<PAGE>
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 Section 240.14a-11(c) or Section 240.14a-12
Harleysville Group Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
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was paid previously. Identify the previous filing by registration statement
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<PAGE>
Walter R.
Bateman
Harleysville Group Inc. Logo
Chairman of the
Board,
President & CEO
355 Maple Ave.
Harleysville, PA
19438-2297
March 23, 1999
Dear Harleysville Group Inc. Stockholder:
You are cordially invited to attend the Annual Meeting of the
Stockholders of Harleysville Group Inc. at the Company's headquarters, 355
Maple Avenue, Harleysville, Pennsylvania on Wednesday, April 28, 1999, at
10:00 A.M.
At the meeting, stockholders will vote on two items of business. Those
items and the vote the Board of Directors recommends are:
<TABLE>
<CAPTION>
Item Recommended Vote
---- ----------------
<C> <S> <C>
1. election of two directors, and FOR
2. approval of Year 2000 Directors'
Stock Option Program FOR
</TABLE>
We will also review Harleysville Group Inc.'s 1998 performance and will
be pleased to answer your questions about the Company. Enclosed with this
proxy statement are your proxy card and the 1998 Annual Report.
We look forward to seeing you on April 28, 1999. Whether or not you plan
to attend the meeting in person, it is important that you complete and return
the enclosed proxy card in the envelope provided in order that your shares can
be voted at the meeting as you have instructed.
Sincerely,
/s/ Walter R. Bateman
Walter R. Bateman
<PAGE>
Roger A. Brown
Harleysville Group Inc. Logo Secretary
355 Maple Ave.
Harleysville, PA
19438-2297
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 28, 1999
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 28, 1999 at its headquarters at 355 Maple
Avenue, Harleysville, Pennsylvania 19438, for the following purposes:
1. To elect two Class C directors;
2. To approve the Year 2000 Directors' Stock Option Program; and
3. To transact such other business as may properly be presented.
Your Board recommends a vote in favor of the nominated directors and in
favor of approval of the Year 2000 Directors' Stock Option Program.
The Board of Directors has fixed the close of business on March 5, 1999
as the record date for determining the stockholders entitled to vote at the
Annual Meeting.
For further information on the individuals nominated as directors and on
the Year 2000 Directors' Stock Option Program, please read the proxy statement
that follows.
This notice, the proxy statement, the proxy card and the 1998 Annual
Report to Stockholders are being distributed to stockholders on or about March
23, 1999.
By Order of the Board of
Directors,
/s/ Roger A. Brown
Roger A. Brown
Secretary
March 23, 1999
Harleysville, Pennsylvania
<PAGE>
Table of Contents
<TABLE>
<S> <C>
ANNUAL MEETING OF STOCKHOLDERS 1
Purpose of Proxy Statement 1
Matters to be Voted Upon 1
Voting Procedures 1
Other Information 3
BOARD OF DIRECTORS 3
Corporate Governance Practices 3
Item 1. Election Of Directors 5
Biographies of Directors and Nominees 6
Board and Committee Meetings 8
Compensation of Directors 9
Stock Acquisition Programs 10
Item 2. Approval Of The Year 2000 Directors' Stock Option Program 12
Operation Of The Program 12
Federal Income Tax Consequences 14
Estimated Benefits 14
Vote Required 15
OWNERSHIP OF COMMON STOCK 15
Table I - 5% Stockholders 15
Table II - Beneficial Ownership of Directors & Executive Officers 16
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE 17
Compensation Philosophy 17
Compensation Methodology 17
Chief Executive Officer Compensation 20
Internal Revenue Code Impact 22
STOCK PERFORMANCE CHARTS 23
SUMMARY COMPENSATION TABLE 25
OPTION GRANTS IN 1998 27
OPTION EXERCISES & YEAR-END VALUES 28
LONG-TERM INCENTIVE PLAN 29
PENSION PLANS 30
TRANSACTIONS WITH HARLEYSVILLE MUTUAL 32
SECTION 16 REPORTING COMPLIANCE 33
</TABLE>
<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 28, 1999 at the
headquarters of the Company. This proxy statement has been mailed to
stockholders on March 23, 1999.
Matters to be Voted Upon
At the Annual Meeting, stockholders will vote on the election of two
directors, Walter R. Bateman and William E. Strasburg, and on the approval of
the Year 2000 Directors' Stock Option Program.
The Board of Directors knows of no other matters to be presented for
stockholder action at the meeting. If other matters are properly presented at
the meeting, your signed and dated proxy card authorizes Roger A. Brown, Bruce
J. Magee and Dennis M. Hyland to vote your shares in accordance with their best
judgment.
Voting Procedures
Who May Vote
Stockholders as of the close of business on March 5, 1999 (the Record
Date) are entitled to vote at the Annual Meeting. Each share of common stock is
entitled to one vote.
How to Vote
Stockholders may vote
. In person
. By mail by completing and returning the proxy card
Vote Needed for Election of Directors and Approval of the Year 2000 Directors'
Stock Option Program
The two nominees for directors receiving the highest number of votes will
be elected. The Year 2000 Directors' Stock Option Program will be approved if
it receives affirmative votes representing a simple majority of all shares
present and entitled to vote. As of the Record Date, Harleysville Mutual
Insurance Company owned 15,609,386 shares (or approximately 53.5%) of
Harleysville Group's outstanding stock. Harleysville Mutual has advised
Harleysville Group that it will vote in favor of the election of the nominated
directors and for approval of the Year 2000 Directors' Stock Option Program. As
a result, the nominated directors will be elected and the Year 2000 Directors'
Stock Option Program will be approved regardless of the votes of the other
stockholders.
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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,
29,261,311 shares of Harleysville Group's common stock were issued and
outstanding. If you attend in person and indicate your presence, or mail in a
properly signed and dated proxy card, you will be part of the quorum.
Voting of Shares via Proxy
If you have submitted a properly executed proxy by mail and are part of
the quorum, your shares will be voted as you indicate. However, if you sign,
date and mail in your proxy card without indicating how it should be voted on
the election of the directors or approval of the Year 2000 Directors' Stock
Option Program, your shares will be voted in favor of the election of the two
nominated directors and for approval of the Program. If you sign, date and mail
your proxy card and withhold voting for any or all of the nominated directors
(as explained on the proxy card), your vote will be recorded as being withheld
but it will have no effect on the outcome of the election. If you sign, date
and mail your proxy card and mark it "abstain" regarding approval of the Year
2000 Directors' Stock Option Program, your shares will not be voted but such
action will have the effect of a vote against approval. A broker non-vote will
also have the effect of a vote against the approval of the Year 2000 Directors'
Stock Option Program. A broker non-vote occurs when a broker votes on some
matters on the proxy card but not on others because the broker does not have
authority to do so.
Revocation of Proxy
If you later decide to revoke or change your proxy, you may do so by: (1)
sending a written statement to that effect to the Secretary of the Company; or
(2) submitting a properly signed proxy with a later date; or (3) voting in
person at the Annual Meeting.
Substantial Owners of Stock
In addition to Harleysville Mutual, other stockholders that own 5% or
more of Harleysville Group common stock are Capital Guardian Trust Company and
its affiliate Capital International, Inc. which together beneficially own 5.0%
of Harleysville Group common stock. Please see the chart on page 15 for more
details.
Duplicate Proxy Statements and Cards
You may receive more than one proxy statement, proxy card or Annual
Report. This duplication will occur if title to your shares is registered
differently or your shares are in more than one type of account maintained by
ChaseMellon Shareholder Services, the Company's transfer agent. To have all
your shares voted, please sign and return all proxy cards. If you wish to have
your accounts registered in the same name(s) and address, please call
ChaseMellon Shareholders Services at 1-800-851-9677, or contact ChaseMellon
through its website: www.chasemellon.com.
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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 2000 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 18, 1999. A
stockholder must have been a registered or beneficial owner of at least 1% of
the Company's outstanding common stock or stock with a market value of $2,000
for at least one year prior to submitting the proposal, and the stockholder
must continue to own such stock through the date on which the meeting is held.
A stockholder who has not timely submitted a proposal for inclusion in the
proxy statement and who plans to present a proposal at the 2000 Annual Meeting
of Stockholders must provide notice of the matter to the Secretary of the
Company by February 2, 2000, or the persons authorized under management proxies
will have discretionary authority to vote and act according to their best
judgment on said matter.
Expenses of Solicitation
Harleysville Group pays the cost of preparing, assembling and mailing
this proxy-soliciting material. In addition to the use of the mail, proxies may
be solicited personally, by telephone or by other electronic means by
Harleysville Group officers and employees without additional compensation.
Harleysville Group pays all costs of solicitation, including certain expenses
of brokers and nominees who mail proxy material to their customers or
principals.
Independent Public Accountants
Representatives of KPMG Peat Marwick, LLP, the independent public
accountants that audited Harleysville Group's 1998 financial statements, will
attend the Annual Meeting. They will have the opportunity to make a statement,
if they desire to do so, and will respond to any appropriate questions
presented by stockholders.
BOARD OF DIRECTORS
Corporate Governance Practices
In order to promote the highest standards of management for the benefit
of stockholders, the Board of Directors of Harleysville Group Inc. follows
certain governance practices regarding how the Board conducts its business and
fulfills its duties. These practices are:
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<PAGE>
Board Size and Composition
The Board presently consists of 7 directors comprised of 6 non-employee
directors and one employee director. The Board believes that the Board should
consist of at least 7 directors and that, because some members of the Board are
also members of the Board of Harleysville Mutual, the total of the two Boards
should be no more than 12. The Board further believes that of the maximum total
board membership of 12, no more than 3 should be employee directors.
Qualifications of Directors
The Board is responsible for identifying candidates to be directors. The
Nominating Committee, with input from the Chairman and the Chief Executive
Officer, screens director candidates. In overseeing candidates for election,
the Committee, and subsequently the Board, looks for those with the skills,
time and motivation to serve as a director. The Committee seeks individuals
with integrity, mature and independent judgment, analytical ability, objective
and sound business judgment, familiarity with issues important to the Company,
absence of conflicts of interest, ability to work with others and social
consciousness, among other characteristics. There are currently no
relationships between a non-employee director and Harleysville Group or any
other entity that would be construed as compromising the independence of any
director.
Director Retirement
It is Board policy that an employee director should resign as a director
upon resignation or retirement from employment with Harleysville Group, unless
the Nominating Committee requests the individual to remain as a director. Each
director, pursuant to the by-laws of the Company, must retire from the Board at
the next annual meeting following his or her 72nd birthday.
Stock Ownership
Each director is expected to have a significant investment in the
Company's common stock. To assist in this goal, the Company, with stockholder
approval, grants stock options to directors, as well as offers a stock purchase
plan. (See pages 10 and 11 for details).
Leadership
The Board retains the right to exercise the judgment to combine or
separate the offices of the Chairman of the Board and the Chief Executive
Officer. Currently, the Chairman of the Board is also the Chief Executive
Officer.
Performance Evaluations
Each year the non-employee directors of the Company meet to review the
Chief Executive Officer's performance. Each such director prepares a written
4
<PAGE>
evaluation of the Chief Executive Officer's performance which is submitted to
the Chairman of the Compensation and Personnel Development Committee who
compiles a report of the views of the non-employee directors. The non-employee
directors then meet privately to discuss the Chief Executive Officer's
performance and to agree on the content of the appraisal which the members of
the Compensation and Personnel Development Committee later review with the
Chief Executive Officer.
In addition, each year the Nominating Committee will conduct an
assessment of the Board's effectiveness and make a report on that subject to
the Board, along with any recommendations to modify the Company's Corporate
Governance Practices.
Director Compensation
Annually, Harleysville Group's management presents a report to the
Compensation and Personnel Development Committee that compares the compensation
of Harleysville Group's Board to compensation of directors at peer companies,
which are benchmarks for the Company's financial performance.
Board Agendas and Meetings
The Chairman and Chief Executive Officer establishes the agendas for
Board meetings but each director is free to suggest items for the agenda, and
each director is free to raise subjects at any Board meeting that are not on
the agenda for that meeting. The Executive Committee of the Board reviews and
approves Harleysville Group's yearly operating plan and specific financial
goals at the start of each year, and the Board monitors performance throughout
the year. The Board also reviews long-range strategic issues at regular Board
meetings as well as at periodic meetings devoted solely to strategic issues.
Executive Sessions of Outside Directors
The non-employee directors meet privately in executive sessions to review
the performance of the Chief Executive Officer and to review recommendations of
the Compensation and Personnel Development Committee concerning compensation
for the employee directors.
Item 1. Election Of Directors
Harleysville Group's Board of Directors currently consists of 7
directors. Each director is elected for a three-year term, except that if a
nominee will attain the age of 72 within the next two years following such
nominee's election, such nominee will be nominated for a term of one or two
years, as the case may be, to expire on the first Annual Meeting date following
the nominee's reaching age 72. The Board of Directors is divided into three
classes. The current three-year terms of Class A, B and C directors expire in
the years 2001, 2000 and 1999, respectively.
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<PAGE>
Two Class C directors are to be elected at the 1999 Annual Meeting. The
nominees are:
Class C
<TABLE>
<CAPTION>
Name Age Director Since Year Term Will Expire
- ---- --- -------------- ---------------------
if Elected
----------
<S> <C> <C> <C>
Walter R. Bateman 51 1992 2002
William E. Strasburg 71 1986 2000
</TABLE>
Your Board of Directors recommends a vote "FOR" the Nominated Directors.
If a nominee is unavailable for election, stockholders will vote for another
nominee proposed by the Board or the Board may reduce the number of directors
to be elected at the meeting.
Directors continuing in office are:
Class A
<TABLE>
<CAPTION>
Name Age Director Since Year Term Will Expire
- ---- --- -------------- ---------------------
<S> <C> <C> <C>
Lowell R. Beck 64 1996 2001
Robert D. Buzzell 65 1992 2001
Joseph E. McMenamin 67 1999 2001
</TABLE>
Class B
<TABLE>
<CAPTION>
Name Age Director Since Year Term Will Expire
- ---- --- -------------- ---------------------
<S> <C> <C> <C>
Michael L. Browne 52 1986 2000
Frank E. Reed 64 1986 2000
</TABLE>
Biographies of Directors and Nominees
Mr. Bateman, who was elected Chairman of the Board of both Harleysville
Group and Harleysville Mutual in August 1998, 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. 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
6
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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. 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 Visiting Professor
of Marketing at Georgetown University. He is also Distinguished Professor of
Marketing, George Mason University, School of Business Administration, Fairfax,
Virginia commencing that position in 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. McMenamin became a director of Harleysville Group and Harleysville
Mutual in January 1999. Mr. McMenamin was President and Chief Operating Officer
of the Keystone Insurance Companies, Philadelphia, Pennsylvania from 1983 until
he retired in 1996. He served as a Board member of the Keystone Insurance
Companies until December 1998 when he joined the Harleysville boards.
Mr. 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, as a result of a merger between First
Pennsylvania Corporation and CoreStates Financial Corp., Mr. Reed became
President and Chief Executive Officer of CoreStates Philadelphia National Bank.
Mr. Reed retired from that position in March 1995. Mr. Reed was Chairman of the
Board and a director of 360(degrees) Communications Company until its merger in
July 1998 with Alltel Corporation, of which he is now a director.
7
<PAGE>
Board and Committee Meetings
The Board met six times in 1998. A description of the Committees
follows the table of members and meetings.
1998 BOARD COMMITTEE MEMBERS & MEETINGS
<TABLE>
<CAPTION>
Name Audit Compensation Coordinating Executive Finance Nominating
&
Personnel
Development
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman X* X*
- ------------------------------------------------------------------------------------
Lowell R. Beck X X X
- ------------------------------------------------------------------------------------
Michael L. Browne X X X X X
- ------------------------------------------------------------------------------------
Robert D. Buzzell X X*
- ------------------------------------------------------------------------------------
Frank E. Reed X* X X
- ------------------------------------------------------------------------------------
William E. Strasburg X* X
- ------------------------------------------------------------------------------------
Number of
Meetings in 1998 3 5 1 7 8 5
</TABLE>
*Denotes Chairperson of the Committee; the Audit Committee Chair was vacant as
of December 31, 1998.
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 department and periodically reviews
the relationships among that department, 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 currently composed of two individuals who are solely Harleysville
Group directors and three individuals who are solely Harleysville Mutual
directors plus a chairperson who is on the board of both companies. No
material inter-company transaction can occur until
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a majority of both Harleysville Group directors and Harleysville Mutual
directors on the Committee approves a transaction. The decisions of the
Coordinating Committee are binding on Harleysville Group and Harleysville
Mutual.
The Executive Committee meets during the intervals between meetings of
the Board of Directors and has the right and authority to exercise the full
powers of the Board of Directors.
The Finance Committee establishes overall investment policies and
guidelines, and reviews and approves investments made by Harleysville Group.
The Nominating Committee considers and recommends nominees to the Board
for election as a director, as well as assesses the effectiveness of the Board
and corporate governance 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
Employee directors receive no additional compensation for serving on the
Board or a Committee.
Non-employee directors receive the following fees:
<TABLE>
<CAPTION>
Type of Compensation As of April 1998 As of April 1999
- -------------------------------------------------------------------------
<S> <C> <C>
Annual Retainer $19,000 $21,000
- -------------------------------------------------------------------------
Board Attendance Fee per Meeting $ 1,000 $ 1,250
- -------------------------------------------------------------------------
Committee Attendance Fee per Meeting $ 1,000 $ 1,000
- -------------------------------------------------------------------------
Attendance Fee per 2nd & Subsequent $ 650 $ 650
Meeting
- -------------------------------------------------------------------------
Annual Retainer for Committee Chair $ 3,500 $ 3,500
</TABLE>
Non-employee directors are reimbursed for out-of-pocket expenses. A non-
employee director who serves on both the Harleysville Group and Harleysville
Mutual Boards receives only one retainer and, if the Boards or the same
Committees of Harleysville Group and Harleysville Mutual meet on the same day,
the non-employee director receives only one attendance fee. In either case, the
retainer or attendance fee is allocated equally to Harleysville Group and
Harleysville Mutual.
9
<PAGE>
Stock Acquisition Programs
Directors' Stock Option Programs
In 1990, Harleysville Group adopted the 1990 Directors' Stock Option
Program (the "1990 Program"), which provided for the issuance of an aggregate
of 94,500 shares of common stock, subject to adjustment for stock splits or
other changes. Under the 1990 Program, non-qualified stock options to purchase
6,300 shares were awarded to all non-employee directors of Harleysville Group
and Harleysville Mutual during the period 1990 through May 1994. The options
vested and became exercisable at the rate of 20% per year of active Board
service. The option price per share is 100% of the fair market value of a share
of common stock on the date of grant. The 1990 Program is administered by the
Compensation and Personnel Development Committee of the Board of Directors of
Harleysville Group. The Committee had no discretion with regard to the
eligibility or selection of directors to receive options under the 1990
Program, the number of shares of stock subject to such options under the 1990
Program, or the purchase price thereunder. On February 1, 1999, there were
44,100 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. The total options
granted to date are 112,440 with 90,960 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.
In February 1999, the Board adopted the Year 2000 Directors' Stock Option
Program, subject to submission to stockholders for approval at the Annual
Meeting. Please see page 12 for a description of the program.
10
<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 and
subject to forfeiture until the first to occur of his or her retirement from
the Board after attaining age 72, death or disability. A total of 45,168 shares
were initially awarded to eight directors who possess the right to vote the
shares and receive dividends thereon. Concurrently, the Board determined that
it would no longer elect any current or future director as a Director Emeritus.
Formerly, a director of Harleysville Group, upon ceasing to be a Board member
as of the annual meeting following attainment of age 72, in accordance with the
by-laws, was eligible to be elected a Director Emeritus for up to three one-
year terms. Director Emeriti were paid a retainer and attendance fees for
attendance at the Board meetings with re-election being contingent upon
satisfactory attendance at the Board meetings. Directors' current holdings of
restricted stock are set forth on the chart on page 16.
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 five
subscription periods since its inception, a total of 53,683 shares have been
purchased by directors. The Plan provides for up to 20 subscription periods.
11
<PAGE>
Item 2. Approval Of The Year 2000 Directors' Stock Option Program
On February 24, 1999, the Board of Directors adopted, subject to
stockholder approval at the 1999 Annual Meeting, the Year 2000 Directors' Stock
Option Program (the "Y2000 Program"). No options under this program have been
or will be granted until approval by the stockholders.
The purpose of the Y2000 Program is to attract and motivate non-employee
directors of Harleysville Group and Harleysville Mutual. A further purpose of
the Y2000 Program is to link compensation of non-employee directors to the
growth of Harleysville Group.
Harleysville Group has previously adopted stock option plans for non-
employee directors. Descriptions of those programs and the number of options
granted thereunder are found on pages 10 and 11 above.
Operation Of The Program
Stock options are the right to purchase, for cash or previously owned
shares of common stock, Harleysville Group's common stock at the fair market
value at the close of business on the day of grant. The per share market value
of the common stock on March 5, 1999 was $19.75.
A total of 123,500 shares of common stock will be reserved and available
for use under the Y2000 Program, subject to adjustment for stock splits or
other changes discussed below. Options to purchase 2,500 shares are to be
awarded at the May 2000 Board of Directors meeting, and at each May Board
meeting for the next four successive years to the then current non-employee
directors of Harleysville Group and Harleysville Mutual, provided that, if an
incumbent director has options under the 1995 Program that vest in the same
year as an award of options under this Program, then the amount of shares that
are awarded in that year shall be reduced by the number of shares that vest
that year under the 1995 Program. At present there are 9 non-employee directors
of Harleysville Group and Harleysville Mutual. Options to purchase 2,500 shares
will be granted to future non-employee directors of Harleysville Group and
Harleysville Mutual at the first May Board meeting following their eligibility
to participate in the Y2000 Program and at each May Board meeting thereafter
occurring before or in May 2004. To the extent that insufficient shares would
exist at any May Board meeting to grant a full award of 2,500 shares to all
directors, then the remaining shares will be divided equally among the then
current directors.
Options shall vest and become exercisable immediately.
The shares available under the Y2000 Program may be either authorized but
unissued shares or shares acquired by Harleysville Group. The authorization of
123,500 shares for this Program will not, however, result in the creation of a
greater number of total shares of Company common stock reserved for options
than currently exists. The 123,500 shares on which options may be granted will
be
12
<PAGE>
comprised of previously authorized but unissued shares under the prior
discontinued directors' stock option programs and from a reduction in shares
previously authorized but unissued under the Company's Equity Incentive Plan.
Distribution of shares will be made only after the registration of such shares
with the Securities and Exchange Commission ("SEC") or pursuant to exemptions
from registration under applicable SEC rules and regulations. If any option or
other interest granted under the Y2000 Program expires, terminates or is
forfeited before exercise, payment in full or final distribution, the shares
covered by the unexercised or unpaid portion may be used again for new grants
under the Y2000 Program.
Proceeds received by Harleysville Group from the exercise of stock
options will be added to the general funds of the Company.
The Y2000 Program will be administered by the Compensation and Personnel
Development Committee of the Board of Directors of Harleysville Group. (See
page 8 for the current members of that Committee.) The Committee will have the
general authority to interpret the provisions of the Y2000 Program and adopt
such rules as it deems necessary or desirable for the administration of the
Program, but the Committee will have no discretion with respect to the
eligibility or selection of directors to receive options under the Y2000
Program, the number of shares of stock subject to any such options under the
Y2000 Program, or the purchase price thereunder.
Stock options under the Y2000 Program will be "non-qualified" for
purposes of the Internal Revenue Code. The options have a term of 10 years from
the date of grant, subject to earlier termination in cases of death,
disability, retirement, or other termination of service. In the event of
retirement, disability or death of a director, the options are exercisable for
a period of 2 years after such event, but in no event after 10 years after
grant. In the event of other termination of service, options shall expire 120
days after such termination date, or on their stated expiration date, whichever
is earlier. All stock options shall be evidenced by notices or agreements which
may contain such other terms, not inconsistent with the Y2000 Program, as may
be established by the Committee.
The Y2000 Program provides for adjustments in the 123,500 shares
available for the Y2000 Program, and in the outstanding awards granted pursuant
to the program, because of a stock split, stock dividend, merger,
consolidation, combination of shares or similar occurrence.
The program may be suspended or terminated by the Board at any time, in
which case options previously granted under the Y2000 Program will remain in
effect in accordance with their terms and conditions. The Board may amend the
Y2000 Program for any reason, except that it may not, without stockholder
approval, change the selection or eligibility of directors to receive options
under the Y2000 Program, the number of shares of stock subject to any such
options under the Y2000 Program or the purchase price thereunder.
13
<PAGE>
Federal Income Tax Consequences
A director who receives a stock option under the Y2000 Program will not
realize any income, nor will Harleysville Group be entitled to a deduction for
federal income tax purposes, at the time of the grant or award. A director will
recognize ordinary income upon the date of exercise of the stock option in an
amount equal to the difference between the option price and the fair market
value on the date of exercise. Harleysville Group will be entitled to a
deduction equal to the amount the director is required to treat as ordinary
income. If the exercise price of an option is paid by surrender of previously
owned shares, the basis of an equivalent number of new shares will have the
basis of the previously owned shares, while the additional new shares issued
have a basis equal to their fair market value on the date of exercise.
When a director disposes of shares of common stock acquired under the
Y2000 Program, 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 capital gain, depending upon the holding period of the
shares. If the amount received is less than that value, the loss will be
treated as long-term or short-term capital loss, depending upon the holding
period of the shares.
Estimated Benefits
The following table summarizes the estimated benefits available to the
current Named Executive Officers and the identified groups under the Y2000
Program, to the extent such information is available or can be determined. Of
the directors nominated for election, none would be currently expected to
receive a grant of any options under this Program.
<TABLE>
<CAPTION>
Name and Position Dollar Number of
Value ($) Units (#)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Non-Executive Director Group $551,250 73,500
- ----------------------------------------------------------------------------------
All Others, including Named Executive
Officers, Executive Group and Non-Executive 0 0
Officer Group
</TABLE>
The dollar value of the options to be awarded under the Y2000 Program cannot be
determined at this time because such value is based upon the per share exercise
price of the option awarded, which is 100% of the fair market value of a share
of common stock on the date of the grant. The dollar value figure shown above
is the value if 2,500 options had been granted to all current non-employee
directors at the May 1998 Board meeting, based on the then fair market value of
common stock of $24.50.
14
<PAGE>
Vote Required
The affirmative vote of a majority of the shares of common stock present
and entitled to vote at the Annual Meeting is required for the adoption of the
Y2000 Program.
Your Board of Directors recommends a vote "FOR" the Year 2000 Directors'
Stock Option Program.
OWNERSHIP OF COMMON STOCK
Table I - 5% Stockholders
Those persons owning more than 5% of Harleysville Group stock as of December
31, 1998 are set forth below. On that date there were 29,150,518 shares of
Harleysville Group stock held by stockholders.
<TABLE>
<CAPTION>
Name and Address Voting Authority Dispositive Total Amount Percent of
Authority of Beneficial Class
Ownership
------------------------------------------------------------------
Sole Shared Sole Shared
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harleysville Mutual
Insurance Company 15,609,386 15,609,386 15,609,386 53.5%
Harleysville, PA
19438
- --------------------------------------------------------------------------------------
Capital Guardian
Trust Company & 1,213,200 1,473,200 1,473,200 5.0%
Capital International,
Inc.
11100 Santa Monica
Blvd., Suite 1500
Los Angeles, CA
90025
</TABLE>
15
<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,
1999. The "aggregate number of shares beneficially owned" listed in the second
column includes the numbers listed in the third and fourth columns. For a
description of the Restricted Stock, please see the Directors Equity Award
Program on page 11. On February 15, 1999, there were 29,259,031 shares of
Harleysville Group stock held by stockholders.
<TABLE>
<CAPTION>
Name Aggregate Right to Number of Percent of
Number Acquire Shares of Shares
Of Shares w/in 60 Restricted (less than
Beneficially days Stock Owned 1% unless
Owned (number of indicated)
shares)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Walter R. Bateman 168,824 109,600 5,646
- ---------------------------------------------------------------------------
Lowell R. Beck 9,250 6,000
- ---------------------------------------------------------------------------
Michael L. Browne 25,077 16,300 5,646
- ---------------------------------------------------------------------------
Robert D. Buzzell 23,738 15,040 5,646
- ---------------------------------------------------------------------------
Joseph E. McMenamin 0 0
- ---------------------------------------------------------------------------
Frank E. Reed 29,184 16,300 5,646
- ---------------------------------------------------------------------------
William E. Strasburg 33,848 16,300 5,646
- ---------------------------------------------------------------------------
Mark R. Cummins 58,995 52,679
- ---------------------------------------------------------------------------
Thomas E. Roden 76,133 61,238
- ---------------------------------------------------------------------------
Spencer M. Roman 46,151 40,647
- ---------------------------------------------------------------------------
Bruce J. Magee 54,796 41,891
- ---------------------------------------------------------------------------
All directors & executive
officers as a group (17) 705,901 516,134 28,230 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;
Thomas Roden disclaims beneficial ownership of 79 shares held by him as
custodian for a minor child; and Spencer Roman disclaims beneficial ownership
of 209 shares held by his spouse as custodian for a minor child and 60 shares
held by a stepson.
16
<PAGE>
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE
Compensation Philosophy
The Compensation and Personnel Development Committee of the Board of
Directors (the "Compensation Committee"), which consists entirely of outside
directors as defined in section 162(m) of the Internal Revenue Code, has
established a management compensation program designed to further the
attainment of the Company's strategic goals of growth and profitability and
thus enhance shareholder value. In order to achieve these strategic goals, the
Company has identified four principles to guide its compensation program. The
program must:
. Attract, retain and motivate talented executives;
. Reward competencies and behaviors critical to the Company's success;
. Offer total compensation levels that are consistent with the performance
of the executive measured against other executives both within the
Company and within the industry;
. Focus executives on performance goals and measures that are the key to
the Company's success by providing variable compensation programs linked
to creation of shareholder value.
Compensation Methodology
The Harleysville Group compensation program is designed to enable
Harleysville Group to fairly compete for talented and experienced staff with
companies of similar size whether publicly or privately held. Data from many
different insurance companies are employed to determine proper competitive
compensation levels for an organization the size of Harleysville. As a result,
the group from which data are gathered and used is not the same as the peer
group represented on the Stock Performance Charts which includes all NASDAQ
traded property/casualty companies regardless of size, or other
characteristics, although data from many of the same companies may be employed.
Total compensation is comprised of fixed compensation (annual base
salary), variable compensation (annual and long-term incentive plans), and
stock options. In determining total compensation, Harleysville Group targets
fixed compensation at the market median, while total compensation is targeted
at the midpoint of the second quartile. This total compensation target is
designed to enable the organization to attract and retain high-performing
executives and to reward above average performance, while a flexible mix
between base salary and variable compensation permits higher potential of pay
for those positions where performance results are highly measurable and where
the value of those results to the Company is clear and significant.
In order that compensation policies benefit all companies in the
organization, two Harleysville Mutual-only non-employee directors participate
in the determination of compensation philosophy, methodology and goals
applicable to executives. All decisions of the Compensation Committee regarding
fixed and variable compensation are subject to review by the Board of
Directors.
17
<PAGE>
The individual components of total compensation and how they function are
described below:
. Base Salary
Consistent with the compensation philosophy, annual base salary is
designed to be competitive within the industry. Each position in the
Company is placed in an appropriate paygrade whose midpoint level is set
at the median pay for that position when compared to the industry on a
size adjusted basis. A salary range based on the midpoint is then
developed for that paygrade. An individual officer's salary within his
or her paygrade is determined each November for the following year and
is based on 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 ratio is a standard term of measurement in the
property/casualty insurance industry and means the ratio produced by
adding (1) the ratio of losses, loss adjustment expenses, and
policyholder dividends to net earned premiums and (2) the ratio of
underwriting expenses to net written premium. The figure then is
expressed as a percentage.
. Annual Incentive Compensation
The Company each year adopts targets under its Senior Management
Incentive Compensation Plan in order to direct executive officer
attention to the attainment of significant annual corporate goals. For
the 1998 plan, the goals included: combined ratio goals for the entire
Harleysville organization's property/casualty results; a return on
equity goal; a premium growth goal; and service and processing
timeliness goals. The weightings for each factor were: combined ratio
30%; return on equity 30%; premium growth 25%; and service and
processing goals 15%. The plan is designed to pay a target award at a
level of 15% to 30% of annual salary depending on position when the
target goals are achieved. Payouts may be as large as 200% of the target
award if actual performance exceeds the target. Consistent with the
Compensation Committee's philosophy, the size of the award range is
determined for the Chief Executive Officer specifically and executive
officers generally based on an analysis of the appropriate competitive
total compensation package that is typically available for executive
officers of a property/casualty insurance company of similar size. There
is no payout under the Plan unless the combined after-tax net income as
reported on the Combined Annual Statement of Harleysville Mutual
Insurance Company and its affiliated property and casualty insurers plus
after-tax net income resulting to Harleysville Group from management
agreements is at least 2% of the combined net earned premium as shown on
such statement. The Combined Annual Statement is a financial statement
required to be filed with state insurance regulatory authorities. It
includes financial information on a combined basis for all
property/casualty insurance companies owned by
18
<PAGE>
Harleysville Group and Harleysville Mutual. The payouts in 1996, 1997
and 1998 reflect that all the target goals were not fully attained in
those years. For 1999, the Company has adopted distinct goals for the
Chief Investment Officer that provide incentives for investment
performance in addition to corporate performance goals. The goals and
the weightings for each are 10% for combined ratio; 30% for return on
equity; 50% for equity investment performance; and 10% for fixed income
investment performance.
. 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 a combination
of Harleysville Group's annual rate of return on equity ("ROE") and
written premium growth over the four-year period. Potential target
awards for each year are designed to range from 15% to 45% of a
participant's salary depending upon officer level. A target amount is
payable if Harleysville Group's average ROE exceeds certain levels of
targeted ROE. There is a maximum payment of 150% of target award if
Harleysville Group's ROE exceeds certain higher levels of targeted ROE.
If ROE falls between the target level and the maximum level, then the
amount of the award is prorated accordingly. Once an ROE of 8% is
achieved, an additional incentive award based on 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 1993-1996, 1994-1997 and 1995-1998 are reported in the Summary
Compensation Table on page 25 under the years 1996, 1997, and 1998
respectively, although paid in the following year. For the four-year
period beginning in 1998, the target ROE goal is 12% per year, and, if
ROE is 8% or greater per year, an additional incentive may be paid if
direct written premium growth is at least 7% 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 1998 is 99.0% of
target for Mr. Bateman and the other Named Executive Officers who
participate. This payout level was based on the ROE being higher than
the target return for three of the four years, i.e. 1995, 1997 and 1998.
See the chart on page 29 for further information on payouts under this
Plan.
19
<PAGE>
. Stock Options
Pursuant to the terms of the Equity Incentive Plan, each year the
Compensation Committee grants stock options to officers and key
employees of Harleysville Group. Because stock option grants are a
component of a compensation target, these awards do not take into
account options already held by the officer. Awards are based on an
objective formula that seeks to achieve, in combination with the other
components of compensation, the total compensation target established by
the Compensation Committee for the paygrade level of the executive
position. The Compensation Committee generally uses the Black-Scholes
option value method to determine the value of the stock option grant
component of compensation and awards the number of stock options whose
total value equals the target amount. Additionally, in 1998, because of
the volatility of the stock market, grants were kept at the same level
as in 1997 to maintain a competitive compensation target. Based upon the
recommendation of the CEO, an officer may not receive a grant award in
any one year if that officer's performance for the prior year does not
meet expectations. However, in order to receive stock options at a level
necessary to keep total compensation at the target level, executive
officers above a certain level, including Mr. Bateman and all Named
Executive Officers, must own an annually increasing number of shares of
Harleysville Group stock, which for Mr. Bateman and the Named Executive
Officers annually is the number of shares equal in value to 10% of a
figure equal to 90% of the salary grade midpoint. In 1998, all such
officers owned at least the required minimum number of shares. The stock
option grants to the Named Executive Officers in 1998 are set out on the
Summary Compensation Table on page 25 and the Option Grant Table on page
27. All stock options granted under the Equity Incentive Plan in 1998,
as well as in 1997 and 1996, have been non-qualified options receiving
no special tax benefit, have an exercise price equal to the fair market
value of a share of common stock on the date of grant, have a term of 10
years, and vest at the rate of 50% each on the first and second
anniversary dates of award, except that options become immediately
exercisable upon an optionee's retirement, death or disability. Retired
optionees, age 61 and younger, may exercise the options within one year
of retirement, and retired optionees, age 62 and older, may exercise the
options granted prior to May 1997 within 2 years after retirement and
the options granted May 1997 and after within 5 years after retirement
if the options do not otherwise expire. The exercise price may be paid
by delivery of already owned shares. The Compensation Committee may, in
its discretion, accelerate the exercisability of options in the event of
a merger, consolidation or other change in control of Harleysville
Group. The Company has never repriced stock options and has no current
intention to do so.
Chief Executive Officer Compensation
Mr. Bateman's compensation for 1998 as set forth in the Summary
Compensation Table on page 25 was based on the factors set forth above. His
total compensation, composed of base salary, annual incentive compensation,
long-term compensation and stock option grants, reflects both a target
compensation package
20
<PAGE>
commensurate with similar officers within the insurance industry peer group as
well as an evaluation of his personal and company performance on both a
qualitative and quantitative basis.
Mr. Bateman's base salary paid in 1998 was determined in November 1997
based upon a review of Mr. Bateman's and the Company's results in 1997.
Although earned premiums increased only slightly in 1997, the other key
financial indicators were quite positive: ROE 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 increased only 2% over 1996. However, ROE increased
from 8.5% in 1996 to 14.4% in 1997 and the combined ratio in 1997 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 as of December 31, 1997. 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 $123,748 for
1998 was based on a formula that reflected attainment of 194.0% of the ROE
award goal, 118.5% of the premium growth award goal and 89.8% of the service
award goals; the minimum combined ratio award goal was not achieved. Likewise,
the payout for the long-term incentive plan for the period 1995 to 1998 was
based on the attainment of higher than goal ROE targets in 1995, 1997 and 1998.
Finally, the award of stock options in May 1998 was based on the appropriate
formula applied to Mr. Bateman's salary paygrade.
In November 1998, the Committee determined Mr. Bateman's base
compensation, and 1999 annual and 1999-2002 long-term incentive plan target
awards. The incentive plan target maximum award levels were continued at the
same levels as prior years while base compensation was determined taking into
account: Mr. Bateman's additional responsibilities as Chairman of the Board;
premium growth (in excess of that resulting from the Minnesota Fire and
Casualty Company acquisition); the success of the Company's coastal windstorm
strategy; excellence of fundamental underwriting despite weather catastrophes;
ROE of 14.8%; and increased operating earnings, book value and stockholder
equity.
21
<PAGE>
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 1998
and it is not expected to have any impact on the Company in 1999 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 & Personnel Development Committee of the Board of
Directors:
William E. Strasburg, Chairperson
Michael L. Browne
Robert D. Buzzell
22
<PAGE>
STOCK PERFORMANCE CHARTS
The following graphs show changes over the past 10-year period and 5-year
period (all full calendar-year periods) in the value of $100 invested in (1)
Harleysville Group Common Stock; (2) the NASDAQ Stock Market index; and (3) the
Peer Group index. All values are as of the last trading day of each year.
10-Year Graph
<TABLE>
<CAPTION>
Comparison of 10-Year Cumulative Total Stockholder Return
- -
1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
Harleysville Group 100 156.41 140.52 200.60 273.15 298.86
NASDAQ 100 121.20 102.92 165.10 192.07 220.46
Peer Group 100 140.90 134.62 191.06 256.97 265.64
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Harleysville Group 246.67 338.16 328.10 528.26 580.41
NASDAQ 215.51 304.81 374.82 459.84 646.42
Peer Group 256.00 358.51 392.85 594.22 506.65
</TABLE>
23
<PAGE>
5-Year Graph
<TABLE>
<CAPTION>
Comparison of 5-Year Cumultive Total Stockholder Return
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Harleysville Group 100 82.54 113.15 109.78 176.76 194.20
NASDAQ 100 97.75 138.26 170.02 208.58 293.21
Peer Group 100 96.37 134.96 147.89 223.70 190.73
</TABLE>
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, 82 NASDAQ Company
stocks and includes, for the 5 year chart, 62 NASDAQ Company stocks in SIC
Major Group 633 (SIC 6330-6339: U.S. and foreign, fire, marine and casualty
insurance). A complete list of these companies may be obtained from CRSP, at
the University of Chicago Graduate School of Business, 1101 East 58th Street,
Chicago, Illinois, 60637; (773) 702-7467. CRSP reweights the indices daily,
using the market capitalization on the previous trading day.
24
<PAGE>
SUMMARY COMPENSATION TABLE
This table indicates, for the last three fiscal years, 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, 1998
Awards Payouts
-------------------------------------------------------
Securities Long-Term
Salary Bonus Underlying Incentive
Stock Options Payouts
(# of shares)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman 1998 $414,600 $123,748 32,736 $227,159 $24,876
Chairman, President & 1997 $389,300 $ 96,728 32,736 $160,059 $22,858
Chief Executive Officer 1996 $363,800 $ 16,614 32,674 $ 87,676 $16,371
- --------------------------------------------------------------------------------------
Mark R. Cummins 1998 $239,338 $ 51,306 14,038 $ 71,897 $14,360
Executive Vice 1997 $221,900 $ 36,872 14,038 $ 48,433 $13,314
President, 1996 $207,300 $ 6,332 14,010 $ 48,808 $ 9,329
Chief Investment
Officer & Treasurer
- --------------------------------------------------------------------------------------
Thomas E. Roden 1998 $227,500 $ 58,409 16,148 $102,110 $13,650
Senior Vice President, 1997 $217,700 $ 53,008 16,148 $ 48,433 $13,062
Governmental Affairs & 1996 $208,300 $ 9,105 16,116 $ 45,514 $ 9,374
Special Projects
- --------------------------------------------------------------------------------------
Spencer M. Roman
Executive Vice 1998 $188,962 $ 43,858 10,614 $ 51,705 $11,338
President, 1997 $170,700 $ 27,885 10,614 $ 0 $10,242
Field Operations 1996 $161,800 $ 4,789 10,596 $ 0 $ 7,281
- --------------------------------------------------------------------------------------
Bruce J. Magee 1998 $183,600 $ 35,678 10,614 $ 54,340 $11,016
Senior Vice President & 1997 $172,400 $ 27,885 10,614 $ 36,665 $10,326
Chief Financial Officer 1996 $161,600 $ 4,789 10,596 $ 0 $ 7,272
</TABLE>
Cash bonuses under the Senior Management Incentive Bonus
Plan for services rendered in fiscal years 1998, 1997, and 1996,
have been listed in the year earned, but were actually paid in
the following year. Cash bonuses under the Long-Term Incentive
Plan for services rendered in fiscal years 1993-1996, 1994-1997
and 1995-1998 have been listed in 1996, 1997 and 1998
respectively, although paid in the subsequent year.
The terms of stock options granted in fiscal years 1998,
1997 and 1996 are described in the Report of the Compensation and
Personnel Development Committee beginning on page 17.
25
<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 1998, of $9,600
on behalf of each of the Named Executive Officers to match 1998 pre-tax
elective deferral contributions made by each to the Extra Compensation Plan;
(b) 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; and (c) 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; the remainder of each amount is the allocation for each
Named Executive Officer under the Excess Match.
26
<PAGE>
OPTION GRANTS IN 1998
This table shows the number and value of stock options granted
to the Named Executive Officers in 1998.
<TABLE>
<CAPTION>
Name Number of % of Total Exercise Price Expiration Grant Date
Securities Options Per Share Date Present Value
Underlying Granted to
Options Employees
Granted(#) in Fiscal
Year
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman 32,736 10% $24.50 5/20/08 $236,681
- ----------------------------------------------------------------------------------
Mark R. Cummins 14,038 4% $24.50 5/20/08 $101,495
- ----------------------------------------------------------------------------------
Thomas E. Roden 16,148 5% $24.50 5/20/08 $116,750
- ----------------------------------------------------------------------------------
Spencer M. Roman 10,614 3% $24.50 5/20/08 $ 76,739
- ----------------------------------------------------------------------------------
Bruce J. Magee 10,614 3% $24.50 5/20/08 $ 76,739
</TABLE>
In calendar year 1998, Harleysville Group granted a total of
334,870 options representing the right to purchase 334,870 shares of
common stock to 148 officers and key employees under the Equity
Incentive Plan.
The Grant Date Present Value was determined using the Black-
Scholes option pricing model. These numbers are calculated based on
the requirements promulgated by the SEC and do not reflect
Harleysville Group's estimate of future stock price growth. Use of
this model should not be viewed in any way as a forecast of the
future performance of Harleysville Group's common stock, which will
be determined by future events and unknown factors.
For a description of the option plan, please see page 20.
27
<PAGE>
OPTION EXERCISES & YEAR-END VALUES
This table shows the number and value of stock options
(exercised in 1998 and the value of unexercised options as of
the end of 1998) for the Named Executive Officers during 1998.
Year-end value is calculated using the difference between the
option exercise price and $25.8125 (year-end stock price)
multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Name No. of Value No. of Securities Value of Unexercised
Shares Realized Underlying Unexercised In-the-Money
Acquired on Options at Fiscal Options at Year-End
Exercise Year-End
--------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman 0 $ 0 125,600 49,104 $1,612,170 $171,864
- ---------------------------------------------------------------------------------------------
Mark R. Cummins 0 $ 0 52,679 21,057 $ 651,480 $ 73,700
- ---------------------------------------------------------------------------------------------
Thomas E. Roden 5,040 $90,720 61,238 24,222 $ 790,902 $ 84,777
- ---------------------------------------------------------------------------------------------
Spencer M. Roman 0 $ 0 40,647 15,921 $ 498,763 $ 55,724
- ---------------------------------------------------------------------------------------------
Bruce J. Magee 2,554 $49,964 41,891 15,921 $ 547,472 $ 55,724
- ---------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
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 1998. Four-year performance periods under
the Plan were completed in 1996, 1997 and 1998 and actual payments thereunder
are shown in the Summary Compensation Table for those years.
<TABLE>
<CAPTION>
Name Performance Target Estimated Future Payments Under
or Other Award Non-Stock Price Based Plans
Period Until Percent of
Maturation 1/1/98 Salary
or Payout
------------------------------------
Threshold Target Maximum
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman 4 years 45% 0 $ 186,600 $ 279,900
----------------------------------------------------------------------------------
Mark R. Cummins 4 years 25% 0 $ 58,800 $ 88,200
----------------------------------------------------------------------------------
Thomas E. Roden 4 years 35% 0 $ 79,600 $ 119,400
----------------------------------------------------------------------------------
Spencer M. Roman 4 years 25% 0 $ 44,400 $ 66,600
----------------------------------------------------------------------------------
Bruce J. Magee 4 years 25% 0 $ 45,900 $ 68,800
</TABLE>
For a description of the long-term incentive compensation plan, please
see page 19.
29
<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 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Year Credited
Salary @
12/31/98
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$600,000 $131,779 $197,669 $263,558 $329,448 $329,448 $329,448
- ------------------------------------------------------------------------
$550,000 $120,529 $180,794 $241,058 $301,323 $301,323 $301,323
- ------------------------------------------------------------------------
$500,000 $109,279 $163,919 $218,558 $273,198 $273,198 $273,198
- ------------------------------------------------------------------------
$450,000 $ 98,029 $147,044 $196,058 $245,073 $245,073 $245,073
- ------------------------------------------------------------------------
$400,000 $ 86,779 $130,169 $173,558 $216,948 $216,948 $216,948
- ------------------------------------------------------------------------
$350,000 $ 75,529 $113,294 $151,058 $188,823 $188,823 $188,823
- ------------------------------------------------------------------------
$300,000 $ 64,279 $ 96,419 $128,558 $160,698 $160,698 $160,698
- ------------------------------------------------------------------------
$250,000 $ 53,029 $ 79,544 $106,058 $132,573 $132,573 $132,573
- ------------------------------------------------------------------------
$200,000 $ 41,779 $ 62,669 $ 83,558 $104,448 $104,448 $104,448
- ------------------------------------------------------------------------
$150,000 $ 30,529 $ 45,794 $ 61,058 $ 76,323 $ 76,323 $ 76,323
- ------------------------------------------------------------------------
$125,000 $ 24,904 $ 37,356 $ 49,808 $ 62,261 $ 62,261 $ 62,261
</TABLE>
30
<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 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Year Credited
Salary @
12/31/98
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$600,000 $115,444 $173,165 $230,887 $288,609 $288,609 $288,609
- ------------------------------------------------------------------------
$550,000 $105,694 $158,540 $211,387 $264,234 $264,234 $264,234
- ------------------------------------------------------------------------
$500,000 $ 95,944 $143,915 $191,887 $239,859 $239,859 $239,859
- ------------------------------------------------------------------------
$450,000 $ 86,194 $129,290 $172,387 $215,484 $215,484 $215,484
- ------------------------------------------------------------------------
$400,000 $ 76,444 $114,665 $152,887 $191,109 $191,109 $191,109
- ------------------------------------------------------------------------
$350,000 $ 66,694 $100,040 $133,387 $166,734 $166,734 $166,734
- ------------------------------------------------------------------------
$300,000 $ 56,944 $ 85,415 $113,887 $142,359 $142,359 $142,359
- ------------------------------------------------------------------------
$250,000 $ 47,194 $ 70,790 $ 94,387 $117,984 $117,984 $117,984
- ------------------------------------------------------------------------
$200,000 $ 37,444 $ 56,165 $ 74,887 $ 93,609 $ 93,609 $ 93,609
- ------------------------------------------------------------------------
$150,000 $ 27,694 $ 41,540 $ 55,387 $ 69,234 $ 69,234 $ 69,234
- ------------------------------------------------------------------------
$125,000 $ 22,819 $ 34,228 $ 45,637 $ 57,047 $ 57,047 $ 57,047
</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, 11 years; Mr. Roden,
15 years; Mr. Cummins, 7 years; Mr. Magee, 13 years; and Mr.
Roman, 5 years.
The retirement benefits shown in the Pension Plan Tables
assume that benefits will be payable at age 65 in the form of a
single life annuity, and are not subject to any deduction for
Social Security or other offset amounts. For the purposes of
calculating benefits under the Pension Plans, no Named Executive
Officer may be credited with more than 25 years of service.
31
<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, of which the
material ones are summarized herein, have been fair to Harleysville Group and
equal to those terms that could have been negotiated with an independent third
party.
Under a lease effective January 1, 1995, Harleysville Mutual rents the
home office property from a partnership owned by Harleysville Group for a five-
year term at a base rent of $2.75 million. Harleysville Mutual may also pay
additional rent, based on a formula, for any additions, improvements or
renovations. There was no additional rental payment for 1998. 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 $5.7 million in 1998 for its services under these management agreements.
Harleysville Group borrowed approximately $18.5 million from Harleysville
Mutual in connection with the acquisition of Mid-America Insurance Company and
New York Casualty Insurance Company in 1991. It was a demand loan with a stated
maturity in March 1998. In February 1998 the maturity was extended to March
2005 and the interest rate became LIBOR plus .65%, which was a commercially
reasonable market rate in 1998.
Harleysville Group's property/casualty insurance subsidiaries participate
in an underwriting pool with Harleysville Mutual whereby such subsidiaries cede
to Harleysville Mutual all of their insurance business and assume from
Harleysville Mutual an amount equal to their participation in the pooling
agreement. All losses and loss settlement and other underwriting expenses are
prorated among the parties on the basis of participation in the pooling
agreement. The agreement pertains to all insurance business written or earned
on or after January 1, 1986, and Harleysville Group's pool participants are not
liable for losses occurring prior to January 1, 1986. Harleysville Group's
participation in 1998 was 72%. The pooling agreement may be
32
<PAGE>
amended or terminated by agreement of the parties. Information describing the
pool arrangement is contained in Harleysville Group's 1998 Annual Report to
Stockholders.
The property/casualty insurance subsidiaries of Harleysville Group
entered into a reinsurance agreement with Harleysville Mutual, effective
January 1, 1997, whereby Harleysville Mutual reinsures the property/casualty
insurance company subsidiaries of Harleysville Group on a post-pooled basis for
property losses as a result of catastrophes, excluding earthquakes and
hurricanes, incurred in a quarter. Harleysville Mutual in turn pays to the
subsidiaries in the event of covered catastrophes 100% of the subsidiaries'
accumulated net loss in a quarter in excess of their retention (or deductible),
which for 1998 was their pooling percentage times $2.5 million, up to a maximum
net loss equaling $22.5 million times the subsidiaries' total pooling
percentages. In 1998, retention was $1.8 million and the maximum amount covered
was $16.2 million per quarter. Effective January 1, 1999, the retention became
the subsidiaries' pooling percentage times $5 million and the maximum net loss
equals $20 million times the subsidiaries' pooling percentage. The premium paid
by the subsidiaries of Harleysville Group to Harleysville Mutual is 3.7% of
property premium.
SECTION 16 REPORTING COMPLIANCE
Harleysville Group believes that for 1998 its officers, directors and 10%
shareholders complied with the requirements of Section 16 of the Securities
Exchange Act of 1934 based on a review of forms filed, or written notice that
no annual forms were required.
33
<PAGE>
XPU-056 (ED: 3-99)
<PAGE>
[HARLEYSVILLE LOGO]
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 28, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Roger A. Brown, Bruce
J. Magee, and Dennis M. Hyland, 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 28, 1999, at 10:00 A.M.,
local time, and at any adjournment thereof, as follows:
(Continued, and to be marked, dated and signed on reverse side)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE.
MAP HERE
<PAGE>
1. ELECTION OF CLASS C DIRECTORS
<TABLE>
<S> <C> <C> <C>
FOR WITHHOLD (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE
all the AUTHORITY FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE
nominees to vote for THROUGH THE NOMINEE'S NAME BELOW.)
listed. the nominees
listed. Walter R. Bateman William E. Strasburg
[ ] [ ]
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
2. APPROVAL OF THE YEAR 2000 DIRECTORS' STOCK OPTION PROGRAM
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment
thereof.
THIS PROXY WHEN PROPERLY SIGNED WILL BE VOTED AS SPECIFIED. IF A CHOICE
IS NOT SPECIFIED, THE PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS
STATED ABOVE.
[ [Name & Address] ]
[ ]
Signature Signature Date
----------------------- ----------------------- ---------
This proxy should be dated, signed by the stockholder exactly as his or her name
appears herein and returned promptly in the enclosed envelope. Persons signing
in a fiduciary capacity should so indicate.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
</TABLE>
[HARLEYSVILLE LOGO]
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 28, 1999
10:00 A.M.
355 Maple Ave.
Harleysville, PA 19438
YOUR VOTE IS IMPORTANT!
Mark, sign and date your proxy card and return it promptly in the enclosed
envelope.
PLEASE VOTE
<PAGE>
HARLEYSVILLE GROUP INC.
YEAR 2000 DIRECTORS' STOCK OPTION PROGRAM
APPROVED BY BOARD OF DIRECTORS
FEBRUARY 24, 1999
<PAGE>
HARLEYSVILLE GROUP INC.
YEAR 2000 DIRECTORS' STOCK OPTION PROGRAM
APPROVED BY BOARD OF DIRECTORS
FEBRUARY 24, 1999
T A B L E O F C O N T E N T S
I. INTRODUCTION...................................................1
A. Purpose of the Program.................................1
B. Definitions............................................1
II. PROGRAM ADMINISTRATION.........................................2
A. Administration.........................................2
B. Participation..........................................3
C. Maximum Number of Shares Available.....................3
D. Adjustments............................................3
E. Registration Conditions................................3
F. General Provisions.....................................4
III. STOCK OPTIONS..................................................4
A. Price..................................................4
B. Amount and Timing of Grants............................4
C. Exercisability of Options..............................5
D. Period.................................................5
E. Exercise Procedures....................................5
F. Payment................................................5
G. Termination of Service.................................5
H. Retirement, Disability or Death........................5
IV. MISCELLANEOUS PROVISIONS.......................................6
A. Amendment, Suspension and Termination of Program.......6
B. Government and Other Regulations.......................6
C. Other Compensation Plans and Programs..................6
D. Transferability........................................6
E. Withholding Taxes......................................6
F. Construction of Program................................6
G. Unfunded Program.......................................6
H. Pronouns, Singular and Plural..........................6
I. Effective Dates........................................7
J. Limitation of Rights...................................7
<PAGE>
HARLEYSVILLE GROUP INC.
YEAR 2000 DIRECTORS' STOCK OPTION PROGRAM
I. INTRODUCTION
------------
A. PURPOSE OF THE PROGRAM: Harleysville Group Inc. (the "Company) has
----------------------
established the Program to further its long-term financial success
by offering stock options to non-employee Directors of the Company
and of its parent, Harleysville Mutual Insurance Company, whereby
such Directors can share in achieving and sustaining such success.
The Program also provides a means to attract and retain the
Directors needed to achieve the Company's and the Parent's long-
term growth and profitability objectives. No more option grants
shall be made after May 1999 under the 1995 Directors' Stock
Option Program.
B. DEFINITIONS: When used in the Program, the following terms shall
-----------
have the meanings set forth below:
"Award(s)" shall mean Non-Qualified Stock Options made under the
Program.
"Board" shall mean the Board of Directors of the Company and the
Board of Directors of the Parent.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Harleysville Group Inc., a Delaware
corporation, and any successor in a reorganization or similar
transaction.
"Committee" shall mean the Compensation & Personnel Development
Committee of the Board of Directors, which shall administer the
Program. The Committee shall be composed of at least two persons
who are from time to time appointed to serve by the Board of the
Company.
"Common Stock" shall mean the common stock of the Company, par
value of $1.00 per share, and may be either stock previously
authorized but unissued, or stock reacquired by the Company.
"Director" shall mean a member of the Board of Directors of the
Company or a member of the Board of Directors of the Parent.
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 2
"Disability" shall mean the inability of a Participant to perform
the services normally rendered due to any physical or mental
impairment that can be expected to be of either permanent or
indefinite duration, as determined by the Committee on the basis
of appropriate medical evidence, and that results in the
Participant's Termination of Service.
"Fair Market Value" shall mean with respect to a given day, the
closing price of Common Stock, as reported by such responsible
reporting service as the Committee may select, or if there were no
transactions in the Common Stock on such day, then the last
preceding day on which transactions took place. The foregoing
notwithstanding, the Committee may determine the Fair Market Value
in such other manner as it may deem more appropriate for Program
purposes or as is required by applicable laws or regulations.
"1995 Program" shall mean the 1995 Directors' Stock Option
Program.
"Non-Qualified Stock Option" or "NQSO" shall mean a right to
purchase the Company's Common Stock which is not intended to
comply with the terms and conditions for an incentive stock
option, as set forth in Section 422A of the Code, or such other
sections of the Code as may be in effect from time to time.
"Parent" shall mean Harleysville Mutual Insurance Company.
"Participant" shall mean an active member of the Board who is not
an officer or full-time salaried employee of the Company or of the
Parent.
"Program" shall mean the Company's Year 2000 Directors' Stock
Option Program.
"Termination of Service" shall mean a cessation of the
Participant's Board service for any reason.
II. PROGRAM ADMINISTRATION
----------------------
A. ADMINISTRATION: The Program shall be administered by the
--------------
Committee. Subject to the express provisions of the Program, the
Committee shall have authority to interpret the Program, to
prescribe, amend and rescind rules and regulations relating to the
Program and to make all other determinations deemed necessary or
advisable in the implementation and administration of the Program;
provided, however, that the Committee shall have no discretion
with respect to the eligibility or selection of Directors to
receive options under the Program, the number of shares of stock
subject to any such options under the Program, or the purchase
price thereunder, and provided further that the Committee shall
not have the authority to take any action or make any
determination that would materially increase the benefits accruing
to Participants under the Program. The determination of the
Committee in the administration of the Program, as described
herein, shall be final, conclusive and binding upon all persons
including, without limitation,
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 3
the Company, its stockholders and the persons granted options
under the Program. The Secretary of the Company shall be
authorized to implement the Program in accordance with its terms
and to take such action of a ministerial nature as shall be
necessary to effectuate the intent and purposes thereof.
B. PARTICIPATION: All current and future non-employee active
-------------
Directors of the Company and the Parent who hold office at any
time between the May 2000 Board Meeting and the May Board Meeting
in 2004 shall be eligible to participate in the Program. Non-
employee Directors as of the May 2000 Board of Directors Meeting
shall automatically participate in the Program. Future non-
employee Directors, including an employee Director who becomes a
non-employee Director, will automatically participate in the
Program as of the date of the first May meeting of the Board of
Directors following election to the Board of Directors, or at the
first May Board of Directors meeting after becoming a non-employee
Director (whether or not newly elected to the Board) at or prior
to the May 2004 Board of Directors meeting.
C. MAXIMUM NUMBER OF SHARES AVAILABLE: The maximum number of shares
----------------------------------
for which options may be granted under the Program is 123,500,
subject to adjustment as provided under Article II, Paragraph D,
of the Program. The shares made available are comprised of all
shares not issued under the 1990 Directors' Stock Option Program
and 1995 Directors' Stock Option Program, with any additional
amount of shares concurrently necessary, up to a maximum of
123,500, to be made available through a reduction in the amount of
total shares reserved for the Company' s Equity Incentive Plan
approved in 1997.
Stock options which expire or are terminated, cancelled or
forfeited in accordance with the Program shall again be available
for Award under the Program.
D. ADJUSTMENTS: In the event of stock dividends, stock splits,
-----------
re-capitalizations, mergers, consolidations, combinations,
exchanges of shares, spin-offs, liquidations, reclassifications or
other similar changes in the capitalization of the Company, the
number of shares of Common Stock available for grant under this
Program shall be adjusted proportionately, and the number of
shares, and the option price of outstanding stock options shall be
similarly adjusted. Also, in instances where another business
entity is acquired by the Company or its Parent, and the Company
or its Parent has assumed outstanding option grants under a prior
existing plan of the acquired entity, similar adjustments are
permitted at the discretion of the Board of the Company. In the
event of any other change affecting the Common Stock reserved
under the Program, such adjustment, if any, as may be deemed
equitable by the Committee, shall be made to give proper effect to
such event.
E. REGISTRATION CONDITIONS:
-----------------------
1. Unless issued pursuant to a registration statement under the
Securities Act of 1933, as amended, no shares shall be
issued to a Participant under the Program unless the
Participant represents and agrees with the Company that such
shares are being acquired for investment and not with a view
to the resale or distribution thereof, or such other
documentation as may be
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 4
required by the Company, unless in the opinion of counsel to
the Company such representation, agreement or documentation
is not necessary to comply with such Act.
2. Any restriction on the resale of shares shall be evidenced
by an appropriate legend on the stock certificate.
3. The Company shall not be obligated to deliver any Common
Stock until it has been listed on each securities exchange
on which the Common Stock may then be listed or until there
has been qualification under or compliance with such federal
or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to
obtain such listing, qualification and compliance.
F. GENERAL PROVISIONS: Each Award under the Program shall be
------------------
subject to the requirement that if at any time the Committee
shall determine that (i) the listings, registrations or
qualifications of the shares of Common Stock subject or related
thereto upon any securities exchange or under any state or
federal law, or (ii) the consent or approval of any government
regulatory body, or (iii) an agreement by the recipient of an
Award with respect to the disposition of shares of Common Stock
is necessary or desirable as a condition of or in connection with
the granting of such Award or the issuance or purchase of shares
of Common Stock thereunder, such Award shall not be consummated
in whole or in part unless such listing, registration,
qualification, consent, approval, or agreement shall have been
effected or obtained free of any conditions not acceptable to the
Committee.
III. STOCK OPTIONS
-------------
All stock options granted to Participants under the Program shall be
Non-Qualified Stock Options and evidenced by a Notice of Award which
shall be subject to applicable provisions of the Program, and such
other provisions as the Committee may adopt, including the following
provisions:
A. PRICE: The option price per share shall be one hundred percent
-----
(100%) of the Fair Market Value of a share of Common Stock at the
close of business on the date of grant.
B. AMOUNT AND TIMING OF GRANTS: An incumbent Director shall receive
---------------------------
a grant of 2,500 Non-Qualified Stock Options at the Year 2000 May
Board Meeting and a grant of 2,500 options at each May Board
Meeting thereafter for four successive years until and including
the May 2004 Board Meeting, except that if an incumbent Director
has options under the 1995 Program that vest in the same year as
an award of options under this Program then the amount of shares
awarded in that year shall be reduced by the number of shares that
vest that year under the 1995 Program. For Directors first elected
after May 2000, or for an employee Director becoming a non-
employee Director after May 2000, he or she shall receive a grant
of 2,500 options at the first May Board Meeting following election
or an employee
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 5
Director becoming a non-employee Director and a grant of 2,500
options at each May Board Meeting thereafter occurring in or
before May 2004. No options shall be granted under this Program
after May 2004.
In the event that at a May Board meeting there are insufficient
shares remaining in the Program on which to grant 2,500 options to
each Director otherwise entitled to receive options, then the
remaining shares shall be divided by the number of Participants
and options shall be granted to the Participants in an amount
equal to the whole number so determined.
C. EXERCISABILITY OF OPTIONS: All options vest and are
-------------------------
exercisable as of the day of grant.
D. PERIOD: Stock options shall have a term of ten years from
------
the date of grant and shall expire at 5:00 p.m. on the tenth
anniversary of the grant, subject to earlier expiration or
termination as set forth herein.
E. EXERCISE PROCEDURES: A stock option, or portion thereof,
-------------------
shall be exercised by delivery of a written notice of
exercise to the Secretary of the Company, and payment of the
full price of the shares being purchased.
F. PAYMENT: The price of an exercised stock option, or portion
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thereof, may be paid:
1. in cash or by check, bank draft or money order payable
to the order of the Company, or
2. through the delivery of shares of the Company's Common
Stock owned by the Participant, having an aggregate
Fair Market Value as determined on the date of exercise
equal to the option price, or
3. by a combination of both 1 and 2 above.
G. TERMINATION OF SERVICE: In the event of the Termination of
----------------------
Service on the Board by a Director, other than by reason of
retirement, Disability or death as set forth in paragraph H
hereof, the then outstanding options of such Director may be
exercised within one hundred twenty days after such
termination, or on their stated expiration date, whichever
occurs first. For purposes of this Program, the term "by
reason of retirement" shall mean mandatory retirement at age
72 pursuant to Board policy.
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 6
H. RETIREMENT, DISABILITY OR DEATH: In the event of Termination of
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Service by reason of retirement (as defined above) or death, or
Disability of a Director, the Director or his/her guardian or
legal representative may exercise all options within two years
after such retirement, death or Disability, or on their stated
expiration date, whichever occurs first.
IV. MISCELLANEOUS PROVISIONS
------------------------
A. AMENDMENT, SUSPENSION AND TERMINATION OF PROGRAM: The Board of
------------------------------------------------
Directors may suspend or terminate the Program or revise or amend
it in any respect whatsoever; provided, however, that without
approval of the stockholders, no revision or amendment shall
change the selection or eligibility of Directors to receive
options under the Program, the number of shares of stock subject
to any such options of the Program, the purchase price thereunder,
or materially increase the benefits accruing to Participants under
the Program.
B. GOVERNMENT AND OTHER REGULATIONS: The obligation of the Company to
--------------------------------
issue Awards under the Program shall be subject to all applicable
laws, rules and regulations, and to such approvals by any
government agencies as may be required.
C. OTHER COMPENSATION PLANS AND PROGRAMS: The Program shall not
-------------------------------------
be deemed to preclude the implementation by the Company or
its Parent of other compensation plans or programs which may
be in effect from time to time.
D. TRANSFERABILITY: No right or interest of any Participant in any
---------------
Award under the Program shall be (a) assignable or transferable,
except by will or the laws of descent and distribution or a valid
beneficiary designation made in accordance with procedures
established by the Committee, and (b) liable for, or subject to,
any lien, obligation or liability.
E. WITHHOLDING TAXES: The Company shall have the right to require a
-----------------
payment from a Participant to cover applicable withholding for any
federal, state or local taxes, if any. The Company reserves the
right to offset such tax payment from any other funds which may be
due the Participant by the Company.
F. CONSTRUCTION OF PROGRAM: The interpretation of the Program and the
-----------------------
application of any rules implemented hereunder shall be determined
in accordance with the laws of the Commonwealth of Pennsylvania.
G. UNFUNDED PROGRAM: The Program shall be unfunded, and the Company
----------------
shall not be required to segregate any assets which may at any
time be represented by Awards. Any liability of the Company to any
person with respect to an Award under this Program shall be based
solely upon any obligations which may be created by this Program;
no such obligation of the Company shall be deemed to be secured by
any pledge or other encumbrance on any property of the Company.
<PAGE>
Harleysville Group Inc.
Year 2000 Directors' Stock Option Program
Page No. 7
H. PRONOUNS, SINGULAR AND PLURAL: The masculine may be read as
-----------------------------
feminine, the singular as plural, and the plural as singular as
necessary to give effect to the Program.
I. EFFECTIVE DATES: The Program will become effective on approval
---------------
by stockholders. The Program and all outstanding Awards shall
remain in effect until all outstanding Awards have been exercised
or repurchased, have expired or have been cancelled.
J. LIMITATION OF RIGHTS:
--------------------
1. No Right to Continue as a Director: Neither the Program, nor
----------------------------------
the granting of an option nor any other action taken pursuant
to the Program, shall constitute or be evidence of any
agreement or understanding, express or implied, that the
Director has a right to continue as a Director for any period
of time, or at any particular rate of compensation.
2. No Share Owners' Rights for Options: A Director who has been
-----------------------------------
granted options shall have no rights as a share owner with
respect to the shares covered by options granted hereunder
until the date of the issuance of a stock certificate
therefor, and no adjustment will be made for dividends or
other rights for which the record date is prior to the date
such certificate is issued.
