
Mutual to purchase Company stock at the lower of 85% of the fair market value of
the shares at the start or end of a six month subscription period, which runs
from July 15 to January 14, and January 15 to July 14. Directors are permitted
to contribute, through withholding from fees or a lump sum payment, up to
$20,000 per subscription period with the number of shares, including fractional
shares, purchased being equal to the dollar amount contributed, divided by the
purchase price. Two hundred thousand shares of Harleysville Group common stock
have been reserved for this program. During the three subscription periods since
its inception, a total of 43,889 shares were purchased by directors. The Plan
provides for up to 20 subscription periods.
OWNERSHIP OF COMMON STOCK
TABLE I - 5% STOCKHOLDERS
Those persons owning more than 5% of Harleysville Group stock as of December 31,
1997 are set forth below. On that date there were 28,821,973 shares of
Harleysville Group stock held by stockholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
| | | DISPOSITIVE | TOTAL | |
| | VOTING AUTHORITY | AUTHORITY | AMOUNT OF | |
| | ---------------- | ----------- | BENEFICIAL| PERCENT OF |
| NAME AND ADDRESS | SOLE | SHARED | SOLE | SHARED | OWNERSHIP | CLASS |
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
| Harleysville Mutual | | | | | | |
| Insurance Company | | | | | | |
|Harleysville, PA 19438 | 15,609,386| | 15,609,386| | 15,609,386| 54% |
- ----------------------------------------------------------------------------------------------------
| The Capital Group | | | | | | |
| Companies, Inc. | | | | | | |
| 333 South Hope St. | | | | | | |
| Los Angeles, CA 90071 | 1,110,000 | | 2,090,000 | | 2,090,000 | 7% |
- ----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
TABLE II - BENEFICIAL OWNERSHIP OF DIRECTORS & EXECUTIVE OFFICERS
This table shows Harleysville Group stock holdings of Directors, Nominees, Named
Executive Officers (who are the CEO and the next four most highly paid executive
officers), and all executive officers as a group as of February 15, 1998. The
"aggregate number of shares beneficially owned" listed in the second column
includes the numbers listed in the third and fourth columns. On February 15,
1998, there were 28,910,914 shares of Harleysville Group stock held by
stockholders.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
| | | RIGHT TO | | |
| | AGGREGATE | ACQUIRE | | PERCENT OF |
| | NUMBER | W/IN 60 | NUMBER OF | SHARES |
| | OF SHARES | DAYS | SHARES OF | (LESS THAN |
| DIRECTORS AND NAMED EXECUTIVE | BENEFICIALLY | (NUMBER | RESTRICTED | 1% UNLESS |
| OFFICERS | OWNED | OF SHARES) | STOCK OWNED | INDICATED) |
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
| Bradford W. Mitchell | 55,760 | 11,276 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Walter R. Bateman, II | 143,113 | 92,895 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Lowell R. Beck | 6,162 | 4,000 | | |
- ---------------------------------------------------------------------------------------------------
| Michael L. Browne | 22,899 | 14,300 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Robert D. Buzzell | 21,948 | 13,292 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Gerard G. Johnson | 20,489 | 12,284 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Frank E. Reed | 26,096 | 14,300 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| William E. Strasburg | 29,672 | 14,300 | 5,646 | |
- ---------------------------------------------------------------------------------------------------
| Thomas E. Roden | 64,224 | 50,146 | | |
- ---------------------------------------------------------------------------------------------------
| Mark R. Cummins | 43,753 | 38,655 | | |
- ---------------------------------------------------------------------------------------------------
| Bruce J. Magee | 46,142 | 33,840 | | |
- ---------------------------------------------------------------------------------------------------
| Spencer M. Roman | 34,695 | 30,042 | | |
- ---------------------------------------------------------------------------------------------------
| ALL DIRECTORS & EXECUTIVE OFFICERS | | | | |
| AS A GROUP (16) | 602,416 | 392,916 | 39,522 | 2% |
- ---------------------------------------------------------------------------------------------------
</TABLE>
DISCLAIMER OF BENEFICIAL OWNERSHIP
The following directors and officers disclaim beneficial ownership of
certain shares included in the totals above. Michael Browne disclaims beneficial
ownership of 130 shares held by him as custodian for a minor child; Gerard
Johnson disclaims beneficial ownership of 880 shares held by his spouse; Thomas
Roden disclaims beneficial ownership of 77 shares held by him as custodian for a
minor child; and Spencer Roman disclaims beneficial ownership of 200 shares held
by his spouse as custodian for a minor child and 60 shares held by a stepson.
For a description of Restricted Stock, please see the Directors' Equity Award
Program on page 8.
9
<PAGE>
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE
COMPENSATION PHILOSOPHY
The Compensation and Personnel Development Committee of the Board of
Directors (the "Compensation Committee") has established a management
compensation program designed to further the attainment of the Company's
strategic goals of growth and profitability and thus enhance shareholder value.
In order to achieve these strategic goals, the Company has identified four
principles to guide its compensation program. The program must:
o Attract, retain and motivate talented executives;
o Reward competencies and behaviors critical to the Company's success;
o Offer total compensation levels that are consistent with the performance of
the executive measured against other executives both within the Company and
within the industry;
o Focus executives on performance goals and measures that are the key to the
Company's success by providing variable compensation programs linked to
creation of shareholder value.
COMPENSATION METHODOLOGY
In establishing compensation programs, the Compensation Committee measures
compensation levels against those types of companies with which Harleysville
Group most often competes for talented and experienced staff. The selection of
the insurance companies included in the comparison group is based on similarity
of size, distribution system and method of operations. This comparison group is
not the same as the peer group represented on the Stock Performance Charts which
includes all NASDAQ traded property/casualty companies regardless of size,
distribution system, and method of operations, although some of the companies
may be the same. Total compensation is comprised of fixed compensation (annual
base salary), variable compensation (annual and long-term incentive plans), and
stock options. In determining total compensation, Harleysville Group targets
fixed compensation at the market median while total compensation is targeted at
the midpoint in the second quartile. This total compensation target is designed
to enable the organization to attract and retain high performing executives,
while a flexible mix between base salary and variable compensation permits
higher potential of pay for those positions where performance results are highly
measurable and where the value of those results to the Company is clear and
significant. In order that compensation policies benefit all companies in the
organization, two Harleysville Mutual-only directors participate in the
determination of compensation philosophy, methodology and goals applicable to
executives. The individual components of total compensation and how they
function are described below:
o Base Salary
Consistent with the compensation philosophy, annual base salary is
designed to be competitive with the peer group. Each position in the Company
is placed in an applicable paygrade whose midpoint level is set at the
median pay for that position when compared to the peer group. A salary range
based on the midpoint is then developed for that paygrade. An individual
officer's salary within his or her paygrade is determined each November for
the following year and is based on his or her individual performance and
that of the Company. To evaluate Company performance, the Compensation
Committee compares the Company's overall corporate performance against the
insurance industry in terms of comparison of return on equity, combined
ratio, and premium growth. The term combined
10
<PAGE>
ratio is a standard term of measurement in the property/casualty insurance
industry and means the ratio produced by adding (1) the ratio of losses,
loss adjustment expenses, and policyholder dividends to net earned premiums
to (2) the ratio of underwriting expenses to net written premium. The figure
then is expressed as a percentage.
o Annual Incentive Compensation
The Company each year adopts targets under its Senior Management
Incentive Compensation Plan in order to direct executive officer attention
to the attainment of significant annual corporate goals. For 1997, the goals
included: a combined ratio goal; service and processing timeliness goals;
and a peer group ranking goal based on a comparison of combined ratios. The
weightings for each factor were: combined ratio 60%; peer group ranking 25%;
and service and processing goals 15%. If an amount is paid for attaining a
combined ratio goal, such amount can be increased if direct written premium
growth is over 3.5%. The maximum increase is 30% of the bonus for combined
ratio. The peer group used for ranking is the United States
property/casualty industry as a whole as reported by the A.M. Best Company,
Inc. statistical study in the Best Week Property/Casualty Supplement. The
plan is designed to pay a target award at a level of 15% to 30% of annual
salary depending on position when the target goals are achieved. Payouts may
be as large as 175% of the target award if performance exceeds the target.
Consistent with the Compensation Committee's philosophy, the size of the
award range is determined for the Chief Executive Officer specifically and
executive officers generally based on an analysis of the appropriate
competitive total compensation package that is typically available for
executive officers of a property/casualty insurance company with similar
characteristics. There is no payout under the Plan unless the combined
after-tax net income as reported on the Harleysville Insurance Companies
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. It includes financial information on a combined
basis for all property/casualty insurance companies owned by Harleysville
Group and Harleysville Mutual. The payouts in 1995, 1996 and 1997 reflect
that the target goals were not fully attained in those years.
o Long-Term Incentive Compensation
The Company has also established a Long-Term Incentive Plan designed
primarily to reward those senior executive officers of Harleysville Group
involved in establishing the Company's strategy for the attainment of
long-term return on equity goals. Since the Plan's inception in 1988, target
goals have been set each year for the next four-year period. Awards are
designed to provide payments at the end of each successive four-year
performance period in an amount that is a percentage of each participant's
salary at January 1st of the first year of each period, with the amount of
payment dependent upon Harleysville Group's four-year average annual rate of
return on equity ("ROE") from the time of the award until the payout date.
Potential target awards for each year are designed to range from 25% to 45%
of a participant's salary. A target amount is payable if Harleysville
Group's average ROE exceeds certain levels of targeted ROE. There is a
maximum payment of 150% of target award if Harleysville Group's ROE exceeds
certain higher levels of targeted ROE. If ROE falls between the target level
and the maximum level then the amount of the award is prorated accordingly.
Once an ROE resulting in a
11
<PAGE>
40% of target award is achieved, an additional incentive award based on
written premium growth takes effect. If less than the targeted level of ROE
is reached, a reduced percentage of the target award may be granted. In the
event that ROE falls below a stated level, a negative percentage of the
target award will be assessed, and previously credited awards will be
proportionately reduced. Under the terms of the Long-Term Incentive Plan,
the Compensation Committee retains discretion, subject to plan limits, to
modify the terms of outstanding awards to take into account the effect of
unforeseen or extraordinary events and accounting changes. Awards, if
earned, are paid in cash at the end of the four-year performance period.
Cash payments made under awards for the four-year periods 1992-1995,
1993-1996 and 1994-1997 are reported in the Summary Compensation Table under
the years 1995, 1996, and 1997 respectively, although paid in the following
year. For the four-year period beginning in 1997, the target return on
equity goal is 12% per year, and, if return on equity is 8% or greater per
year, an additional incentive may be paid if written premium growth is at
least 8% in that year. The size of the award opportunity is determined for
the Chief Executive Officer specifically and executive officers generally
based on the same factors referenced under Annual Incentive Compensation
above. The actual payout under the Plan for the four-year period ending in
1997 is 119% of target for Mr. Bateman and the other Named Executive
Officers who participate. This payout level was based on the return on
equity being higher than the target return for two of the four years, i.e.,
1995 and 1997. Please see the chart on page 19 for further information on
payouts under this Plan.
o Stock Options
Pursuant to the terms of the Equity Incentive Plan, each year the
Compensation Committee grants stock options to officers and key employees of
Harleysville Group. Awards are based on a formula that seeks to achieve, in
combination with the other components of compensation, the total
compensation target established by the Compensation Committee for an
executive position. The Compensation Committee uses the Black-Scholes option
value method to determine the value of the stock option grant component of
compensation and awards the number of stock options whose total value equals
the target amount. However, in order to receive stock options at a level
necessary to keep total compensation at the target level, executive officers
above a certain level, including Mr. Bateman and all Named Executive
Officers, must own an annually increasing number of shares of Harleysville
Group stock. In 1997, all such officers owned at least the required minimum
number of shares. The stock option grants to the Named Executive Officers in
1997 are set out on the Summary Compensation Table on page 16 and the grant
table on page 17. All stock options granted under the Equity Incentive Plan
in 1997, as well as in 1996 and 1995, have been non-qualified options
receiving no special tax benefit, have an exercise price equal to the fair
market value of a share of common stock on the date of grant, have a term of
ten years, and vest at the rate of 50% each on the first and second
anniversary dates of award, except that options become immediately
exercisable upon an optionee's retirement, death or disability. Retired
optionees, age 61 and younger, may exercise the options within one year of
retirement, and retired optionees, age 62 and older, may exercise the
options granted prior to May 1997 within two years after retirement and the
options granted May 1997 within five years after retirement if the options
do not otherwise expire. The exercise price may be paid by delivery of
already owned shares. The Compensation Committee may, in its discretion,
accelerate the exercisability of options in the event of a merger,
consolidation or other change in control of Harleysville Group.
12
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Bateman's compensation was determined in 1997 for 1998 by the
Compensation Committee utilizing the factors set forth above. His total
compensation, composed of base salary, annual incentive compensation, long-term
incentive compensation, and stock option grants, was based on a comparison of
compensation packages of similar officers within the insurance industry peer
group and an evaluation of his personal and company performance on both a
qualitative and quantitative level.
Harleysville Group results in 1997 were excellent. Although earned premiums
increased only slightly, the other key financial indicators were quite positive:
return on equity increased, combined ratio decreased and net income after taxes
increased. The low premium growth was attributable both to competitive factors
beyond the control of Harleysville Group and to voluntary actions of
Harleysville Group. In particular, as a result of rate reductions in the
workers' compensation line caused by state rating boards taking actions that
resulted in rate decreases, efforts to maintain pricing discipline in the face
of competitive pressures, and efforts to reduce coastal weather catastrophe
exposures while improving profitability overall, earned premiums only increased
2% over 1996. However, return on equity increased from 8.5% in 1996 to 14.4% and
the combined ratio was 103.5% compared to the combined ratio of 107.3% in 1996.
Basic operating earnings were $1.74 per share in 1997, a substantial gain over
1996's $.96 per share. Basic net income was $1.89 per share compared to $1.03 in
1996. Stockholders' equity increased from $370.2 million to $446.5 million, with
book value per share increasing from $13.09 to $15.49. In addition, the total
return on Company stock was 61% in 1997. On the qualitative side, the
Compensation Committee recognized Mr. Bateman's continued efforts in reducing
exposure to weather catastrophes and efforts in the market development area
including, most significantly, the acquisition of Minnesota Fire and Casualty
Company which further helped to spread risk geographically to the midwestern
area of the United States.
Mr. Bateman's annual incentive compensation plan payout of $96,729 for 1997
was based upon attaining 107.5% of the combined ratio goal and 113.8% of the
service goals, but failing to achieve the peer group goal. Likewise, the payout
for the Long-Term Incentive Plan ending for the period 1994 to 1997 was based on
the attainment of a higher than goal return on equity targets in 1995, 1996 and
1997. Finally, the award of stock options in May 1997 was based on the
appropriate formula applied to Mr. Bateman's salary paygrade.
INTERNAL REVENUE CODE IMPACT
Internal Revenue Code Section 162(m) imposes conditions on the full
deductibility of compensation in excess of $1 million. The Compensation
Committee has reviewed, and continues to review, the potential consequences to
the Company of this section. This section had no impact on the Company in 1997
and it is not expected to have any impact on the Company in 1998 inasmuch as the
compensation levels other than from stock option exercises are below the $1
million figure, and any income from stock option exercises is fully deductible
under the current requirements of Section 162(m).
SUBMITTED BY THE COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE OF THE BOARD
OF DIRECTORS:
William E. Strasburg, Chairperson
Robert D. Buzzell
13
<PAGE>
STOCK PERFORMANCE CHARTS
The following graphs show changes over the past ten-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; and (3) the Peer Group
index. All values are as of the last trading day of each year.
TEN-YEAR GRAPH
Comparison of Ten-Year Cumulative Total Stockholder Return
[In the printed version there appears a line chart with the
following plot points depicted.]
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harleysville Group 100 141.0 220.5 198.1 282.8 385.1 421.4 347.8 476.8 462.6 744.8
NASDAQ 100 118.7 143.8 122.2 196.1 228.2 262.0 256.1 362.2 445.5 546.7
Peer Group 100 106.8 150.0 143.7 204.0 274.4 283.7 273.4 382.9 419.6 634.7
</TABLE>
14
<PAGE>
FIVE-YEAR GRAPH
Comparison of Five-Year Cumulative Total Stockholder Return
[In the printed version there appears a line chart with the
following plot points depicted.]
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Harleysville Group 100 109.4 90.3 123.8 120.1 193.4
NASDAQ 100 114.8 112.2 158.7 195.2 239.5
Peer Group 100 103.4 99.6 139.5 152.9 231.3
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.
Both graphs were prepared by the Center for Research in Security Prices
("CRSP"). The NASDAQ Stock Market index includes all U.S. Companies in NASDAQ
and the Peer Group index includes, for the 10 year chart, 83 NASDAQ Company
stocks and includes, for the 5 year chart, 65 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. CRSP reweights the indices daily, using
the market capitalization on the previous trading day.
15
<PAGE>
SUMMARY COMPENSATION TABLE
This table indicates, for the last three fiscal years, the cash and other
compensation paid to the Named Executive Officers.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
| NAME AND PRINCIPAL | YEAR | ANNUAL | LONG-TERM | ALL OTHER |
| POSITION AS OF | | COMPENSATION | COMPENSATION | COMPENSATION |
| DECEMBER 31, 1997 | | -------------------- | ----------------------------- | -------------- |
| ------------------- | | SALARY BONUS | | | |
| | | --------- -------- | | | |
| | | | AWARDS | PAYOUTS | |
| | | | ------ | ------- | |
| | | | SECURITIES | | |
| | | | UNDERLYING STOCK | LONG-TERM | |
| | | | OPTIONS | INCENTIVE | |
| | | | (# OF SHARES) | PAYOUTS | |
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
|Walter R. Bateman, II | 1997 | $389,300 | $96,728 | 32,736 | $160,059 | $22,858 |
| President & | 1996 | $363,800 | $16,614 | 32,674 | $ 87,676 | $16,371 |
| Chief Executive | 1995 | $340,000 | $126,516 | 31,358 | $ 77,375 | $15,300 |
| Officer | | | | | | |
- --------------------------------------------------------------------------------------------------------
| Thomas E. Roden | 1997 | $217,700 | $53,008 | 16,148 | $ 48,433 | $13,062 |
| Executive Vice | 1996 | $208,300 | $ 9,105 | 16,116 | $ 45,514 | $ 9,374 |
| President | 1995 | $196,500 | $68,596 | 15,468 | $ 43,779 | $ 8,843 |
| Field Operations & | | | | | | |
| Subsidiaries | | | | | | |
- --------------------------------------------------------------------------------------------------------
| Mark R. Cummins | 1997 | $221,900 | $36,872 | 14,038 | $ 48,433 | $13,314 |
|Senior Vice President | 1996 | $207,300 | $ 6,332 | 14,010 | $ 48,808 | $ 9,329 |
| Chief Investment | 1995 | $193,700 | $47,196 | 13,450 | $ 45,434 | $ 8,717 |
| Officer & Treasurer | | | | | | |
- --------------------------------------------------------------------------------------------------------
| Bruce J. Magee | 1997 | $172,400 | $27,885 | 10,614 | $ 36,665 | $10,326 |
|Senior Vice President | 1996 | $161,600 | $ 4,789 | 10,596 | $ -0- | $ 7,272 |
| & | 1995 | $146,400 | $35,682 | 10,168 | $ -0- | $ 6,588 |
| Chief Financial | | | | | | |
| Officer | | | | | | |
- --------------------------------------------------------------------------------------------------------
| Spencer M. Roman | 1997 | $170,700 | $27,885 | 10,614 | $ -0- | $10,242 |
|Senior Vice President | 1996 | $161,800 | $ 4,789 | 10,596 | $ -0- | $ 7,281 |
| Home Office | 1995 | $139,300 | $31,033 | 8,844 | $ -0- | $ 6,269 |
| Insurance Operations | | | | | | |
- --------------------------------------------------------------------------------------------------------
</TABLE>
Cash bonuses under the Senior Management Incentive Bonus Plan (the "SMIP")
for services rendered in fiscal years 1997, 1996, and 1995, have been listed in
the year earned, but were actually paid in the following year. Cash bonuses
under the Long-Term Incentive Plan (the "LTIP") for services rendered in fiscal
years 1992-1995, 1993-1996, and 1994-1997 have been listed in 1995, 1996, and
1997 respectively, although paid in the subsequent year.
The terms of stock options granted in fiscal years 1997, 1996, and 1995 are
described in the Report of the Compensation and Personnel Development Committee
beginning on page 10. The figures in the table are adjusted to reflect the
effect of the 2 for 1 stock split in October 1997.
16
<PAGE>
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%,
75% or 100% match to the Extra Compensation Plan for all employee participants
and an allocation under the Excess Match for a percentage of each higher-paid
participant's salary up to 6%. The amounts shown under "All Other Compensation"
reflect contributions to the Extra Compensation Plan: (a) for 1997, of $9,500 on
behalf of each of the Named Executive Officers to match 1997 pre-tax elective
deferral contributions made by each to the Extra Compensation Plan; (b) for
1996, of $6,750 on behalf of each of the Named Executive Officers to match 1996
pre-tax elective deferral contributions made by each to such plan; and (c) 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.
Roman who received $6,269 and Mr. Magee who received $6,588. The remainder of
each amount is the allocation for each Named Executive Officer under the Excess
Match.
17
<PAGE>
OPTION GRANTS IN 1997
This table shows the number and value of stock options granted to the Named
Executive Officers in 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
| INDIVIDUAL GRANTS |
- ----------------------------------------------------------------------------------------------------------
| | NUMBER OF | % OF TOTAL | | | |
| | SECURITIES | OPTIONS | | | |
| | UNDERLYING | GRANTED TO | | | |
| | OPTIONS | EMPLOYEES IN | EXERCISE PRICE | EXPIRATION | GRANT DATE |
| NAME | GRANTED (#) | FISCAL YEAR | PER SHARE | DATE | PRESENT VALUE |
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
| Walter R. Bateman, II | 32,736 | 11% | $17.94 | 5/28/07 | $175,405 |
- ----------------------------------------------------------------------------------------------------------
| Thomas E. Roden | 16,148 | 5% | $17.94 | 5/28/07 | $ 86,553 |
- ----------------------------------------------------------------------------------------------------------
| Mark R. Cummins | 14,038 | 5% | $17.94 | 5/28/07 | $ 75,244 |
- ----------------------------------------------------------------------------------------------------------
| Bruce J. Magee | 10,614 | 3% | $17.94 | 5/28/07 | $ 56,891 |
- ----------------------------------------------------------------------------------------------------------
| Spencer M. Roman | 10,614 | 3% | $17.94 | 5/28/07 | $ 56,891 |
- ----------------------------------------------------------------------------------------------------------
</TABLE>
In calendar year 1997, Harleysville Group granted a total of 308,212
options representing the right to purchase 308,212 shares of common stock to 136
officers and key employees under the Equity Incentive Plan and 2,000 options
representing the right to purchase 2,000 shares of common stock to a newly-hired
officer.
The Grant Date Present Value was determined using the Black-Scholes option
pricing model. These numbers are calculated based on the requirements
promulgated by the SEC and do not reflect Harleysville Group's estimate of
future stock price growth. Use of this model should not be viewed in any way as
a forecast of the future performance of Harleysville Group's common stock, which
will be determined by future events and unknown factors.
For a description of the option plans, please see page 12.
18
<PAGE>
OPTION EXERCISES & YEAR-END VALUES
This table shows the number and value of stock options (exercised in 1997
and the value of unexercised options as of the end of 1997) for the Named
Executive Officers during 1997. Year-end value is calculated using the
difference between the option exercise price and $24.00 (year-end stock price)
multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
| | | | NO. OF SECURITIES | |
| | NO. OF | | UNDERLYING | VALUE OF UNEXERCISED IN-THE- |
| | SHARES | | UNEXERCISED OPTIONS AT | MONEY OPTIONS AT YEAR-END |
| | ACQUIRED| | FISCAL YEAR-END | |
| | ON | VALUE |-------------------------------------------------------------
| NAME | EXERCISE| REALIZED | EXERCISABLE | UNEXERCISABLE | EXERCISABLE | UNEXERCISABLE |
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
| Walter R. Bateman, II | 8,506 | $186,579 | 92,895 | 49,073 | $1,501,165 | $374,003 |
- -----------------------------------------------------------------------------------------------------------
| Thomas E. Roden | 3,758 | $ 67,188 | 50,146 | 24,206 | $ 820,636 | $184,481 |
- -----------------------------------------------------------------------------------------------------------
| Mark R. Cummins | 20,000 | $320,000 | 38,655 | 21,043 | $ 552,756 | $160,374 |
- -----------------------------------------------------------------------------------------------------------
| Bruce J. Magee | 4,917 | $104,441 | 33,840 | 15,912 | $ 462,518 | $121,275 |
- -----------------------------------------------------------------------------------------------------------
| Spencer M. Roman | 0 | $ 0 | 30,042 | 15,912 | $ 335,853 | $121,275 |
- -----------------------------------------------------------------------------------------------------------
</TABLE>
LONG-TERM INCENTIVE PLAN
PERFORMANCE OPPORTUNITY AWARDS IN LAST FISCAL YEAR
The table shows the range of potential payouts under the Plan for a
four-year performance period commencing in 1997. Four-year performance periods
under the Plan were completed in 1995, 1996, and 1997 and actual payments
thereunder are shown in the Summary Compensation Table for those years.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
| | PERFORMANCE | | ESTIMATED FUTURE PAYMENTS UNDER |
| | OR OTHER | | NON-STOCK PRICE BASED PLANS |
| | PERIOD UNTIL | TARGET AWARD | -----------------------------------
| | MATURATION | PERCENT OF | | | |
| NAME | OR PAYOUT | 1/1/97 SALARY | THRESHOLD | TARGET | MAXIMUM |
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
|Walter R. Bateman, II | 4 years | 45% | 0 | $175,185 | $262,778 |
------------------------------------------------------------------------------------------------
|Thomas E. Roden | 4 years | 35% | 0 | $ 76,195 | $114,293 |
------------------------------------------------------------------------------------------------
|Mark R. Cummins | 4 years | 25% | 0 | $ 55,475 | $ 83,213 |
------------------------------------------------------------------------------------------------
|Bruce J. Magee | 4 years | 25% | 0 | $ 43,100 | $ 64,650 |
------------------------------------------------------------------------------------------------
|Spencer M. Roman | 4 years | 25% | 0 | $ 42,675 | $ 64,013 |
------------------------------------------------------------------------------------------------
</TABLE>
For a description of long-term incentive compensation plans, please see
page 11.
19
<PAGE>
PENSION PLANS
These tables show estimated annual benefits payable upon retirement to the
Named Executive Officers under the qualified Pension Plan in conjunction with a
non-qualified Supplemental Pension Plan.
Pension Plan Table I shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Bateman, Mr. Roden, and Mr. Magee, who
were first employed prior to January 1, 1989.
TABLE I
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
| | | | | | | |
| Average 5 | | | | | | |
| Year Credited | | | | | | |
| Salary @ | | | | | | |
| 12/31/97 | 10 Years | 15 Years | 20 Years | 25 Years | 30 Years | 35 Years |
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
| $600,000 | $131,818 | $197,726 | $263,635 | $329,544 | $329,544 | $329,544 |
- ------------------------------------------------------------------------------------------------
| $550,000 | $120,568 | $180,851 | $241,135 | $301,419 | $301,419 | $301,419 |
- ------------------------------------------------------------------------------------------------
| $500,000 | $109,318 | $163,976 | $218,635 | $273,294 | $273,294 | $273,294 |
- ------------------------------------------------------------------------------------------------
| $450,000 | $ 98,068 | $147,101 | $196,135 | $245,169 | $245,169 | $245,169 |
- ------------------------------------------------------------------------------------------------
| $400,000 | $ 86,818 | $130,226 | $173,635 | $217,044 | $217,044 | $217,044 |
- ------------------------------------------------------------------------------------------------
| $350,000 | $ 75,568 | $113,351 | $151,135 | $188,919 | $188,919 | $188,919 |
- ------------------------------------------------------------------------------------------------
| $300,000 | $ 64,318 | $ 96,476 | $128,635 | $160,794 | $160,794 | $160,794 |
- ------------------------------------------------------------------------------------------------
| $250,000 | $ 53,068 | $ 79,601 | $106,135 | $132,669 | $132,669 | $132,669 |
- ------------------------------------------------------------------------------------------------
| $200,000 | $ 41,818 | $ 62,726 | $ 83,635 | $104,544 | $104,544 | $104,544 |
- ------------------------------------------------------------------------------------------------
| $150,000 | $ 30,568 | $ 45,851 | $ 61,135 | $ 76,419 | $ 76,419 | $ 76,419 |
- ------------------------------------------------------------------------------------------------
| $125,000 | $ 24,943 | $ 37,414 | $ 49,885 | $ 62,357 | $ 62,357 | $ 62,357 |
- ------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Pension Plan Table II shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Cummins and Mr. Roman who were first
employed after January 1, 1989.
TABLE II
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
| | | | | | | |
| Average 5 | | | | | | |
| Year Credited | | | | | | |
| Salary @ | | | | | | |
| 12/31/97 | 10 Years | 15 Years | 20 Years | 25 Years | 30 Years | 35 Years |
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
| $600,000 | $115,535 | $173,302 | $231,070 | $288,837 | $288,837 | $288,837 |
- ------------------------------------------------------------------------------------------------
| $550,000 | $105,785 | $158,677 | $211,570 | $264,462 | $264,462 | $264,462 |
- ------------------------------------------------------------------------------------------------
| $500,000 | $ 96,035 | $144,052 | $192,070 | $240,087 | $240,087 | $240,087 |
- ------------------------------------------------------------------------------------------------
| $450,000 | $ 86,285 | $129,427 | $172,570 | $215,712 | $215,712 | $215,712 |
- ------------------------------------------------------------------------------------------------
| $400,000 | $ 76,535 | $114,802 | $153,070 | $191,337 | $191,337 | $191,337 |
- ------------------------------------------------------------------------------------------------
| $350,000 | $ 66,785 | $100,177 | $133,570 | $166,962 | $166,962 | $166,962 |
- ------------------------------------------------------------------------------------------------
| $300,000 | $ 57,035 | $ 85,552 | $114,070 | $142,587 | $142,587 | $142,587 |
- ------------------------------------------------------------------------------------------------
| $250,000 | $ 47,285 | $ 70,927 | $ 94,570 | $118,212 | $118,212 | $118,212 |
- ------------------------------------------------------------------------------------------------
| $200,000 | $ 37,535 | $ 56,302 | $ 75,070 | $ 93,837 | $ 93,837 | $ 93,837 |
- ------------------------------------------------------------------------------------------------
| $150,000 | $ 27,785 | $ 41,677 | $ 55,570 | $ 69,462 | $ 69,462 | $ 69,462 |
- ------------------------------------------------------------------------------------------------
| $125,000 | $ 22,910 | $ 34,365 | $ 45,820 | $ 57,275 | $ 57,275 | $ 57,275 |
- ------------------------------------------------------------------------------------------------
</TABLE>
A pension is based on the highest five-year average of credited salary
which is reflected 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, 10 years; Mr. Roden, 14 years; Mr. Cummins, 6 years; Mr.
Magee, 12 years; and Mr. Roman, 4 years.
The retirement benefits shown in the Pension Plan Tables assumes 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.
21
<PAGE>
TRANSACTIONS WITH HARLEYSVILLE MUTUAL
Harleysville Group was formed by Harleysville Mutual in 1979. It was a
wholly-owned subsidiary of Harleysville Mutual until June 1986, when
Harleysville Mutual sold shares of Harleysville Group's Common Stock in a public
offering. Harleysville Mutual's ownership of Harleysville Group's outstanding
Common Stock was reduced from 100% to approximately 70% at that time. In April
1992, Harleysville Mutual sold additional shares of its Harleysville Group
Common Stock holdings, further reducing Harleysville Mutual's ownership to
approximately 55%. Harleysville Group's operations are interrelated with the
operations of Harleysville Mutual. Harleysville Group believes that its various
transactions with Harleysville Mutual, some of which are summarized herein, have
been fair to Harleysville Group and equal to those terms that could have been
negotiated with an independent third party.
Under a lease effective January 1, 1995, Harleysville Mutual rents the home
office property from a partnership owned by Harleysville Group for a five-year
term at a base rent of $2.75 million. Harleysville Mutual may also pay
additional rent, based on a formula, for any additions, improvements or
renovations. There was no additional rental payment for 1997. 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.
Harleysville Group provides certain management services to Harleysville
Mutual and its property/casualty affiliates. Under related agreements,
Harleysville Group serves as the paymaster for the Harleysville companies, with
each company being charged for its proportionate share of salary and employee
benefits expense based upon time allocation. Harleysville Group received a fee
of $5.42 million in 1997 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 bore interest at LIBOR
plus 1%, with no penalty for prepayment. It was a demand loan with a stated
maturity in March 1998. In February 1998 the maturity was extended to March 2005
and the interest rate was changed to LIBOR plus .65% which is a commercially
reasonable market rate in 1998.
Harleysville Group's property/casualty insurance subsidiaries participate
in an underwriting pool with Harleysville Mutual whereby such subsidiaries cede
to Harleysville Mutual all of their insurance business and assume from
Harleysville Mutual an amount equal to their participation in the pooling
agreement. All losses and loss settlement and other underwriting expenses are
prorated among the parties on the basis of participation in the pooling
agreement. The agreement pertains to all insurance business written or earned on
or after January 1, 1986, and Harleysville Group's pool participants are not
liable for losses occurring prior to January 1, 1986. Harleysville Group's
participation in 1997 was 70%. On January 1, 1998, Harleysville Group's pool
participation was increased to 72%. The pooling agreement may be amended or
terminated by agreement of the parties. Information describing the pool
arrangement is contained in Harleysville Group's 1997 Annual Report to
Stockholders.
22
<PAGE>
The property/casualty insurance subsidiaries of Harleysville Group entered
into a reinsurance agreement, effective January 1, 1997, with Harleysville
Mutual whereby Harleysville Mutual reinsures the property/casualty insurance
company subsidiaries of Harleysville Group on a post-pooled basis for property
losses as a result of catastrophes, excluding earthquakes and hurricanes,
incurred in a quarter. The subsidiaries pay 1.7% of property premium to
Harleysville Mutual. In 1997 the payment amounted to $2.6 million. Harleysville
Mutual in turn pays to the subsidiaries in the event of covered catastrophes
100% of the subsidiaries' accumulated net loss in a quarter in excess of their
retention (or deductible), which is their pooling percentage times $2.5 million,
up to a maximum net loss equaling $22.5 million times the subsidiaries' total
pooling percentages. In 1997, retention was $1.75 million and the maximum amount
covered was $15.75 million. Under the agreement, Harleysville Mutual reinsured
$1.6 million of the subsidiaries' covered losses during 1997. The agreement was
continued in 1998 but, as a result of the addition of Minnesota Fire and
Casualty Company to the pool, the Harleysville Group subsidiaries' retention
became $1.8 million and the maximum total amount covered became $16.2 million.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
One Form 4 filed by Mr. Roden for a month failed to include one transaction
as a result of the illness of the person assigned to prepare the form.
23
<PAGE>
XPU-056 (ED:3-98)
<PAGE>
[HARLEYSVILLE LOGO]
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Roger A. Brown, Bruce
J. Magee, and Robert Simpson, Jr., 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 22, 1998, 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.
YOUR VOTE IS IMPORTANT
Mark, sign and date your proxy card and return it promptly in the
enclosed envelope.
PLEASE VOTE
<PAGE>
1. ELECTION OF CLASS A DIRECTORS
<TABLE>
<S> <C> <C>
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. Bradford W. Mitchell Lowell R. Beck Robert D. Buzzell
[ ] [ ]
</TABLE>
A vote FOR is recommended by the Board of Directors.
2. 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.
[ [Name & Address] ]
[ ]
<TABLE>
<S> <C> <C>
Signature__________________________________ Signature_______________________________ Date__________
</TABLE>
This proxy should be dated, signed by the stockholder exactly as his or
her name appears herein and returned promptly in the enclosed envelope. Persons
signing in a fiduciary capacity should so indicate.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
[HARLEYSVILLE LOGO]
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 22, 1998
10:00 A.M.
355 Maple Ave.
Harleysville, PA 19438
