SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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Filed by a Party other than the Registrant [ ]
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
Erie Indemnity Company
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(Name of Registrant as Specified In Its Charter)
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1) Title of each class of securities to which transaction
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2) Aggregate number of securities to which transaction applies:
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computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by the
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 2003
To the Holders of Class A Common Stock and Class B Common Stock of ERIE
INDEMNITY COMPANY:
The Annual Meeting of Shareholders of Erie Indemnity Company (the
"Company") will be held at 3:00 p.m., local time, on Tuesday, April 29, 2003, at
the Auditorium of the F. W. Hirt-Perry Square Building, 100 Erie Insurance Place
(Sixth and French Streets), Erie, Pennsylvania 16530 for the following purposes:
1. To elect 15 Directors of the Company to serve until the Company's
2004 Annual Meeting of Shareholders and until their successors are
elected;
2. To consider and act upon a proposal to approve a change to the
Company's Long-Term Incentive Plan; and
3. To transact such other business as may properly come before the
Annual Meeting and any adjournment, postponement or continuation
thereof.
The Board of Directors has fixed the close of business on Friday, March
7, 2003 as the record date for the determination of the holders of Class B
Common Stock entitled to notice of and to vote at the Annual Meeting. Holders of
Class A Common Stock do not have the right to vote on any of the matters to be
acted upon at the Annual Meeting.
In the event that the Annual Meeting is adjourned, pursuant to Section
1756(b)(1) of the Pennsylvania Business Corporation Law of 1988 (the "BCL"),
those shareholders entitled to vote who attend a meeting of shareholders that
was previously adjourned for lack of a quorum shall constitute a quorum for the
purpose of electing directors even though the number of shareholders present at
such adjourned meeting constitutes less than a quorum as fixed in the Company's
Bylaws.
For purposes other than the election of directors, pursuant to Section
1756(b)(2) of the BCL, those shareholders entitled to vote who attend a meeting
of shareholders that was previously adjourned for one or more periods
aggregating at least 15 days because of an absence of a quorum, shall constitute
a quorum for acting upon any matter set forth in this notice even though the
number of shareholders present at such adjourned meeting constitute less than a
quorum as fixed in the Company's Bylaws.
This Notice and Proxy Statement, together with a copy of the Company's
Annual Report for the year ended December 31, 2002, are being sent to all
holders of Class A Common Stock and Class B Common Stock. Holders of Class B
Common Stock will also receive a form of proxy in accordance with Securities and
Exchange Commission rules.
Holders of Class B Common Stock are requested to complete, sign and
return the enclosed form of proxy in the envelope provided, whether or not they
expect to attend the Annual Meeting in person.
By Order of the Board of Directors,
/s/ Jan R. Van Gorder
Jan R. Van Gorder,
Senior Executive Vice President,
Secretary and General Counsel
April 1, 2003
Erie, Pennsylvania
ERIE INDEMNITY COMPANY
100 Erie Insurance Place
Erie, Pennsylvania 16530
PROXY STATEMENT
This Proxy Statement, which is first being mailed to the holders of
Class A Common Stock and Class B Common Stock of Erie Indemnity Company (the
"Company") on or about April 1, 2003, is furnished in connection with the
solicitation of proxies by the Board of Directors of the Company from holders of
Class B Common Stock to be voted at the Annual Meeting of Shareholders to be
held at 3:00 p.m., local time, on Tuesday, April 29, 2003 and at any
adjournment, postponement or continuation thereof (the "Annual Meeting") at the
Auditorium of the F.W. Hirt-Perry Square Building, 100 Erie Insurance Place
(Sixth and French Streets), Erie, Pennsylvania 16530. Holders of Class B Common
Stock will also receive a form of proxy in accordance with Securities and
Exchange Commission ("SEC") rules.
Shares of Class B Common Stock represented by proxies in the
accompanying form, if properly signed and returned, will be voted in accordance
with the specifications made thereon by the holders of Class B Common Stock. Any
proxy representing shares of Class B Common Stock not specifying to the contrary
will be voted for the election of the candidates for director named below who
were nominated by the Nominating Committee of the Company's Board of Directors
and for the approval of a change to the Company's Long-Term Incentive Plan (the
"LTIP"). See "Other Matters" for a discussion of additional limited
discretionary voting authority. A holder of Class B Common Stock who signs and
returns a proxy in the accompanying form may revoke it at any time before it is
voted by giving written notice of revocation to the Secretary of the Company, by
furnishing a duly executed proxy bearing a later date to the Secretary of the
Company or by attending the Annual Meeting and voting in person.
The cost of solicitation of proxies in the accompanying form will be
borne by the Company, including expenses in connection with preparing and
mailing this Proxy Statement. Such solicitation will be made by mail and may
also be made on behalf of the Company in person or by telephone by the Company's
regular officers and employees, none of whom will receive special compensation
for such services. The Company, upon request therefor, will also reimburse
brokers, nominees, fiduciaries and custodians or persons holding shares of Class
B Common Stock in their names or in the names of nominees for their reasonable
expenses in forwarding the Company's proxy material to beneficial owners.
Only holders of Class B Common Stock of record at the close of business
on March 7, 2003 are entitled to vote at the Annual Meeting. Each share of Class
B Common Stock is entitled to one vote on each matter considered at the Annual
Meeting. Except as may be otherwise provided in Sections 1756(b)(1) and (2) of
the Pennsylvania Business Corporation Law of 1988 (the "BCL") in the case of
adjourned meetings, a majority of the outstanding shares of Class B Common Stock
will constitute a quorum at the Annual Meeting for the election of directors,
and for approval of the change to the LTIP. Cumulative voting rights do not
exist with respect to the election of directors. The 15 candidates for election
as a director who receive the largest number of votes cast by the holders of
Class B Common Stock in person or by proxy at the Annual Meeting will be elected
as directors. The approval of the change to the LTIP will require the
affirmative vote of a majority of the votes cast at the Annual Meeting by the
holders of Class B Common Stock. Shares of Class B Common Stock held by brokers
or nominees as to which voting instructions have not been received from the
beneficial owner or person otherwise entitled to vote and as to which the broker
or nominee does not have discretionary voting power, i.e., broker nonvotes, will
be treated as not present and not entitled to vote for nominees for election as
directors or for approval of the change to the LTIP. Abstentions will be treated
as the withholding of authority to vote for nominees for election as directors
or for approval of the change to the LTIP. Abstentions from voting and broker
nonvotes will have no effect on the election of directors or the approval of the
change to the LTIP because they will not represent votes cast at the Annual
Meeting.
As of the close of business on March 7, 2003, the Company had
64,061,106 outstanding shares of Class A Common Stock, which are not entitled to
vote on the matters to be acted upon at the Annual Meeting, and 2,890 shares of
Class B Common Stock, which have the exclusive right to vote on all matters to
be acted upon at the Annual Meeting.
The H.O. Hirt Trusts collectively own 2,340 shares of Class B Common
Stock, which, because such shares represent 80.97% of the outstanding shares of
Class B Common Stock, is sufficient to determine the outcome of any matter
submitted to a vote of the holders of the Class B Common Stock, assuming all of
the shares held by the H.O. Hirt Trusts are voted in the same manner. The
trustees of the H.O. Hirt Trusts as of the record date for the Annual Meeting
are F. William Hirt ("Mr. Hirt"), Susan Hirt Hagen ("Mrs. Hagen") and Bankers
Trust Company of New York, which is also known as Deutsche Bank ("Bankers
Trust").
On March 3, 1999, Bankers Trust filed a petition with the Orphans'
Court Division of the Court of Common Pleas of Erie County, Pennsylvania (the
"Court") requesting that the Court accept the resignation of Bankers Trust as
corporate trustee of the H.O. Hirt Trusts as a result of conflicts of interest
that Bankers Trust believed existed as a result of certain insurance operations
conducted by Bankers Trust's parent company and affiliates. Also, an affiliate
of Bankers Trust, Deutsche Bank, is one of the largest market makers in the
Company's Class A Common Stock. On May 7, 1999, the Court issued an Order
accepting the resignation of Bankers Trust at such time as the Court appoints a
successor corporate trustee. As of the date of this Proxy Statement, two
successor corporate trustee candidates: First Union National Bank, which is
supported by Mr. Hirt, and Sentinel Trust Company, which is supported by Mrs.
Hagen, have presented testimony to the Court in this matter. Subsequent to that
testimony, Laurel Hirt, a daughter of Mr. Hirt and a beneficiary of the H.O.
Hirt Trusts, filed a petition requesting that the Court also consider a third
successor corporate trustee candidate that is not supported by Mr. Hirt. Mr.
Hirt has filed a petition objecting to Laurel Hirt's petition. Both Laurel
Hirt's and Mr. Hirt's petitions are currently pending.
The Company does not know whom the Court will appoint as successor
corporate trustee, but it is unlikely such appointment will be effective before
the Annual Meeting.
Under the provisions of the H.O. Hirt Trusts, the shares of Class B
Common Stock held by the H.O. Hirt Trusts are to be voted as directed by a
majority of trustees then in office. If at least a majority of the trustees then
in office of both of the H.O. Hirt Trusts vote for the election of the 15
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candidates for director named below, who have been nominated by the Nominating
Committee of the Company's Board of Directors, and for approval of the change to
the LTIP, such candidates will be elected as directors of the Company and the
change to the LTIP will be approved, even if all shares of Class B Common Stock
other than those held by the H.O. Hirt Trusts are not voted for such candidates
or for such approval. The Company has not been advised as of the date of this
Proxy Statement, however, how the trustees of the H.O. Hirt Trusts intend to
vote at the Annual Meeting.
Reference is made to "Legal Proceedings" in this Proxy Statement for
further information regarding litigation involving the H.O. Hirt Trusts.
The Company operates predominantly as a provider of management services
to Erie Insurance Exchange (the "Exchange"). The Company also operates as a
property and casualty insurer through its subsidiaries. Since 1925, the Company
has served as the attorney-in-fact for the policyholders of the Exchange. The
Exchange is a reciprocal insurance exchange, which is an unincorporated
association of individuals, partnerships and corporations that agree to insure
one another. Each applicant for insurance from the Exchange signs a subscriber's
agreement, which contains an appointment of an attorney-in-fact. As
attorney-in-fact, the Company is required to perform certain services relating
to the sales, underwriting and issuance of policies on behalf of the Exchange.
The Exchange and its property and casualty insurance subsidiaries and
the Company's three property and casualty insurance subsidiaries (the "Property
and Casualty Group") write personal and commercial lines property and casualty
coverages exclusively through approximately 8,000 independent agents and pool
their underwriting results. The financial results of the Company and the
Exchange are not consolidated. As a result of the Exchange's 94.5% participation
in the underwriting results of the Property and Casualty Group, the underwriting
risk of the Property and Casualty Group's business is largely borne by the
Exchange.
The Company charges the Exchange a management fee calculated as a
percentage, limited to 25%, of the direct written premiums of the Property and
Casualty Group. Management fees accounted for 77%, 78% and 74%, respectively, of
the Company's revenues for the three years ended December 31, 2002, 2001 and
2000. The management fee rate was 25% in each of those years, and is currently
24%.
The Company's property and casualty insurance subsidiaries are Erie
Insurance Company ("Erie Insurance Co."), Erie Insurance Company of New York
("Erie NY") and Erie Insurance Property & Casualty Company ("EI P&C"). In
addition, the Company holds investments in both affiliated and unaffiliated
entities, including a 21.6% interest in the common stock ("EFL Common Stock") of
Erie Family Life Insurance Company ("EFL"), a life insurance company. The
Exchange has a 53.5% interest in the EFL Common Stock.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 28, 2003 the amount of
the outstanding Class A Common Stock and Class B Common Stock of the Company and
shares of EFL Common Stock beneficially owned by (i) each person who is known by
the Company to own beneficially more than
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5% of the Company's Class A Common Stock or Class B Common Stock or EFL Common
Stock, (ii) each director and candidate for director nominated by the Nominating
Committee, (iii) each executive officer named in the Summary Compensation Table
and (iv) all executive officers and directors of the Company as a group.
Percent of
Shares of Class Percent of Shares of Class Percent of Shares of EFL Outstanding
A Common Stock Outstanding B Common Stock Outstanding Common Stock EFL
Name of Individual Beneficially Class A Beneficially Class B Beneficially Common
or Identity of Group Owned(1)(2) Common Stock(3) Owned(1)(2) Common Stock(3) Owned(1)(2) Stock(3)
-------------------- ---------------- --------------- --------------- --------------- ------------- ------------
5% or Greater Holders:
Black Interests
Limited Partnership(4)
Erie, Pennsylvania 5,726,250 8.94% 390 13.49% --- ---
Samuel P. Black, III(4)(5)*
Erie, Pennsylvania 5,880,430 9.18% 410 14.19% 110,012(14) 1.16%
Hagen Family
Limited Partnership(6)
Erie, Pennsylvania 10,092,900 15.76% 1 --- 154,182 1.63%
H.O. Hirt Trusts(7)
Erie, Pennsylvania --- --- 2,340 80.97% --- ---
Susan Hirt Hagen(6)(7)(8)*
Erie, Pennsylvania 16,752,130 26.15% 2,353 81.42% 154,482(15) ---
Hirt Family Limited
Partnership(9)
Erie, Pennsylvania 11,830,000 18.47% --- --- 166,934 1.77%
F. William Hirt(7)(9)(10)*
Erie, Pennsylvania 12,718,690 19.85% 2,360 81.66% 167,034(16) ---
Erie Insurance Exchange
Erie, Pennsylvania --- --- --- --- 5,055,562 53.50%
Erie Indemnity Company
Erie, Pennsylvania --- --- --- --- 2,043,900 21.63%
Directors and Nominees for
Director(11):
Kaj Ahlman --- --- --- --- --- ---
John T. Baily --- --- --- --- --- ---
J. Ralph Borneman, Jr.* 50,430 --- --- --- 1,536 ---
Wilson C. Cooney --- --- --- --- --- ---
Patricia Garrison-Corbin* 530 --- --- --- --- ---
John R. Graham --- --- --- --- --- ---
C. Scott Hartz --- --- --- --- --- ---
Samuel P. Katz* 930 --- --- --- --- ---
Claude C. Lilly, III* 930 --- --- --- --- ---
Jeffrey A. Ludrof* 5,223 --- --- --- 100 ---
Henry N. Nassau* 1,030 --- --- --- --- ---
John M. Petersen(12)* 2,260,467 3.53% 1 --- 92,141(17) ---
Jan R. Van Gorder* 124,911 --- 1 --- 75(18) ---
Robert C. Wilburn* 2,430 --- --- --- 500 ---
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Percent of
Shares of Class Percent of Shares of Class Percent of Shares of EFL Outstanding
A Common Stock Outstanding B Common Stock Outstanding Common Stock EFL
Name of Individual Beneficially Class A Beneficially Class B Beneficially Common
or Identity of Group Owned(1)(2) Common Stock(3) Owned(1)(2) Common Stock(3) Owned(1)(2) Stock(3)
-------------------- ---------------- --------------- --------------- --------------- ------------- ------------
Executive Officers(13):
John J. Brinling, Jr. 17,332 --- --- --- 1,260(19) ---
Philip A. Garcia 92,489 --- --- --- 1,275 ---
Douglas F. Ziegler 107,000 --- --- --- 570 ---
All Directors, Nominees for
Director and Executive
Officers as a Group
(22 persons) 38,017,206 59.35% 2,785 96.37% 529,069 5.60%
-------------
* Represents incumbent director.
(1) Information furnished by the named persons.
(2) Under the rules of the SEC, a person is deemed to be the beneficial
owner of securities if the person has, or shares, "voting power"
(which includes the power to vote, or to direct the voting of, such
securities) or "investment power" (which includes the power to
dispose, or to direct the disposition, of such securities). Under
these rules, more than one person may be deemed to be the
beneficial owner of the same securities. Securities beneficially
owned also include securities owned jointly, in whole or in part,
or individually by the person's spouse, minor children or other
relatives who share the same home. The information set forth in the
above table includes all shares of Class A Common Stock and Class B
Common Stock and all shares of EFL Common Stock over which the
named individuals, individually or together, share voting power or
investment power. The table does not reflect shares of Class A
Common Stock issuable upon conversion of shares of Class B Common
Stock, each of which is currently convertible into 2,400 shares of
Class A Common Stock.
(3) Less than 1% unless otherwise indicated.
(4) Mr. Black is the managing general partner and a limited partner of
the Black Interests Limited Partnership. Mr. Black has the right to
vote the shares held by the Black Interests Limited Partnership. If
all of the 390 shares of Class B Common Stock beneficially owned by
the Black Interests Limited Partnership were converted into Class A
Common Stock, the maximum number of shares of Class A Common Stock
that the Black Interests Limited Partnership could be deemed to own
beneficially would be 6,662,250 shares of Class A Common Stock, or
10.25% of the then outstanding shares of Class A Common Stock.
(5) Mr. Black owns 130,180 shares of Class A Common Stock directly and
24,000 shares of Class A Common Stock indirectly through Samuel P.
Black & Associates, Inc., of which Mr. Black is President and for
which Mr. Black has the right to vote the shares. Mr. Black also
owns 10 shares of Class B Common Stock directly and 10 shares of
Class B Common Stock indirectly as executor of his father's estate.
Mr. Black's beneficial ownership of Class A Common Stock and Class
B Common Stock also includes the 5,726,250 shares of Class A Common
Stock and
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the 390 shares of Class B Common Stock owned by the Black
Interests Limited Partnership as described in footnote (4). The
maximum number of shares of Class A Common Stock that Mr. Black
could be deemed to own beneficially, including shares of Class A
Common Stock issuable upon conversion of Class B Common Stock,
would be 6,864,430 shares of Class A Common Stock, or 10.55% of the
then outstanding shares of Class A Common Stock.
(6) Mrs. Hagen and her husband, Thomas B. Hagen, are limited partners
of the Hagen Family Limited Partnership and Mr. Hagen is the
general partner. As the general partner of the Hagen Family Limited
Partnership, Mr. Hagen has sole voting power and investment power
over the shares owned by the partnership. If the shares of Class B
Common Stock beneficially owned by the Hagen Family Limited
Partnership were converted into Class A Common Stock, the maximum
number of shares of Class A Common Stock that the Hagen Family
Limited Partnership could be deemed to own beneficially would be
10,095,300 shares of Class A Common Stock, or 15.76% of the then
outstanding shares of Class A Common Stock.
(7) There are two H.O. Hirt Trusts, one for the benefit of Mr. Hirt and
one for the benefit of Mrs. Hagen. Each of the H.O. Hirt Trusts is
the record owner of 1,170 shares of Class B Common Stock, or 40.48%
of the outstanding shares of Class B Common Stock. The trustees of
the H.O. Hirt Trusts as of the date of this Proxy Statement are Mr.
Hirt, Mrs. Hagen and Bankers Trust. Mr. Hirt and Mrs. Hagen, who
are brother and sister, are each deemed the beneficial owner of the
2,340 shares of Class B Common Stock held by the H.O. Hirt Trusts
and, as Co-Trustees, along with Bankers Trust, have shared voting
power over the 2,340 shares of Class B Common Stock held by the
H.O. Hirt Trusts. If all 2,340 shares of Class B Common Stock the
H.O. Hirt Trusts own were converted into Class A Common Stock, the
maximum number of shares of Class A Common Stock that could be
deemed beneficially owned by the H.O. Hirt Trusts would be
5,616,000 shares of Class A Common Stock, or 8.06% of the then
outstanding shares of Class A Common Stock.
(8) Mrs. Hagen owns 730 shares of Class A Common Stock directly and
6,658,500 shares of Class A Common Stock indirectly through a
revocable trust of which Mrs. Hagen was the grantor and is the sole
trustee and beneficiary. Mrs. Hagen owns 12 shares of Class B
Common Stock directly. Also included are the 10,092,900 shares of
Class A Common Stock and one share of Class B Common Stock owned by
the Hagen Family Limited Partnership as described in footnote (6)
and the 2,340 shares of Class B Common Stock owned by the H.O. Hirt
Trusts as described in footnote (7). Thomas B. Hagen, Mrs. Hagen's
husband, disclaims beneficial ownership of the shares of Class A
Common Stock and Class B Common Stock owned by Mrs. Hagen. Mrs.
Hagen disclaims beneficial ownership of the 5,100 shares of Class A
Common Stock and three shares of Class B Common Stock owned by Mr.
Hagen and such shares are not reported in the table. The maximum
number of shares of Class A Common Stock that could be deemed
beneficially owned by Mrs. Hagen, Mr. Hagen and the Hagen Family
Limited Partnership, including shares of Class A Common Stock
issuable upon conversion of Class B Common Stock, would be
22,411,630 shares of Class A Common Stock, or 32.15% of the then
outstanding shares of Class A Common Stock.
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(9) Mr. Hirt is the general and a limited partner of the Hirt Family
Limited Partnership. As the general partner of the Hirt Family
Limited Partnership, Mr. Hirt has the sole right to vote such
shares.
(10) Mr. Hirt owns 888,690 shares of Class A Common Stock directly. Mr.
Hirt also owns 20 shares of Class B Common Stock directly. Mr.
Hirt's beneficial ownership of Class A Common Stock and Class B
Common Stock also includes the 11,830,000 shares of Class A Common
Stock owned by the Hirt Family Limited Partnership as described in
footnote (9) and the 2,340 shares of Class B Common Stock owned by
the H.O. Hirt Trusts as described in footnote (7). Mr. Hirt
disclaims beneficial ownership of the 888,260 shares of Class A
Common Stock owned by his wife, Audrey Hirt, and such shares are
not reported in the table. The maximum number of shares of Class A
Common Stock that could be deemed beneficially owned by Mr. Hirt,
Mrs. Hirt and the Hirt Family Limited Partnership, including shares
of Class A Common Stock issuable upon conversion of Class B Common
Stock, would be 19,270,950 shares of Class A Common Stock, or
27.65% of the then outstanding shares of Class A Common Stock.
(11) Excludes directors listed under "5% or Greater Owners."
(12) Mr. Petersen disclaims beneficial ownership of 120,000 shares of
Class A Common Stock owned by his wife, Gertrude E. Petersen, which
have been included in the total listed herein. The total also
includes 200,000 shares held by the Petersen Family Limited
Partnership. Mr. Petersen is the general partner of the Petersen
Family Limited Partnership and has the sole right to vote such
shares.
(13) Excludes executive officers listed under "Directors." Also excludes
28,432 shares owned by the estate of Stephen A. Milne, who served
as Chief Executive Officer of the Company until January 2002 and as
a director until July 2002, and 4,588 shares owned by Mr. Milne's
wife. Mr. Milne died in September 2002.
(14) Mr. Black owns 2,730 shares indirectly through Samuel P. Black &
Associates, Inc., of which Mr. Black is President. The 110,012
shares also include 1,000 shares owned indirectly by Mr. Black as
executor of his father's estate; 41,803 shares owned indirectly by
Mr. Black through the Samuel P. Black, Jr. 1996 Charitable
Remainder Unitrust of which Mr. Black is a beneficiary and 60,000
shares owned indirectly by Mr. Black through the Black Family
Foundation of which Mr. Black is an officer. Mr. Black directly
owns 4,479 shares.
(15) Includes 300 shares owned directly by Mrs. Hagen and 154,182 shares
owned indirectly by Mrs. Hagen through the Hagen Family Limited
Partnership as described in footnote (6). Mrs. Hagen disclaims
beneficial ownership of 300 shares held by Thomas B. Hagen, Mrs.
Hagen's husband, and these shares are not included in the table.
(16) Mr. Hirt owns 100 shares directly and 166,934 shares indirectly
through the Hirt Family Limited Partnership as described in
footnote (9).
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(17) Of this total, 30,000 shares are held by Mr. Petersen's wife,
Gertrude E. Petersen, as to which Mr. Petersen disclaims beneficial
ownership.
(18) Of this total, 30 shares are held directly by Mr. Van Gorder and
each of his three sons owns 15 shares.
(19) Includes 630 shares held directly by Mr. Brinling, 315 shares
held in an IRA for Mr. Brinling and 315 shares held in an IRA for
his wife.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires that the officers and directors of a corporation that
has a class of equity securities registered under Section 12 of the Exchange
Act, as well as persons who own 10% or more of a class of equity securities of
such a corporation, file reports of ownership of such securities, as well as
statements of changes in such ownership, with the corporation and the SEC.
Except as provided below, based upon written representations received by the
Company from its officers and directors and 10% or greater shareholders, and the
Company's review of filings made with the Company by its officers and directors
and 10% or greater shareholders during 2002, the Company believes that all such
filings required during 2002 were made on a timely basis. A Form 5 Report was
required to be filed in February 2003 by Stephen A. Milne, the Company's Chief
Executive Officer until January 2002 and a director until July 2002, with
respect to his receipt of shares under the LTIP in 2002. Mr. Milne died in
September 2002. The Company filed the report on behalf of Mr. Milne in March
2003 to correct the deficiency. Eric D. Root, Senior Vice President of the
Company, untimely filed a Form 4 Report on January 9, 2003 for one sale of Class
A Common Stock sold on December 23, 2002. Mr. Hirt, the Chairman of the
Company's Board of Directors, untimely filed a Form 4 Report on January 2, 2003
for 16 separate gifts of Class A Common Stock, all of which were made on
December 23, 2002.
PROPOSAL 1
ELECTION OF DIRECTORS
Introduction
The election of directors of the Company by the holders of its Class B
Common Stock is governed by provisions of the Pennsylvania Insurance Holding
Companies Act in addition to provisions of the BCL, the Pennsylvania
Associations Code and the Company's Bylaws. The following discussion summarizes
these statutory provisions and describes the process undertaken by the
Nominating Committee in connection with the nomination of candidates for
election as directors by the holders of Class B Common Stock at the Annual
Meeting.
Background of the Company's Nominating Committee
Section 1405(c)(4) of the Pennsylvania Insurance Holding Companies Act,
which is applicable to the Company, provides that the board of directors of a
domestic insurer shall establish one or more
8
committees comprised solely of directors who are not officers or employees of
the insurer or of any entity controlling, controlled by or under common control
with the insurer and who are not beneficial owners of a controlling interest in
the voting stock of the insurer or any such entity, and that such committee or
committees shall have responsibility for recommending the selection of the
insurer's independent certified public accountants, reviewing the insurer's
financial condition, the scope and results of the insurer's independent audit
and any internal audit, nominating candidates for director for election by the
shareholders, evaluating the performance of officers deemed to be principal
officers of the insurer and recommending to the board of directors the selection
and compensation of the principal officers.
Section 3.09 of the Company's Bylaws is consistent with this statutory
provision and provides that (i) the Company's Board of Directors shall appoint
annually a Nominating Committee that shall consist of not less than three
directors who are not officers or employees of the Company or of any entity
controlling, controlled by or under common control with the Company and who are
not beneficial owners of a controlling interest in the voting securities of the
Company and (ii) the Nominating Committee shall, prior to each annual meeting of
shareholders, determine and nominate candidates for the office of director of
the Company to be elected by the shareholders to serve terms as established by
the Bylaws and until their successors are elected.
In accordance with this Bylaw provision, on April 30, 2002, the
Company's Board of Directors designated a Nominating Committee consisting of
John M. Petersen, Chair, Samuel P. Black, III, J. Ralph Borneman, Jr., Patricia
Garrison-Corbin and Robert C. Wilburn. None of these persons is an officer or
employee of the Company or of any entity controlling, controlled by or under
common control with the Company or a beneficial owner of a controlling interest
in the voting stock of the Company or any such entity.
Establishment of Shareholder Nominating Procedures
On August 16, 1999, the Company's Board of Directors voted to amend the
Company's Bylaws by adding Section 2.07(a) to the Company's Bylaws for the
purpose of establishing a fair and reasonable procedure by which any holder of
Class A Common Stock or Class B Common Stock could propose to the Nominating
Committee one or more persons whom the shareholder believes would be an
appropriate candidate for nomination by the Nominating Committee for election as
a director by the holders of Class B Common Stock at a forthcoming meeting of
shareholders at which directors are to be elected. The Company believes such a
procedure is an important shareholder right, and that proposals from
shareholders assist the Nominating Committee in the exercise of its
responsibility to nominate candidates for election as directors by the holders
of Class B Common Stock. Section 2.07(a) of the Company's Bylaws establishes a
time period in which any such proposal must be submitted, and specifies the
information required to be submitted about any person so proposed in order that
the Nominating Committee has adequate time and information to review the
information submitted, interview the proposed candidate if the Nominating
Committee so desires and determine whether to nominate the person proposed as a
candidate for election as a director by the holders of Class B Common Stock.
Under Section 2.07(a) of the Company's Bylaws, the names of persons
proposed to the Nominating Committee and the requisite supporting information in
respect of directors to be elected
9
by shareholders at the Annual Meeting were required to be submitted not before
December 2, 2002 and not later than January 1, 2003.
Mrs. Hagen, by a letter to the Company dated December 30, 2002,
proposed the following 12 persons: Kenneth B. Frank, Susan Hirt Hagen, Michael
H. Hershock, Louis V. Imundo, Jr., Claude C. Lilly, III, Henry N. Nassau, Ajay
Patel, Richard J. Pinola, William Schwartz, William H. Starbuck, Richard L.
Stover and Daniel J. Whelan (collectively, the "Hagen Nominees"), for
consideration by the Nominating Committee for nomination as candidates for
election as directors by holders of Class B Common Stock at the Annual Meeting.
Of the Hagen Nominees, Mrs. Hagen and Messrs. Lilly and Nassau are currently
directors of the Company and Mrs. Hagen and Mr. Lilly have been nominated for
re-election by the Nominating Committee. Mrs. Hagen's letter stated, however,
that if any of the incumbent independent directors are not nominated by the
Nominating Committee when it announces its slate, Mrs. Hagen reserves the right
to renominate any or all of them at the Annual Meeting. Mrs. Hagen also stated
that, in the event that the size of the Board is increased beyond 13, Mrs. Hagen
reserves the right to propose additional candidates for the consideration of the
Nominating Committee and the shareholders. See "Mrs. Hagen's Shareholder
Proposals".
Mr. Hirt, by a letter to the Company dated December 10, 2002, proposed
Cyrus R. Wellman for consideration by the Nominating Committee for nomination as
a candidate for election as director by shareholders at the Annual Meeting.
Jeffrey A. Ludrof, by a letter to the Company dated December 30, 2002, proposed
John R. Graham for consideration by the Nominating Committee for nomination as a
candidate for election as director by shareholders at the Annual Meeting.
Actions Taken by the Nominating Committee
The Nominating Committee met on March 7, 2003 for the purpose of
nominating candidates for election as directors by the holders of Class B Common
Stock at the Annual Meeting. The Nominating Committee recommended to the Board
of Directors that the size of the Company's Board of Directors be increased to
15 persons and the Nominating Committee nominated persons for election as
directors by the holders of Class B Common Stock at the Annual Meeting of whom
ten are currently directors of the Company (Samuel P. Black, III, J. Ralph
Borneman, Jr., Patricia Garrison-Corbin, Mrs. Hagen, Mr. Hirt, Samuel P. Katz,
Claude C. Lilly, III, Jeffrey A. Ludrof, Jan R. Van Gorder and Robert C.
Wilburn) and of whom five are not currently directors of the Company (Kaj
Ahlman, John T. Baily, Wilson C. Cooney, John R. Graham and C. Scott Hartz).
On March 11, 2003, the Board of Directors accepted the Report of the
Nominating Committee and approved the nomination by the Nominating Committee of
the 15 candidates for election as directors by the holders of Class B Common
Stock at the Annual Meeting set forth under "Candidates for Election."
Candidates for Election
The Company's Bylaws provide that the Board of Directors shall consist
of not less than 7, nor more than 16, directors, with the exact number to be
fixed from time to time by resolution of the Board of Directors. The Board of
Directors has, by resolution, set the number of directors to be elected at the
Annual Meeting at 15.
10
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the election of the nominees named below, all of whom are
currently Directors of the Company with the exception of Kaj Ahlman, John T.
Baily, Wilson C. Cooney, John R. Graham and C. Scott Hartz, each of whom was
nominated for election as a director by the Nominating Committee of the Board of
Directors. If a nominee becomes unavailable for any reason, it is intended that
the proxies will be voted for a substitute nominee selected by the Nominating
Committee of the Board of Directors. The Board of Directors has no reason to
believe the nominees named will be unable to serve if elected. Any vacancy
occurring on the Board of Directors for any reason may be filled by a majority
vote of the directors then remaining in office until the next succeeding annual
meeting of the Company's shareholders.
The names of the candidates for director nominated by the Nominating
Committee, together with certain information regarding them, are as follows:
Director
Age Principal Occupation of the
as of for Past Five Years and Company
Name 4/1/03 Positions with Erie Insurance Group Since
----------------------- ---------- ------------------------------------ --------
Kaj Ahlman 52 Chairman and Chief Executive Officer, ---
Inreon, internet reinsurance venture,
2001 to present; Vice Chairman,
E.W. Blanch Holdings, Inc., 1999 to 2001;
Chief Executive Officer, Employers
Reinsurance Company, 1993 to 1999.
John T. Baily 59 Retired since December 31, 2002; President, ---
Swiss Re Capital Partners, 1999 to 2002;
Partner, PricewaterhouseCoopers LLP,
Chicago, IL, 1976 to 1999.
Samuel P. Black, III 61 President, Treasurer and Secretary, 1997
(1)(3)(4)(5) Samuel P. Black & Associates, Inc.,
insurance agency, with which he has
been associated since 1973; Director,
the Company, Erie Insurance Co., EFL,
Flagship City Insurance Company ("Flagship")
and EI P&C.
J. Ralph Borneman, Jr. CIC 64 President and Chief Executive 1992
(3)(4) Officer, Body-Borneman Associates,
Inc., insurance agency; President,
Body-Borneman, Ltd. and Body-Borneman,
Inc., insurance agencies since 1967;
Director, the Company, EFL, Erie
Insurance Co., Erie NY and National Penn
Bancshares.
11
Director
Age Principal Occupation of the
as of for Past Five Years and Company
Name 4/1/03 Positions with Erie Insurance Group Since
----------------------- ---------- ------------------------------------ --------
Wilson C. Cooney 68 Chairman, ForcesGroup, Ltd., insurance ---
and financial services group, 1999 to
present; Chairman, Cooney Group,
LLC, leadership and business consulting,
1999 to present; Deputy Chief Executive
Officer, United Services Automobile
Association, 1998 to 1999; President -
Property/Casualty Group, United
Services Automobile Association, 1995 to
1998.
Patricia Garrison-Corbin 55 Founder, President and Chief Executive 2000
(2)(4)(6C) Officer of P.G. Corbin & Company, Inc.,
financial advisory and investment management
services for municipalities, since
1986; Director, the Company, Erie Insurance
Co., EFL and P.G. Corbin Asset Management,
Inc.
John R. Graham 57 Executive-in-Residence and Professor of --
Finance, College of Business Administration,
Kansas State University, 2000 to present;
Chairman of the Board of Directors,
President and Chief Executive Officer,
Graham Capital Management, Inc., 1997 to
present; Owner, Graham Ventures, business
consulting and education services,
1970 to present; Chief Executive Officer,
Kansas Farm Bureau Financial Services, KFB
Life Insurance Company, Farm Bureau Mutual
Insurance Company, KFB Insurance Company
and FB Services Insurance Agency, 1979 to
1999; Chairman of the Board and Chief
Executive Officer, FB Capital Management
of Kansas, a registered investment
advisor, 1994 to 1999.
Susan Hirt Hagen 67 Managing Partner, Hagen, Herr & 1980
(1)(5C) Peppin, Group Relations Consultants,
from 1990 until it discontinued operations
in 1999; Co-Trustee of the H.O. Hirt
Trusts; Director, the Company, EFL and Erie
Insurance Co.; Mrs. Hagen has
focused more of her time and
12
Director
Age Principal Occupation of the
as of for Past Five Years and Company
Name 4/1/03 Positions with Erie Insurance Group Since
----------------------- ---------- ------------------------------------ --------
efforts since 1999 fulfilling her
responsibilities as Co-Trustee
of the H.O. Hirt Trusts, a position held since
1967 and as Director of the Company and its
subsidiaries; Mrs. Hagen also engages in
private investment, community leadership
and philanthropic activities.
C. Scott Hartz 57 Consultant, Hartz Group, IT and technology ---
consulting, 2002 to present; Chief Executive
Officer, PwC Consulting, 1995 to 2002.
F. William Hirt, CPCU 77 Chairman of the Board of the Company, EFL, 1965
(1C)(5) Erie Insurance Co., EI P&C and Flagship
since September 1993; Chairman of the
Board of Erie NY since April 1994;
Chairman of the Executive Committee of
the Company and EFL since November 1990;
Interim President and Chief Executive Officer
of the Company, EFL, Erie Insurance
Co., EI P&C, Flagship and Erie NY from
January 1, 1996 to February 12, 1996;
Chairman of the Board, Chief Executive
Officer and Chairman of the Executive
Committee of the Company, EFL and Erie
Insurance Co. for more than five years
prior thereto; Co-Trustee of the H.O. Hirt
Trusts; Director, the Company, EFL,
Erie Insurance Co., Erie NY, EI P&C and
Flagship.
Samuel P. Katz 53 Former CEO, Greater Philadelphia 2000
(2)(3) First, a business
leadership and civic organization,
July 2000 to January 2003;
President, EnterSport Capital Advisors,
Inc., a private investment
and consulting firm,
September 1997 to present;
President, Wynnefield
Capital Advisors, Inc., a
fund manager of a private
equity venture fund,
September 1997 to present;
Partner, Stafford Capital
Partners, L.P., investment
partnership and developer,
1994 to 1997; Co-Chief
Executive Officer,
13
Director
Age Principal Occupation of the
as of for Past Five Years and Company
Name 4/1/03 Positions with Erie Insurance Group Since
----------------------- ---------- ------------------------------------ --------
Public
Financial Management, Inc.,
a municipal finance and
investment advisor, 1976 to
1994; Director, the Company,
Erie Insurance Co., EFL and
Hershey Entertainment and
Resorts Co.
Claude C. Lilly, III, 56 Dean, Belk College of Business 2000
Ph.D., CPCU, CLU Administration,University of North
(2) Carolina Charlotte, July 1998 to
present; James H. Harris Chair of
Risk Management and Insurance, Belk
College of Business Administration,
University of North Carolina Charlotte,
August 1997 to present; Chief
Executive Officer, Quinstone, Inc.,
manufacturing, August 1995 to
January 1996; Professor of
Risk Management, Florida State
University 1981 to August
1997; Director, the Company, Erie
Insurance Co. and EFL.
Jeffrey A. Ludrof 43 President and Chief Executive 2002
(1)(6) Officer of the Company,
EFL, Erie Insurance Co., Erie
NY, EI P&C and Flagship
since May 8, 2002; Executive
Vice President - Insurance
Operations of the Company,
Erie Insurance Co., Erie NY,
EI P&C and Flagship from
1999 to May 7, 2002; Senior
Vice President of the
Company, Erie Insurance Co.,
Erie NY, EI P&C and Flagship
from 1994 to 1999; an
officer in various
capacities from 1989 to
1994; Director of the
Company, Erie Insurance Co.,
EFL, Erie NY, EI P&C and
Flagship.
Jan R. Van Gorder, Esq. 55 Senior Executive Vice President, 1990
(6) Secretary and General
Counsel of the Company, EFL and
Erie Insurance Co. since
1990, and of Flagship and EI
P&C since 1992 and 1993,
respectively and of Erie NY
since April 1994; Acting
President and Chief
Executive Officer of the
Company, EFL, Erie Insurance
Co., Flagship, Erie NY and
EI P&C from January 2002 to
May
14
Director
Age Principal Occupation of the
as of for Past Five Years and Company
Name 4/1/03 Positions with Erie Insurance Group Since
----------------------- ---------- ------------------------------------ --------
2002; Senior Vice
President, Secretary and
General Counsel of the
Company, EFL and Erie
Insurance Co. for more than
five years prior thereto;
Director, the Company, EFL,
Erie Insurance Co.,
Flagship, EI P&C and Erie
NY.
Robert C. Wilburn 59 President and Chief Executive 1999
(2C)(3C)(4)(6) Officer, Gettysburg
National Battlefield Museum
Foundation since 2000;
Distinguished Service
Professor, Carnegie Mellon
University since 1999;
President and Chief
Executive Officer, Colonial
Williamsburg Foundation from
1992 to 1999; President,
Carnegie Institute Library
of Pittsburgh from 1984 to
1992; Director, the Company,
Erie Insurance Co. and EFL.
-----------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation and Development Committee.
(4) Member of the Nominating Committee.
(5) Member of the Charitable Giving Committee.
(6) Member of the Investment Committee.
C Designates Committee Chairperson.
The Board of Directors met nine times in 2002. The standing committees
of the Company's Board of Directors are the Executive Committee, the Audit
Committee, the Executive Compensation and Development Committee, the Nominating
Committee, the Charitable Giving Committee and the Investment Committee.
The Executive Committee, which met twice during 2002, has the
authority, subject to certain limitations, to exercise the power of the Board of
Directors between regular meetings.
The Audit Committee, which met seven times in 2002, has the
responsibility, consistent with the Pennsylvania Insurance Company Law and the
Sarbanes-Oxley Act of 2002, for the selection of independent public accountants,
reviewing the scope and results of the audit and reviewing the adequacy of the
Company's accounting, financial, internal and operating controls.
The Executive Compensation and Development Committee, which met twice
in 2002, has responsibility, consistent with Section 1405(c)(4) of the
Pennsylvania Insurance Holding Companies Act and the Company's Bylaws, for
recommending to the Board of Directors, at least annually, the compensation of
the three highest paid officers of the Company and such other officers as the
Board
15
of Directors may designate, recommending all forms of direct compensation,
including any incentive programs, that would be appropriate for management and
employees of the Company and such other responsibilities as the Board of
Directors may designate. See "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
The Nominating Committee, which met twice in 2002, has responsibility,
consistent with Section 1405(c)(4) of the Pennsylvania Insurance Holding
Companies Act and the Company's Bylaws, for conducting searches for and the
nomination of a slate of candidates to stand for election to the Board of
Directors at the Company's annual meetings of shareholders and to nominate
candidates to fill vacancies on the Board of Directors between annual meetings
of shareholders.
The Charitable Giving Committee, which met twice in 2002, has
responsibility for recommending to the Chief Executive Officer charitable gifts
by the Company within a budgetary limit established by the Board of Directors.
The Investment Committee, which met six times in 2002, has
responsibility to assist the Company's Board of Directors in its general
oversight of the investments of the Company.
All directors hold office until their respective successors are elected
or until their earlier death, resignation or removal. Officers serve at the
discretion of the Board of Directors. There are no family relationships between
any directors or executive officers of the Company, except that Mr. Hirt,
Chairman of the Board, Chairman of the Executive Committee and a director, is
the brother of Mrs. Hagen, a director.
During 2002, each director attended more than 75% of the number of
meetings of the Board of Directors and the standing committees of the Board of
Directors of which such director was a member.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE 15 CANDIDATES FOR
DIRECTOR NOMINATED BY THE NOMINATING COMMITTEE.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
during the fiscal years ended December 31, 2002, 2001 and 2000 to each person
who served as the Chief Executive Officer of the Company and the four other most
highly compensated executive officers of the Company during 2002 for services
rendered in all capacities to the Company, EFL, the Exchange and their
subsidiaries and affiliates who allocate total compensation costs among
themselves according to various formulas. The Company's share of total
compensation expense in 2002 was 65.32%. Dollar amounts indicated are
pre-individual income taxes.
16
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
-------- ---------
Name and Other Annual Restricted LTIP All Other
Principal Compensation Stock Payments Compensation
Position Year Salary($) Bonus($)(1) ($)(2) Awards($)(3) ($)(4) ($)(5)
-------- ---- ----------- ----------- ---------------- ----------- ---------- ----------------
Milne, Stephen A. (6) 2002 78,470 154,391 5,733 0 984,479(8) 17,265,749(6)
President and Chief 2001 741,103 592,204 14,247 411,881 308,160 79,555
Executive Officer 2000 677,606 627,417 5,913 162,971 73,476 74,145
Ludrof, Jeffrey A.(7) 2002 521,544 560,106 4,380 85,284 102,927(8) 38,588
President and Chief 2001 309,463 202,971 2,534 65,125 63,042 19,023
Executive Officer 2000 273,985 203,145 1,362 48,173 21,715 18,265
Van Gorder, Jan R. 2002 476,675 311,255 9,587 120,927 177,740(8) 36,135
Senior Executive Vice 2001 384,211 250,193 6,020 122,591 122,692 32,564
President, Secretary and 2000 359,167 268,681 4,120 97,002 43,726 28,046
General Counsel
Garcia, Philip A. 2002 314,057 231,741 5,350 86,625 107,146(8) 12,563
Executive Vice President 2001 280,457 184,102 3,397 76,441 66,777 18,148
and Chief Financial 2000 262,177 198,593 1,813 45,222 20,398 14,809
Officer
Brinling, Jr., John J. 2002 281,836 180,928 5,983 85,610 121,103(8) 31,252
Executive Vice President 2001 260,408 147,452 2,688 81,830 82,350 30,040
2000 248,530 160,129 2,246 64,807 30,780 29,375
Ziegler, Douglas F. 2002 258,848 170,621 4,386 45,833 84,960(8) 10,354
Senior Vice President, 2001 229,471 95,767 3,658 69,474 64,986 9,179
Treasurer and Chief 2000 214,081 107,430 2,244 47,785 21,554 6,403
Investment Officer
------------
(1) The amounts indicated in the "Bonus" column above represent amounts
earned by the named executives during 2002 under the Company's
Annual Incentive Plan. The purpose of the Annual Incentive Plan is
to promote the best interests of the Exchange while enhancing
shareholder value of the Company by basing a portion of selected
employees' compensation on the performance of such employee and the
Company. Performance measures are established by the Executive
Compensation Committee based on the attainment of individual
performance goals and the Company's financial goals compared to a
selected peer group. The amounts indicated include reimbursement
for minor perquisites in the amounts of $4,598, $10,634, $11,365,
$8,739, $7,069 and $0 in 2002, $13,403, $8,693, $11,339, $9,749,
$8,594 and $0 in 2001 and $16,708, $9,253, $10,696, $10,274,
$14,771 and $0 in 2000 for Messrs. Milne, Ludrof, Van Gorder,
Garcia, Brinling and Ziegler, respectively. The 2002 amount for Mr.
Milne also includes compensation for unused vacation paid upon
retirement in the amount of $143,621.
(2) Amounts indicated in the "Other Annual Compensation" column include
the taxable value of group life insurance policies in excess of
$50,000 and the associated tax reimbursement for the named
executive officers. Amounts also include dividends paid on shares
under the LTIP.
17
(3) The "Restricted Stock Awards" column represents LTIP benefits
expressed in dollar amounts using the closing price of the Class A
Common Stock as of the end of the respective year ($36.26 at
December 31, 2002, $38.49 at December 31, 2001 and $29.81 at
December 31, 2000) that remain restricted at the end of the year.
The number of shares awarded for Messrs. Milne, Ludrof, Van Gorder,
Garcia, Brinling and Ziegler, respectively, were: 0, 2,352, 3,335,
2,389, 2,361 and 1,264 for 2002, 10,701, 1,692, 3,185, 1,986, 2,126
and 1,805 for 2001 and 5,467, 1,616, 3,254, 1,517, 2,174 and 1,603
for 2000. See "Long-Term Incentive Plan" for a detailed description
of the LTIP. LTIP dividends earned in the current year are reported
in "Other Annual Compensation" when paid or in "All Other
Compensation" when deferred.
(4) The "LTIP Payments" column represents LTIP benefits that became
unrestricted at the end of the year. The shares for 2000 were
distributed in January 2001, the shares for 2001 were distributed
in January 2002 and the shares for 2002 were distributed in January
2003. All of such shares were valued using the actual share price
at the time of distribution. The number of shares distributed after
withholding for income taxes for 2002 for Messrs. Ludrof, Van
Gorder, Garcia, Brinling and Ziegler were 2,830, 2,744, 1,654,
2,257 and 1,311, respectively. The number of shares distributed
after withholding for income taxes for Messrs. Milne, Ludrof, Van
Gorder, Garcia, Brinling and Ziegler were 4,539, 928, 2,180, 1,186,
685 and 1,103 for 2001, respectively, and 1,507, 445, 897, 506, 346
and 535 for 2000, respectively. Mr. Brinling deferred the
distribution of 1,076 shares in 2002 (valued using the share price
as of December 31, 2002), 1,075 shares in 2001 (valued using the
share price as of December 31, 2001) and 543 shares in 2000 (valued
using the share price as of December 31, 2000). In accordance with
the terms of his Retirement Performance Award described in footnote
(6), Mr. Milne's benefits under the LTIP were calculated as though
his termination of employment was due to a disability. As a result,
all vesting periods ended on the date of Mr. Milne's retirement,
all open performance periods ended on December 31, 2002 and all
phantom share units were valued based on the shortened performance
period. On February 7, 2002, Mr. Milne received a distribution of
14,225 shares under the LTIP after withholding for income taxes.
The shares were valued using the actual share price at the time of
distribution. The "LTIP Payments" column for Mr. Milne does not
include 30,802 shares that were distributed to Mr. Milne's
surviving spouse on March 20, 2003. These shares represent the
closing of all open performance periods applicable to Mr. Milne
under the LTIP. The value of this distribution was $1,112,876,
based upon the average of the high and low price of the Class A
Common Stock of $36.13 on March 20, 2003.
(5) Amounts shown in the "All Other Compensation" column include
matching contributions made by the Company pursuant to the
Company's Employee Savings Plan, premiums paid by the Company on
behalf of the named individuals on split dollar life insurance
policies, expenses for spousal travel and deferred dividends and
related earnings. For the year 2002, contributions made to the
Employee Savings Plan amounted to $3,139, $20,862, $19,067,
$12,563, $11,274 and $10,354 on behalf of Messrs. Milne, Ludrof,
Van Gorder, Garcia, Brinling and Ziegler, respectively. For the
year 2001, contributions made to the Employee Savings Plan amounted
to $29,644, $12,378, $15,368, $11,218, $10,416 and $9,179 on behalf
of Messrs. Milne, Ludrof, Van Gorder, Garcia, Brinling and Ziegler,
respectively. For the year 2000, contributions made to the Employee
Savings Plan amounted to $20,143, $8,214, $10,736,
18
7,831, $7,456 and $6,403 on behalf of Messrs. Milne, Ludrof, Van
Gorder, Garcia, Brinling and Ziegler, respectively. Premiums paid
during 2002 for split dollar life insurance policies for Messrs.
Milne, Ludrof, Van Gorder, Garcia, Brinling and Ziegler,
respectively, were as follows: $36,708, $17,726, $17,068, $0,
$17,436 and $0. Premiums paid during 2001 for split dollar life
insurance policies for Messrs. Milne, Ludrof, Van Gorder, Garcia,
Brinling and Ziegler, respectively, were as follows: $49,911,
$6,645, $17,196, $6,930, $17,538 and $0. Premiums paid during 2000
for split dollar life insurance policies for Messrs. Milne, Ludrof,
Van Gorder, Garcia, Brinling and Ziegler, respectively, were as
follows: $50,132, $6,674, $17,310, $6,978, $17,634 and $0. The
Company is entitled to recover the premiums from any proceeds paid
on such split dollar life insurance policies and has retained a
collateral interest in each policy to the extent of the premiums
paid with respect to such policies. Expenses for spousal travel
were $3,870, $3,337 and $3,377 for Messrs. Milne, Ludrof and
Brinling, respectively, in 2000. Mr. Brinling also had deferred
dividends of $2,192, $1,967 and $881 and interest on deferred
dividends of $350, $119 and $27 in 2002, 2001 and 2000,
respectively.
(6) Mr. Milne served as President and Chief Executive Officer from
February 1996 until his retirement on January 18, 2002. Mr. Milne
died in September 2002. Upon his retirement, Mr. Milne received the
benefits specified in his employment agreement and a Retirement
Performance Award totaling $17,225,902 that included:
(a) Payment in cash of an amount equal to two times the
sum of (i) Mr. Milne's 2002 base salary and (ii) the amount payable
to him under the Company's Annual Incentive Plan for 2001, in
addition to three times such sum provided under his employment
agreement.
(b) Continuation of the Company's life insurance programs
regarding the life of Mr. Milne until his death.
(c) Credit for 30 years of service for purposes of the
Company's Supplemental Retirement Plan for Certain Members of the
Erie Insurance Group Retirement Plan for Employees (the "SERP")
benefit formula, and changes of the normal form of payment from
10-year Certain and Continuous to 100% Joint and Survivor and with
Mr. Milne's surviving spouse to receive a monthly SERP benefit
under such 100% Joint and Survivor option for the remainder of her
life.
(7) Mr. Ludrof has served as President and Chief Executive Officer
since May 8, 2002.
(8) Amounts shown in the Restricted Stock Awards column are paid in
three annual installments beginning with the year in which the
award is made. The amounts shown are for stock that will become
unrestricted at December 31, 2003 and 2004. Accordingly, amounts
shown in the LTIP Payments column include payments of stock from
the awards made in 2002, 2001 and 2000.
19
Agreements with Executive Officers
The Company has employment agreements with the following of its senior
executive officers: Jeffrey A. Ludrof, President and Chief Executive Officer,
Jan R. Van Gorder, Senior Executive Vice President, Secretary and General
Counsel; Philip A. Garcia, Executive Vice President and Chief Financial Officer,
John J. Brinling, Jr., Executive Vice President of EFL, Douglas F. Ziegler,
Senior Vice President, Treasurer and Chief Investment Officer; Michael J. Krahe,
Executive Vice President of Human Development and Leadership, and Thomas B.
Morgan, Executive Vice President of Insurance Operations. The employment
agreements have the following principal terms:
(a) A four-year term for Mr. Ludrof expiring May 8, 2006 and a two-year
term for Messrs. Van Gorder, Garcia, Brinling, Ziegler, Krahe and Morgan
expiring December 15, 2004, unless the agreement is theretofore terminated in
accordance with its terms, with or without cause, or due to the disability or
death of the officer or notice of nonrenewal is given by the Company or the
executive 30 days before any anniversary date;
(b) A minimum annual base salary at least equal to the executive's
annual base salary at the time the agreement was executed, subject to periodic
review to reflect the executive's performance and responsibilities, competitive
compensation levels and the impact of inflation;
(c) The eligibility of the executive under the Company's incentive
compensation programs and employee benefit plans;
(d) The establishment of the terms and conditions upon which the
executive's employment may be terminated by the Company and the compensation of
the executive in such circumstances. The agreements provide generally, among
other things, that if the employment of an executive is terminated without Cause
(as defined in the agreement) by the Company or by the executive for Good Reason
(as defined in the agreement) then the executive shall be entitled to receive:
(i) an amount equal to the sum of three times the executive's highest annual
base salary during the preceding three years plus an amount equal to three times
the total of the executive's highest award during the preceding three years
under the Company's Annual Incentive Plan; (ii) any award or other compensation
to which the executive is entitled under the LTIP; (iii) continuing
participation in any employee benefit plans for a period of three years
following termination to the extent the executive and his or her dependents were
eligible to participate in such programs immediately prior to the executive's
termination and (iv) immediate vesting and nonforfeitability of accrued benefits
under the Company's SERP;
(e) Provisions relating to confidentiality and nondisclosure following
an executive's termination; and
(f) An agreement by the executive not to compete with the Company for a
period of one year following his or her termination, unless such termination was
without Cause.
20
Stock Options and Stock Appreciation Rights
The Company does not have a stock option plan, nor has it ever granted
any stock option or stock appreciation right to any of the persons named in the
Summary Compensation Table.
Long-Term Incentive Plan
The LTIP is designed to enhance the growth and profitability of the
Company by providing the incentive of long-term rewards to key employees who are
capable of having a significant impact on the performance of the Company, to
attract and retain employees of outstanding competence and ability and to
further align the interests of such employees with those of the shareholders of
the Company. The LTIP was approved by the Company's shareholders in 1997 as a
performance-based plan under the Internal Revenue Code of 1986, as amended (the
"Code"), and its continuation was approved by the Company's shareholders at the
2002 Annual Meeting in satisfaction of requirements of the Code. Each of the
named executives has been granted awards of phantom share units under the LTIP
based upon a target award calculated as a percentage of the executive's base
salary. The total value of any phantom share units is determined at the end of
the performance period based upon the growth in the Company's retained earnings.
Each executive is then entitled to receive restricted shares of Class A Common
Stock equal to the dollar value of the phantom share units at the end of the
performance period. The vesting period for the restricted shares of Class A
Common Stock issued to each executive is three years after the end of the
performance period. If an executive ceases to be an employee prior to the end of
the performance period for reasons other than retirement, death or disability,
the executive forfeits all phantom share units awarded. If an executive ceases
to be an employee prior to the end of the vesting period for reasons other than
retirement, death or disability, the executive forfeits all unvested restricted
shares previously granted. The following table sets forth target awards granted
to each person who served as the Company's Chief Executive Officer and the
Company's four other highest paid executive officers during 2002, all current
executive officers as a group and all employees other than the executive
officers as a group (i) for the three-year performance period of 2002 to 2004,
(ii) for the three-year performance period of 2001 to 2003 and (iii) for the
three-year performance period of 2000 through 2002. See "Proposal 2 -- Approval
of a Change to the Long-Term Incentive Plan" for information regarding the
proposed change to the LTIP.
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
Performance or
Number of Other Period Until
Shares, Units or Maturation Estimated Future Payouts Under
Name Other Rights(#) or Payout Non-Stock Price-Based Plans
---------------------- ------------------ ------------------ -------------------------------------
Phantom
Share Units Threshold Target($) Maximum
------------- --------- ---------- -------
Milne, Stephen A. (2) 96,380 2000-2002 0 513,600 (1)
88,406 2001-2003 0 549,552 (1)
99,936 2002-2004 0 755,634 (1)
21
Performance or
Number of Other Period Until
Shares, Units or Maturation Estimated Future Payouts Under
Name Other Rights(#) or Payout Non-Stock Price Based Plans
---------------------- ------------------ ------------------ -------------------------------------
Phantom
Share Units Threshold Target($) Maximum
------------- --------- ---------- -------
Ludrof, Jeffrey A. 25,638 2000-2002 0 136,620 (1)
24,835 2001-2003 0 154,381 (1)
74,185 2002-2004 0 560,906 (1)
Van Gorder, Jan R. 35,122 2000-2002 0 187,162 (1)
32,216 2001-2003 0 200,263 (1)
30,916 2002-2004 0 233,762 (1)
Garcia, Philip A. 25,638 2000-2002 0 136,620 (1)
23,517 2001-2003 0 146,183 (1)
24,448 2002-2004 0 184,855 (1)
Brinling, John J., Jr. 24,863 2000-2002 0 132,492 (1)
22,167 2001-2003 0 137,792 (1)
20,874 2002-2004 0 157,835 (1)
Ziegler, Douglas F. 14,121 2000-2002 0 75,250 (1)
12,953 2001-2003 0 80,518 (1)
16,532 2002-2004 0 125,000 (1)
Executive Officer Group 207,641 2000-2002 0 1,106,494 (1)
191,141 2001-2003 0 1,188,171 (1)
250,356 2002-2004 0 1,892,992 (1)
Non-Executive Officer 104,019 2000-2002 0 554,306 (1)
Employee Group 104,355 2001-2003 0 648,696 (1)
117,129 2002-2004 0 885,641 (1)
-----------
(1) An executive's target award is established by the LTIP
Administrator. The actual value of an executive's phantom share
units at the end of a performance period may be more or less than
the executive's target amount. However, the maximum value of
phantom share units earned by an executive for any performance
period may not exceed $500,000. See "Proposal 2 -- Approval of a
Change to the Long-Term Incentive Plan".
(2) See Note (4) to the Summary Compensation Table for information
regarding Mr. Milne's LTIP awards.
Pension Plan
The following table sets forth the estimated total annual benefits
payable upon retirement at age 65 under the Erie Insurance Group Retirement Plan
for Employees and the SERP (collectively, the "Retirement Plans").
22
PENSION PLAN TABLE
Years of Service
----------------------------------------------------------------------------
Remuneration 15 20 25 30
------------ -------------- -------------- -------------- -----------
$150,000 $45,000 $60,000 $75,000 $90,000
200,000 60,000 80,000 100,000 120,000
250,000 75,000 100,000 125,000 150,000
300,000 90,000 120,000 150,000 180,000
350,000 105,000 140,000 175,000 210,000
400,000 120,000 160,000 200,000 240,000
450,000 135,000 180,000 225,000 270,000
500,000 150,000 200,000 250,000 300,000
550,000 165,000 220,000 275,000 330,000
600,000 180,000 240,000 300,000 360,000
650,000 195,000 260,000 325,000 390,000
700,000 210,000 280,000 350,000 420,000
750,000 225,000 300,000 375,000 450,000
800,000 240,000 320,000 400,000 480,000
The compensation covered by the Retirement Plans is the base salary
reported in the Summary Compensation Table.
Under the Retirement Plans, credited years of service is capped at 30
years. Credited years of service for each of the individuals named in the
Summary Compensation Table other than Mr. Milne, is as follows: Jeffrey A.
Ludrof -- 22 years, Jan R. Van Gorder -- 22 years, , Philip A. Garcia -- 22
years, John J. Brinling, Jr. -- 30 years and Douglas F. Ziegler -- 15 years. See
Note (6) to the Summary Compensation Table for information regarding the
treatment of Mr. Milne's pension benefits.
The benefits under the Retirement Plans are computed on the basis of
straight-life annuity amounts and a life annuity with a ten-year certain
benefit. The benefits listed in the Pension Plan Table are not subject to
deduction for Social Security or other offset amounts. The information in the
foregoing table does not reflect certain limitations imposed by the Code. The
Code prohibits the inclusion of earnings in excess of $200,000 per year
(adjusted periodically for cost of living increases) in the average earnings
used to calculate benefits. The Code also limits the maximum annual pension
(currently $160,000, but adjusted periodically for cost of living increases)
that can be paid to each eligible employee. A SERP for senior management is in
effect that provides benefits in excess of the earnings limitations imposed by
the Code similar to those provided to all other full-time employees as if the
Code limitations were not in effect. Those benefits are incorporated into the
Pension Plan Table.
Director Compensation
The annual retainer for the Company's directors is $25,000, plus
$1,500 for each meeting attended and $1,500 for each committee meeting attended
plus an additional $2,000 per year for each committee chairperson. In addition,
all directors are reimbursed for their expenses incurred in attending meetings.
Officers of the Company who serve as directors are not compensated for
23
attendance at meetings of the Board of Directors and its committees. See also
"Certain Transactions." A director may elect prior to the end of a calendar year
to defer receipt of up to 100% of the director's board compensation, including
retainers, meeting fees and chairperson fees. A deferred compensation account is
maintained for each outside director who elects to defer board compensation. A
director who defers board compensation may select hypothetical investment
options for amounts in the director's deferred compensation account and such
account is credited, including with hypothetical interest, based on the
investment results of the hypothetical investment options selected.
In 2002, the Company's Board of Directors, at the recommendation of
the Executive Compensation and Development Committee, approved a deferred stock
compensation plan for its outside directors. The purpose of this plan is to
further align the interests of outside directors with shareholders by providing
for a portion of annual compensation for the directors' services in shares of
the Company's Class A Common Stock. A deferred stock account is maintained for
each outside director under the plan. The account is credited annually with a
grant of shares of Class A Common Stock determined by dividing $25,000 by the
closing price of the Class A Common Stock on the first business day after the
Company's annual meeting. Each director vests in the grant 25% every three full
calendar months over the course of a year, with the final 25% vesting on the
date of the next annual meeting if the next annual meeting is held before the
final three full calendar months have elapsed. Dividends paid by the Company are
reinvested into each director's account with additional shares of the Company's
Class A Common Stock and such credited shares vest immediately. The Company
accounts for the fair value of its grants under the plan in accordance with FAS
148, "Accounting for Stock-Based Compensation." The annual charge related to
this plan to the Company and its affiliates totaled approximately $277,000 for
2002; the Company's share of this charge was approximately $167,000.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation and Development Committee (the "Compensation
Committee") of the Company presently consists of Robert C. Wilburn, Chair,
Samuel P. Black, III, J. Ralph Borneman, Jr. and Samuel P. Katz. No member of
the Compensation Committee is a former or current officer or employee of the
Company, the Exchange, EFL or any of their respective subsidiaries or
affiliates.(1) Furthermore, no executive officer of the Company serves as a
member of a
--------
(1) J. Ralph Borneman, Jr. is the President and a principal shareholder of
Body-Borneman Associates, Inc., Body-Borneman, Inc. and Body-Borneman, Ltd. and
Samuel P. Black, III is the President and a principal shareholder of Samuel P.
Black & Associates, Inc., each of which is an independent insurance agency
representing a number of insurers, including the insurance subsidiaries of the
Company, EFL and the Exchange and its insurance subsidiary and which receive
commissions in the ordinary course of business from such insurance companies.
Under the provisions of Section 162(m) of the Code relating to qualified plans,
Messrs. Black and Borneman are not deemed independent for purposes of approving
performance-based incentive plans. Messrs. Black and Borneman have recused
themselves from voting on such plans as members of the Compensation Committee.
24
compensation committee of another entity, one of whose executive officers serves
on the Compensation Committee, or as a director of the Company, nor does any
executive officer of the Company serve as a director of another entity, one of
whose executive officers serves on the Compensation Committee.
Report of the Executive Compensation and Development Committee of the Company
Consistent with Section 1405(c)(4) of the Pennsylvania Insurance
Holding Companies Act and the Company's Bylaws, the Compensation Committee is
charged with the duty of recommending to the Board of Directors the compensation
of the three highest paid officers of the Company and such other officers as are
determined by the Board of Directors; recommending to the Board of Directors all
forms of bonus compensation, including incentive programs, that would be
appropriate for the Company and to undertake such other responsibilities as may
be delegated to the Compensation Committee by the Board of Directors. The Board
of Directors has authorized the Compensation Committee to consider the
compensation of the four highest paid officers, including the Chief Executive
Officer. The purpose of the Compensation Committee is to determine the level and
composition of compensation that is sufficient to attract and retain top quality
executives for the Company.
The objectives of the Company's executive compensation practices are
to: (1) attract, reward and retain key executive talent and (2) to motivate
executive officers to perform to the best of their abilities and to achieve
short-term and long-term corporate objectives that will contribute to the
overall goal of enhancing shareholder value and policyholder security. To that
end, compensation comparisons are made to benchmark positions at other insurers
in terms of compensation levels and composition of the total compensation mix.
Under Section 162(m) of the Code, the Company is not allowed a federal
income tax deduction for compensation, under certain circumstances, paid to
certain executive officers to the extent that such compensation exceeds
$1,000,000 per officer in any fiscal year. No officer of the Company has
received compensation in excess of $1,000,000 in any fiscal year to date with
the exception of Stephen A. Milne, President and Chief Executive Officer of the
Company in 1999, 2000 and 2001, and Messrs. Milne and Jeffrey A. Ludrof, who
succeeded Mr. Milne, in 2002. The Compensation Committee may consider adopting
policies with respect to this limitation on deductibility when appropriate.
The Compensation Committee reviewed the salary ranges and base salaries
of the four highest paid executives, including each person who served as the
Chief Executive Officer of the Company, in 2002. The Compensation Committee has
position descriptions for the four highest paid executives of the Company,
including the Chief Executive Officer, that define the responsibilities and
duties of each position. The position descriptions also delineate the functional
areas of accountability and the qualifications and skills required to perform
such responsibilities and duties. The Compensation Committee then reviewed the
salary ranges for the Chief Executive Officer and the other three highest paid
executives, comparing the ranges to third party data compiled for similar
positions with other property and casualty insurers. In reviewing the salary
ranges for the four highest paid executives, including the Chief Executive
Officer, the Compensation Committee referenced Sibson's Management Compensation
Survey published annually by Sibson & Company, Inc., which summarized
compensation data for more than 100 insurance companies along with other
industry survey data.
25
The Compensation Committee also reviewed data obtained from Towers Perrin, a
nationally recognized consulting firm with specific expertise in the insurance
industry regarding executive compensation. The data is reported by position,
company asset size and premium volume. The unique aspects of each position, its
duties and responsibilities, the effect on the performance of the Company, the
number of employees supervised directly and other criteria are also considered
in establishing the base salaries.
The level of compensation for each executive reflects his or her
skills, experience and job performance. Normally, base salary will not be less
than the minimum for the salary range established for each position. Executives
with a broader range of skills, experience and consistently high performance
with the Company may receive compensation above the midpoint for the established
salary range.
Compensation for the Chief Executive Officer consists primarily of
salary, annual incentive and long-term incentive payments and minor perquisites
that amount to less than 10% of the Chief Executive Officer's salary and bonus.
The Board of Directors approved adoption of an annual incentive plan and a
long-term incentive plan for senior executives of the Company as recommended by
the Executive Committee at its meeting of March 11, 1997 (the "Annual Incentive
Plan" and the "LTIP", respectively).
The purpose of the Annual Incentive Plan is to promote the best
interests of the Exchange while enhancing shareholder value of the Company and
to promote the attainment of significant business objectives for the Company,
its subsidiaries and affiliates by basing a portion of the executives'
compensation on the attainment of both premium growth and underwriting
profitability goals. The annual incentive awards are paid in cash. Annual
Incentive Plan target award levels, expressed as a percentage of base salary,
are established annually by the Compensation Committee. Payments under the
Annual Incentive Plan are based on a combination of individual executive
performance and the Company's performance.
The LTIP was approved by shareholders on April 29, 1997 and its
continuation was approved by shareholders in 2002 for purposes of qualifying the
plan as a performance-based plan under Section 162(m) of the Code. The LTIP is
designed to maximize returns to shareholders by linking executive compensation
to the overall profitability of the Company. Target award amounts, expressed as
a percentage of base salary, are determined by comparisons to peer companies and
approved by the Compensation Committee. The Compensation Committee believes that
the Company has been competitive with compensation levels necessary to attract,
reward and retain key executive talent, and to motivate executive officers to
perform to the best of their abilities in line with the best interests of the
Company, its employees and its culture. However, current awards to executives
under the LTIP are approaching, and in some cases have reached, the maximum
annual limit under the terms of the LTIP. The Compensation Committee has
determined that, in order to remain competitive with market data for executive
compensation, and to continue to align the goals of management and the
shareholders to achieve the short-term and long-term corporate objectives of
enhancing shareholder value and policyholder security, the maximum value of
phantom share units earned by a participant in any performance period should be
increased to $1,000,000. The change of the maximum value limitation to
$1,000,000 is being submitted for shareholder approval at the Annual Meeting.
26
Performance factors applicable to the Company, such as property and
casualty insurance loss ratios, investment portfolio returns and overall Company
profitability, as well as other factors are considered in evaluating the Chief
Executive Officer's performance. Such performance factors were considered in
approving Mr. Ludrof's compensation. Compensation of the next three most highly
compensated individuals is determined by the Compensation Committee and is based
upon the factors and processes enumerated, i.e., a determination of a salary
range based upon market data and evaluation of the executive with respect to the
executive's job description and his or her position within the salary range.
Compensation of the next highest paid executives (other than the Chief
Executive Officer and the next three highest paid executives) was based upon the
Company's established standard compensation policies and was not determined by
the Compensation Committee.
Erie Indemnity Company Executive Compensation and Development Committee:
Robert C. Wilburn, Chair
Samuel P. Black, III
J. Ralph Borneman, Jr.
Samuel P. Katz
March 11, 2003
27
Comparison of Cumulative Total Shareholder Return on the Class A Common Stock
with Certain Averages
The following graph depicts the cumulative total shareholder return for
the periods indicated for the Class A Common Stock compared to the Standard &
Poor's 500 Stock Index and the Standard & Poor's Property-Casualty Insurance
Index.
CUMULATIVE TOTAL SHAREHOLDER RETURN COMPARISON(1) CHART
[CHART OMITTED]
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Erie Indemnity Company $100 $108 $113 $106 $139 $134
Standard & Poor's 500 Stock Index 100 129 156 141 125 97
Standard & Poor's Property-Casualty 100 93 70 108 100 89
Insurance Index
--------------
(1) Assumes $100.00 invested at the close of trading on the last trading day preceding the first day of the fifth
preceding fiscal year in the Class A Common Stock, Standard & Poor's Property-Casualty Insurance Index and
Standard & Poor's 500 Stock Index. Cumulative total shareholder return assumes the reinvestment of dividends.
CERTAIN TRANSACTIONS
Directors Borneman and Black are officers and principal shareholders of
insurance agencies that receive insurance commissions in the ordinary course of
business from the insurance companies managed by the Company in accordance with
the companies' standard commission schedules and agents' contracts. Such
payments made in 2002 to the agencies for commissions written on insurance
policies from the Property and Casualty Group and EFL amounted to $4,264,962 and
$476,472 for the Borneman and the Black insurance agencies, respectively.
28
John M. Petersen, a director and former President and Chief Executive
Officer, and previous Chief Investment Officer of the Erie Insurance Group of
Companies, who retired as an executive officer of the Company on December 31,
1995, entered into a consulting arrangement with the Company effective January
2, 1996. Under the terms of the arrangement, which is terminable upon 30 days
notice by either party, the Company engaged Mr. Petersen as a consultant to
furnish the Company and its pension trust, the Exchange and EFL with investment
services with respect to their investments in common stocks. As compensation for
services rendered by Mr. Petersen, a fee of .15 of 1 percent, on an annualized
basis, of the total fair market value of the common stocks under management, is
paid to Mr. Petersen. The Company also pays for all necessary and reasonable
expenses related to Mr. Petersen's consulting services performed under this
arrangement. The compensation paid to Mr. Petersen under this arrangement in
2002 by the Exchange, the Company, the pension trust and EFL was $3,656,546,
$69,511, $100,001 and $51,875, respectively. Consistent with the terms of his
consulting arrangement, Mr. Petersen notified the Company in writing that he
intends to retire. Mr. Petersen has agreed to continue to perform services under
the existing consulting arrangement until such services can be transitioned by
the Company.
The common stock portfolio of the Exchange under the direction of Mr.
Petersen outperformed the Standard & Poor's 500 Stock Index, a standard index
used by many managers of equity investments, by $119.0 million during the seven
years ended December 31, 2002 and the period January 1, 2003 to February 28,
2003. The common stock portfolio performance of the Company, the pension trust
and EFL (combined) was in-line with the Standard & Poor's 500 Stock Index over
the same period. The Exchange common stock portfolio returned an annualized
7.48%, the Company, the pension trust and EFL (combined) common stock portfolios
returned an annualized 5.93% and the Standard & Poor's 500 Stock Index returned
6.08%.
LEGAL PROCEEDINGS
Legal Proceedings Relating to the Appointment of a Successor Corporate
Trustee to Bankers Trust
On March 3, 1999, Bankers Trust filed a petition with the Court
requesting that the Court accept its resignation as corporate trustee of the
H.O. Hirt Trusts as a result of conflicts of interest that Bankers Trust
believed existed from certain insurance operations of its parent company and
affiliates. Also, an affiliate of Bankers Trust, Deutsche Bank, is one of the
largest market makers in the Company's Class A Common Stock.
On May 7, 1999, the Court conducted a hearing on the Bankers Trust
Petition, at which time the Court issued an Order accepting the resignation of
Bankers Trust at such time as the Court appoints a successor corporate trustee.
On December 15, 1999 and on January 27, 2000, the Court conducted
hearings on the selection of a successor corporate trustee, including the
presentation of testimony by two successor trustee candidates, one supported by
Mr. Hirt and one supported by Mrs. Hagen. Subsequent to that testimony, Laurel
Hirt, Mr. Hirt's daughter and a beneficiary of the H.O. Hirt Trusts, filed a
petition requesting that the Court also consider a third successor corporate
trustee candidate not supported by
29
Mr. Hirt. Mr. Hirt has filed a petition objecting to Laurel Hirt's petition.
Both Laurel Hirt's and Mr. Hirt's petitions are currently pending.
In a related matter, Mr. Hirt and Mrs. Hagen, pursuant to a February
23, 2000 Order of the Court, were directed to finalize certain matters relating
to a so-called "funding plan" for the payment of the fees and costs of the
successor corporate trustee and to make application to the Internal Revenue
Service for a private letter ruling on the tax treatment of the finalized
"funding plan." Under its Order of February 23, 2000, the Court indicated that
upon the receipt of the private letter ruling from the Internal Revenue Service,
the Court would then select the successor corporate trustee from the two
candidates.
On March 6, 2000, the Company filed a motion for reconsideration and/or
clarification of the Court's February 23, 2000 Order. The motion requested that
the Court (i) reconsider its schedule for designating a successor corporate
trustee due to the March 3, 1999 resignation and make that designation presently
and (ii) reconsider and/or clarify the Court's prohibition on the Company's
involvement in a finalized funding plan for payment of the corporate trustees'
fees because several of the proposed funding alternatives could only be
implemented through actions to be undertaken by the Company. On March 8, 2000,
Mr. Hirt also filed a motion for reconsideration. On March 15, 2000, the Court
denied the Company's and Mr. Hirt's motions.
On January 30, 2001, the Court conducted a further hearing on the
matter of the selection of a successor corporate trustee.
On September 10, 2001, a Joint Petition for Construction of the H.O.
Hirt Trusts (the "Joint Construction Petition") was filed by Mr. Hirt, Mrs.
Hagen and Bankers Trust. The Joint Construction Petition sought, among other
things, relief from the Court in the form of an Order of the Court under which
the trustees of the H.O. Hirt Trusts would, under certain circumstances, be
permitted to sell shares owned by the H.O. Hirt Trusts in order to fund the fees
and expenses of the corporate trustee.
On October 16, 2001, Laurel Hirt filed an Answer and Objection to the
Joint Construction Petition. On December 3, 2001, Mr. Hirt and Mrs. Hagen filed
responses to Laurel Hirt's Answer and Objection.
On January 25, 2002, the Court conducted a hearing on the matter of the
Joint Construction Petition. On January 28, 2002, the Court entered its Order
indicating that it was deferring any decision on the Joint Construction Petition
until April 1, 2002 so as to permit the parties to attempt to mediate the issues
raised by the Joint Construction Petition. The Court further indicated in its
January 28, 2002 Order that if the parties were not able to mediate those
issues, the Court would enter a ruling on the Joint Construction Petition within
30 days after April 1, 2002.
On June 13, 2002, the Court entered its Order approving the Joint
Construction Petition, thereby permitting the H.O. Hirt Trusts, under certain
circumstances, to sell shares of Class B Common Stock owned by the H.O. Hirt
Trusts in order to pay the fees and expenses of the corporate trustee. Laurel
Hirt has appealed the Court's June 13, 2002 Order to the Pennsylvania Superior
Court. Mr. Hirt and Mrs. Hagen have opposed Laurel Hirt's appeal, which is
currently pending before the Pennsylvania Superior Court.
30
MRS. HAGEN'S SHAREHOLDER PROPOSALS
In a letter dated December 30, 2002, Mrs. Hagen submitted to the
Company a notice containing six proposals relating to the nomination of
candidates for director at the Annual Meeting and proposed amendments to the
Company's Bylaws. The proposals will be presented for consideration by holders
of Class B Common Stock at the Annual Meeting only if the proposals are
presented by or on behalf of Mrs. Hagen at the Annual Meeting. Mrs. Hagen's
letter identified her proposals as follows:
(1) Nomination of Candidates for Director
"I propose the following persons named below (the
"Candidates") for consideration by the Nominating Committee of the
Company (the "Nominating Committee") for election to the Board of
Directors of the Company (the "Board") at the Annual Meeting. Should
the Candidates not be selected by the Nominating Committee, and
depending upon the slate of candidates nominated by the Nominating
Committee, this Notice constitutes my proposal to nominate a number of
the Candidates at the Annual Meeting. The Candidates are:
Kenneth B. Frank
Susan Hirt Hagen
Michael H. Hershock
Louis V. Imundo, Jr., Ph.D.
Claude C. Lilly, Ph.D., CPCU, CLU
Henry N. Nassau, Esq.
Ajay Patel
Richard J. Pinola, CPA
William Schwartz, Esq.
William Starbuck, Ph.D.
Richard Stover
Daniel J. Whelan
In addition to myself, I am proposing a pool of candidates who
are truly independent, as defined by the proposed new NASDAQ listing
standards, for the shareholders to consider at the 2003 Annual Meeting
in order to increase the number and percentage of independent Directors
on the Board. I believe that all the individuals listed are appropriate
candidates for election at the Annual Meeting.
I assume that each of the Company's other three current
independent Directors, as defined by the proposed new NASDAQ listing
standards, will be renominated by the Nominating Committee to stand for
re-election at the Annual Meeting. However, if any of these other
independent Directors is not selected by the Nominating Committee when
it announces its slate, I hereby reserve the right to renominate any or
all of them at the Annual Meeting. Since each of those individuals
currently serves on the Board, the Company should be able to access the
requisite information required by Section 2.07(a)(4) of the Bylaws in
order to update the biographical information contained in the Company's
2002 proxy statement and its recent Form S-3 Registration Statement.
31
In addition, if the number of Directors constituting the
entire Board is expanded by the Board beyond the currently authorized
size of 13 members, I hereby reserve the right to propose additional
candidates for the consideration of the Nominating Committee and the
shareholders.
I will appear at the Annual Meeting to make these
nominations."
(2) Advance Notice of Director Nominations
"To permit the two dozen or so voting shareholders of the
Company, including the H.O. Hirt Trusts, sufficient time within which
to consider and propose the direct nomination of candidates to stand
for election to the Board, I propose that Section 2.07 of the Bylaws be
amended, effective upon adoption at the Annual Meeting, to (a) add a
new paragraph (c) to read as follows:
"(c) Nomination of Candidates for Election as Directors.
-----------------------------------------------------
Nominations of persons for election to the Board of
Directors may be made at any meeting of Shareholders
at which Directors are to be elected (i) by or at the
direction of the Nominating Committee of the Board of
Directors, or (ii) by any Shareholder who is entitled
to vote at any meeting at which such Directors are to
be elected (a "Director Nomination") and who complies
with the applicable notice procedures set forth in
this Section 2.07(c).
"(1) A Director Nomination shall be made by notice in
writing, delivered in person or by first class United
States mail postage prepaid or by reputable overnight
delivery service, to the Nominating Committee of the
Board of Directors of the corporation to the
attention of the Secretary of the corporation at the
principal office of the corporation, within the time
limits specified herein and otherwise in accordance
with this Section 2.07(c).
"(2) The corporation shall publicly announce the
Nominating Committee's nominees for election to the
Board of Directors, in the case of an annual meeting
of Shareholders, not less than 60 calendar days nor
more than 120 calendar days before the first
anniversary of the date of the annual meeting of
Shareholders in the immediately preceding year by
mailing notice of such nominees to its Shareholders,
issuing a press release, filing a periodic report
with the SEC, or otherwise publicly disseminating
notice of such nominees.
"(3) Any Director Nomination must be received by the
Nominating Committee, in the case of an annual
meeting of Shareholders, not more than 30 calendar
days following the corporation's public announcement
of the Nominating Committee's nominees for Director
in connection with such meeting as provided in clause
(2) of this Section 2.07(c).
"(4) Any Director Nomination submitted in connection with
an annual meeting of Shareholders in accordance with
clause (3) of this Section 2.07(c) shall set forth,
with respect to each nominee, the information
specified in clause (4) of Section 2.07(a).
32
"(5) If a Director Nomination submitted to the Nominating
Committee fails, in the reasonable judgment of the
Nominating Committee, to contain the information
specified in clause (4) of Section 2.07(a) is
otherwise deficient, the Chairperson of the
Nominating Committee shall, as promptly as is
practicable under the circumstances, provide written
notice to the Shareholder of such failure or
deficiency in the Director Nomination and such
Shareholder shall have five business days from
receipt of such notice to submit a revised Director
Nomination that corrects such failure or deficiency
in all material respects.
"(6) Notwithstanding anything to the contrary contained in
this Section 2.07(c), no Shareholder entitled to vote
for Directors shall be required to submit a prior
written notice of any Director Nomination that such
Shareholder intends to make (i) in the case of an
annual meeting of Shareholders, if timely
announcement of the Nominating Committee's nominees
for Director in connection with such meeting shall
not have been made in accordance with clause (2) of
this Section 2.07(c), or (ii) in the case of any
special meeting of Shareholders at which one or more
Directors are to be elected, in either of which cases
the Director Nomination may be made at such annual or
special meeting.; and
(b)amend the first sentence of clause (1) of Section 2.07(b) of the Bylaws in
its entirety to read as follows:
"(1) A Shareholder of the corporation may bring a matter
(other than a proposal to the Nominating Committee of
a candidate for election as a Director which is
covered by subsection (a) or subsection (c) of this
Section 2.07) before a meeting of Shareholders
only if (A) such matter is a proper matter for
Shareholder action and such Shareholder shall have
provided notice in writing, delivered in person or by
first class United States mail postage prepaid or
by reputable overnight delivery service, to the
Secretary of the corporation at the principal office
of the corporation, within the time limits specified
herein or (B) the Shareholder complies with the
provisions of Rule 14a-8 under the Securities
Exchange Act of 1934 (as amended) relating to
inclusion of Shareholder proposals in the
corporation's proxy statement."
I will appear at the Annual Meeting to present this
proposal."
(3) Other Shareholder Proposals
"In order to give shareholders a better opportunity to submit
proposals (other than in connection with the election of Directors) for
a vote of shareholders at annual meetings, I propose that clause (2) of
Section 2.07(b) of the Bylaws be amended, effective upon adoption at
the Annual Meeting, in its entirety to read as follows:
"(2) In the case of an annual meeting of Shareholders, any
such written notice of presentation of a matter by a
Shareholder must be received by the Secretary of the
corporation not less than 60 calendar days nor more
than 120
33
calendar days before the first anniversary
of the date of the annual meeting of Shareholders in
the immediately preceding year; provided, however,
that in the case of an annual meeting of Shareholders
that is called for a date which is not within 30
calendar days before or after the first anniversary
date of the annual meeting of Shareholders in the
immediately preceding year, any such written notice
of presentation by a Shareholder of a matter must be
received by the Secretary of the corporation within
five business days after the earlier of the date the
corporation shall have mailed notice to its
Shareholders that an annual meeting of Shareholders
will be held, issued a press release, filed a
periodic report with the SEC, or otherwise publicly
disseminated that an annual meeting of Shareholders
will be held."
I will appear at the Annual Meeting to present this
proposal."
(4) Fixing the Size of the Board
"To fix the number of Directors serving on the Board and to
provide that such number cannot be changed except by a vote of the
shareholders, I propose that the first sentence of Section 3.02 of the
Bylaws be amended, effective upon adoption at the Annual Meeting, in
its entirety to read as follows:
"The Board of Directors shall consist of thirteen
(13) Directors, the majority of whom shall be citizens and
residents of the United States, each of whom shall be at least
eighteen (18) years of age, elected at the Annual Meeting of
Shareholders, to serve until the ensuing Annual Meeting and
until a successor is elected and qualified or until his or her
earlier death, resignation or removal."
I will appear at the Annual Meeting to present this proposal."
(5) Filling Board Vacancies
"To eliminate the power of the Board to fill any vacancies and
newly created directorships and to vest such power exclusively in the
shareholders, I propose that Section 3.14 of the Bylaws be amended,
effective upon adoption at the Annual Meeting, in its entirety to read
as follows:
"Section 3.14. VACANCIES. Vacancies in the Board of
Directors, including vacancies resulting from an increase in
the number of Directors, may be filled only by Shareholders
entitled to vote thereon at a meeting duly called and held for
such purpose, and each person so selected shall be a director
to serve for the balance of the unexpired term, and until a
successor has been selected and qualified or until his or her
earlier death, resignation or removal."
I will appear at the Annual Meeting to present this proposal."
34
(6) Bylaw Amendments
"To ensure that the foregoing amendments to the Bylaws can
only be amended in the future by the shareholders of the Company, for
whose benefit such amendments are being proposed, I propose that
Section 8.01 of the Bylaws be amended, effective upon adoption at the
Annual Meeting, in its entirety to read as follows:
"Section 8.01. Amendments. These bylaws may be
altered, amended or repealed and new bylaws adopted, either
(i) by vote of the Shareholders at any duly organized annual
or special meeting of Shareholders, or (ii) with respect to
those matters that are not by statute committed expressly to
the Shareholders and regardless of whether the Shareholders
have previously adopted or approved the bylaw being amended or
repealed, by vote of a majority of the Board of Directors of
the corporation in office at any regular or special meeting of
Directors; provided, however, that a vote of the Shareholders
shall be required to amend, repeal or adopt any provision
inconsistent with Section 2.07, the first sentence of Section
3.02, Section 3.14 or this Section 8.01 of these bylaws. Any
change in these bylaws shall take effect when adopted unless
otherwise provided in the resolution affecting the change."
I will appear at the Annual Meeting to present this proposal."
PROPOSAL 2
APPROVAL OF A CHANGE TO THE LONG-TERM INCENTIVE PLAN
In 1997, the Board of Directors and the Class B shareholders of the
Company approved the LTIP, and its continuation was approved by the Class B
shareholders in 2002. The purposes of the LTIP are to (i) enhance the growth and
profitability of the Company by providing the incentive of long-term rewards to
key employees who are capable of having a significant impact on the performance
of the Company, (ii) to attract and retain employees of outstanding competence
and ability and (iii) to further align the interests of such employees with
those of shareholders of the Company.
Under the terms of the current LTIP, the maximum value of phantom share
units that may be earned by any participant may not exceed $500,000 in any
performance period. The Executive Compensation and Development Committee of the
Board of Directors believes that the Company has been competitive with respect
to compensation necessary to attract, reward and retain key executive talent,
and to motivate executive officers to perform to the best of their abilities.
However, current awards to executives under the LTIP are approaching, and in
some cases have reached, the maximum annual limit under the terms of the LTIP.
The Executive Compensation and Development Committee has determined that, in
order to remain competitive with executive compensation, and to continue to
align the goals of management and the shareholders to achieve the short-term and
long-term corporate objectives of enhancing shareholder value and policyholder
security, the maximum value of phantom share units earned by a participant in
any performance period should be increased to $1,000,000.
35
If the proposed change is approved by shareholders, the increased
maximum value limitation will not be applicable to existing performance awards.
If the proposed change is not approved by shareholders, the LTIP will remain in
effect with its current maximum value limitation.
Although the Executive Compensation and Development Committee has the
authority to determine or change the targets under the LTIP under a prior
general approval of the types of performance goals to be used, regulations
promulgated under Section 162(m) of the Code require that the material terms
under which the remuneration is to be paid, including the performance goals, and
any changes thereto, be disclosed to, and approved by, the holders of the
Company's Class B Common Stock.
Summary of the LTIP
The following summary of the LTIP, as proposed to be amended, is
qualified in its entirety by reference to the complete text of the LTIP, a copy
of which is attached as Appendix A to this Proxy Statement.
Term. The effective date of the LTIP was January 1, 1997. The LTIP does
not have a fixed expiration date.
Administration. The LTIP is administered by the Executive Compensation
and Development Committee of the Company's Board of Directors or, in certain
events, by the full Board or a committee of the Board comprised solely of
outside directors (the "LTIP Administrator"). The LTIP Administrator has sole
and complete authority to make awards under the LTIP, to determine the terms and
conditions of such awards and to interpret and make all other determinations
affecting the LTIP.
Participation and Award Estimates. Participation in the LTIP is limited
to officers and other salaried key employees of the Company and its
majority-owned subsidiaries who are selected from time to time by the LTIP
Administrator. A total of approximately 16 employees are eligible for selection
by the LTIP Administrator to participate in the LTIP. Participation in the LTIP
does not preclude participation in any other employee benefit plans of the
Company and does not create any rights to continued employment with the Company.
Because the grant of awards under the LTIP is at the discretion of the LTIP
Administrator, it is not possible to indicate at this time which persons may
receive future awards under the LTIP or the amount of such awards.
Operation of the LTIP
Phantom Share Units. The LTIP provides for the grant, in the discretion
of the LTIP Administrator after receiving the recommendations of chief executive
officer of the Company, of phantom share units to participants in the LTIP. In
connection with any such grant, the LTIP Administrator will establish a
performance period, which must commence at the beginning of the fiscal year for
which performance objectives are established and may not be less than three
consecutive years, and performance objectives for such performance period.
Within 90 days after the end of the performance period, the LTIP Administrator
will determine the total dollar value of the phantom share units held by each
participant for such performance period based on the extent to which the related
performance objectives have been achieved. Each participant will then be
entitled
36
to receive that number of shares of restricted Class A Common Stock equal to the
value of the phantom share units held by such participant, based on the average
fair market value, as defined, of the Class A Common Stock during the 30 days
following the end of the performance period.
In the event of the death, disability or retirement (as defined under
the Company's Retirement Plans) of a participant prior to the end of a
performance period, the number of phantom share units held by such participant
will be determined as of the end of the fiscal year in which such event occurs.
If a participant ceases to be an employee of the Company prior to the end of a
performance period for any other reason, the participant will forfeit all
outstanding phantom share units previously granted under the LTIP.
Restricted Class A Common Stock. The restricted Class A Common Stock,
if any, granted to a participant at the end of a performance period will vest
over a period of not more than three years. The vesting period applicable to any
such shares will be established by the LTIP Administrator at the time of grant
of the related phantom share units. Until such shares vest, the certificates
representing such shares will be held by the Company for the account of the
participant and the participant will have all the rights of a shareholder,
including the right to receive dividends, except that (i) the participant will
not be entitled to receive a certificate representing such shares, (ii) the
shares may not be transferred, sold, assigned, pledged or otherwise encumbered
and (iii) all of such shares shall be forfeited unless, with certain exceptions,
the participant remains in the continuous employment of the Company for the
entire vesting period. If the participant is employed by the Company at the end
of the vesting period, the participant will be entitled to receive certificates
for the Class A Common Stock credited to his or her account under the LTIP free
and clear of all restrictions.
In the event of the death or disability of a participant after the end
of the performance period but prior to the end of a vesting period applicable to
any restricted Class A Common Stock, the participant, or the participant's
estate, will be entitled to receive the shares of Class A Common Stock in the
participant's account without restrictions. If a participant retires during such
period (i.e., voluntarily terminates employment after age 55 with at least five
years of service), the participant will not forfeit such shares, but the other
restrictions on such shares will continue to apply for the remainder of the
applicable vesting period. Finally, if a participant ceases to be an employee of
the Company for any other reason during such period, the participant will
forfeit the Class A Common Stock to which the participant would otherwise be
entitled.
In any case, the LTIP Administrator may, in its sole discretion, permit
a participant to retain the phantom share units or restricted Class A Common
Stock that would otherwise be forfeited under the terms of the LTIP.
In order to avoid dilution, the Company intends to satisfy its
obligations under the LTIP by purchasing shares of Class A Common Stock in the
open market. If such purchases are not practicable because such stock is not
readily available in the marketplace or such purchase would artificially affect
the market price of the Class A Common Stock, then the Company may issue
deferred stock units in lieu of restricted Class A Common Stock and may pay cash
in lieu of the issuance of Class A Common Stock at the expiration of the
applicable vesting period.
Performance Objectives and Section 162(m). The performance objectives
established by the LTIP Administrator for any performance period must based upon
one or more of the following
37
performance measures for the Company as a whole, for the business unit of the
Company in which a participant is involved or a combination thereof: (i)
retained earnings per share plus dividends, (ii) earnings or earnings per share,
(iii) assets or return on assets, (iv) shareholders' equity or return on
shareholders' equity, (v) revenues, (vi) costs, (vii) gross profit margin,
(viii) investment earnings, (ix) loss ratio, (x) combined ratio or (xi) any
other measure determined by the LTIP Administrator to be in the best interests
of the Company.
Section 162(m) of the Code provides, in general, that compensation in
excess of $1,000,000 per year paid to the chief executive officer and the four
other most highly compensated officers of a public company is not deductible to
the corporation; however, certain performance-based compensation may be excluded
from this deductibility limitation if, among other things, (i) the compensation
is paid solely on account of the attainment of one or more performance goals,
(ii) the performance goals are established by a compensation committee
consisting solely of two or more outside directors, (iii) the material terms
under which the compensation is to be paid, including the performance goals, are
disclosed to and approved by the shareholders prior to payment and (iv) prior to
payment, the compensation committee must certify that the performance goals were
in fact satisfied. It is the current intention of the LTIP Administrator to
ensure that all otherwise tax deductible compensation payable under the LTIP be
excludable from the limitation on deductibility imposed by Section 162(m);
however, the LTIP Administrator retains the ability to make awards under the
LTIP that are not eligible for exclusion from Section 162(m) in the event that
it determines that the making of such awards is in the best interests of the
Company.
Maximum Annual Award. The Company has established that the maximum
value of phantom share units that may be earned by any participant under the
LTIP in any year may not exceed $500,000. If approved by the shareholders, the
maximum value of phantom share units that may be earned in any year would be
increased to $1,000,000.
Adjustments. With certain exceptions, the LTIP Administrator may, in
its discretion, at any time adjust the performance objectives applicable to any
phantom share units, adjust the manner in which such performance objectives are
measured, shorten the performance period or shorten the vesting period with
respect to any restricted Class A Common Stock if it determines that conditions
so warrant. Further, the number of phantom share units and shares of restricted
Class A Common Stock will be appropriately adjusted by the LTIP Administrator
for stock dividends, stock splits, recapitalizations, mergers and other changes
in the capitalization of the Company.
Amendment and Termination of the LTIP. The Board of Directors of the
Company may modify, amend or terminate the LTIP at any time except that no
modification, amendment or termination may adversely affect the rights of a
participant under an award previously made without such participant's consent.
Federal Income Tax Consequences. Unless a participant elects to
recognize income at the time of the grant of restricted Class A Common Stock,
there are no federal income tax consequences to a participant or to the Company
upon the grant of phantom share units or upon the issuance of restricted Class A
Common Stock. In either event, a participant recognizes income for federal
income tax purposes in an amount equal to the fair market value of the shares
received (determined as of the date on which the shares become transferable or
not subject to a substantial risk of forfeiture,
38
whichever occurs first) and the Company is entitled to a deduction in a like
amount. The LTIP Administrator may, in its sole discretion, permit a participant
to defer the receipt of all or a portion of the Class A Common Stock payable
upon lapse of applicable restrictions. Further, the LTIP Administrator may, in
its sole discretion, permit a participant to defer the receipt of all or a
portion of the Class A Common Stock payable upon lapse of applicable
restrictions. Further, the LTIP Administrator may permit a participant to
satisfy any income tax withholding obligation of the Company with respect to any
award under the LTIP by withholding a portion of the shares of Class A Common
Stock otherwise payable to the participant or by delivering previously owned
shares of Class A Common Stock.
The following table sets forth target awards granted to the persons who
served as Chief Executive Officer of the Company and the Company's four other
highest paid executive officers during 2002, all current executive officers as a
group and all employees other than executive officers as a group for the
three-year performance period commencing 2003.
NEW PLAN BENEFITS
Long-Term Incentive Plan
Number of
Name and Position Dollar Value(1)($) Phantom Share Units
-------------------------------- --------------------- -----------------------
Milne, Stephen A., President and -- --
Chief Executive Officer(2)
Ludrof, Jeffrey A., President and 605,320 61,302
Chief Executive Officer
Van Gorder, Jan R., Senior Executive 247,787 25,094
Vice President, Secretary and
General Counsel
Garcia, Philip A., Executive Vice 199,644 20,218
President and Chief Financial Officer
Brinling, John J., Jr., Executive Vice 164,148 16,624
President
Ziegler, Douglas F. , Senior Vice President, 132,500 13,419
Treasurer and Chief Investment Officer
Executive Officer Group 1,593,164 161,343
Non-Executive Officer Employee Group 717,474 72,659
-------------
(1) Dollar value represents the target award granted. An executive's
target award is established by the LTIP Administrator. The actual
value of an executive's phantom share units at the end
39
of a performance period may be more or less than the
executive's target award. However, the value of an executive's
phantom share units may not exceed $500,000 at the end of a
performance period.
(2) Mr. Milne served as President and Chief Executive Officer until his
retirement in January 2002. See "Note (4) to the Summary
Compensation Table" for information regarding Mr. Milne's LTIP
awards.
In addition to the awards set forth in the above table, a table setting
forth target awards granted to the persons who served as the Company's Chief
Executive Officer and its four other highest paid executive officers during
2002, all current executive officers as a group and all employees other than the
executive officers as a group for the three-year performance periods commencing
2000, 2001 and 2002 is set forth under "Executive Compensation -- Long-Term
Incentive Plan." In addition, the Summary Compensation Table sets forth the
dollar value of restricted stock awards and the dollar value of awards that
became unrestricted under the LTIP for 2000 and 2001. Such information for 2002
and ensuing years cannot yet be determined.
Because executive officers of the Company (two of whom are members of
the Board of Directors) are eligible to receive awards under the LTIP, each of
them has a personal interest in the proposal to approve the change to the LTIP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE CHANGE TO
THE LTIP.
SELECTION OF INDEPENDENT AUDITORS
On September 10, 2002, the Company's Audit Committee selected Ernst &
Young, LLP to be the Company's independent auditors for the fiscal year ending
December 31, 2003. Malin, Bergquist & Company, LLP (M,B&C) continued as the
Company's independent auditors for the fiscal year ended December 31, 2002. On
March 28, 2003, Ernst & Young, LLP succeeded M,B&C as the Company's independent
auditors.
The Audit Committee of the Company annually considers the selection of
the Company's independent auditors. In previous years, the Audit Committee would
recommend the appointment of the independent auditors to the Company's Board of
Directors for shareholder ratification. At its meeting of September 9, 2002, the
Company's Board of Directors amended the Bylaws of the Company, consistent with
the provisions of the Sarbanes-Oxley Act of 2002, to give the Audit Committee
sole authority to engage the Company's independent auditors.
M,B&C's reports on the Company's consolidated financial statements for
the past two years did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's two most recent fiscal years and through March 27,
2003, there were no disagreements with M,B&C on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to M,B&C's satisfaction, would have caused them
to make reference to the subject matter in connection with their report on the
Company's
40
consolidated financial statements for such years; and there were no
reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.
The Company provided M,B&C with a copy of the foregoing disclosures.
The Company's Report on Form 8-K/A dated March 27, 2003 included as Exhibit 16.1
a copy of M,B&C's letter, dated March 27, 2003, stating its agreement with such
statements.
During the Company's two most recent fiscal years and through March 27,
2003, the Company did not consult Ernst & Young, LLP with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, or any other matters or
reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Representatives from Ernst & Young LLP and M, B & C are expected to
attend the Annual Meeting and will have the opportunity to make a statement if
they so desire. Such representatives are expected to be available at the Annual
Meeting to respond to appropriate questions.
REPORT OF THE AUDIT COMMITTEE OF THE COMPANY
The Audit Committee is comprised of four directors, all of whom are
independent as independence is defined in Rule 4200(a)(14) of the National
Association of Securities Dealers' listing standards and all of whom satisfy the
financial literacy requirements thereof. The Board of Directors has adopted a
written charter for the Audit Committee, which is included as Appendix B to this
Proxy Statement.
The Audit Committee, which met seven times during 2002, has
responsibility, consistent with the requirements of Section 1405(c)(4) of the
Pennsylvania Insurance Holding Companies Act and the Company's Bylaws, for the
selection of independent auditors, reviewing the scope and results of the audit
and reviewing the adequacy of the Company's accounting, financial, internal and
operating controls. The Audit Committee has reviewed the requirements of the
Sarbanes-Oxley Act of 2002 (the "Act") and the associated regulations and
proposed regulations of the SEC as they pertain to audit committees. The Audit
Committee has initiated a process to comply fully with the requirements of the
Act and the rules and regulations of the SEC by the effective date of the
respective final regulations.
The Audit Committee reviews the Company's financial reporting process
on behalf of the Board of Directors. In fulfilling its responsibilities, the
Audit Committee reviewed and discussed the Company's audited consolidated
financial statements for the year ended December 31, 2002 with management.
The Audit Committee discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended. In addition, the Audit
Committee received and reviewed the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has discussed with the
independent auditors their independence.
41
The Audit Committee reviewed and discussed with the independent
auditors the following fees for services, none of which were deemed to be for
consulting services, rendered for the 2002 fiscal year and has considered the
compatibility of non-audit services with the auditor's independence:
Erie Indemnity Erie Insurance Other
Company and Exchange and Affiliated
Subsidiaries Subsidiary Entities
-------------- -------------- -----------
Audit fees $91,940 $86,510 $76,520
Financial information systems 0 0 0
design and implementation
All other fees 16,000 0 2,025
Based upon the discussions and reviews referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 for filing with the SEC.
Erie Indemnity Company Audit Committee:
Robert C. Wilburn, Chairman
Patricia Garrison-Corbin
Samuel P. Katz
Claude C. Lilly III
March 11, 2003
ANNUAL REPORT
A copy of the Company's Annual Report for 2002 is being mailed to all
holders of Class A Common Stock and Class B Common Stock with this Proxy
Statement.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions
of Rule 14a-8 of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in the Company's proxy statement for its 2004 Annual Meeting of
Shareholders must deliver such proposal in writing to the Company's Secretary at
the Company's principal executive offices at 100 Erie Insurance Place, Erie,
Pennsylvania 16530, not later than December 3, 2003.
Pursuant to Section 2.07 of the Company's Bylaws, the full text of
which follows, if a shareholder desires to present at the 2004 Annual Meeting of
Shareholders (i) a proposal to the Nominating Committee relating to candidates
for consideration and decision as to their nomination for election as directors
by shareholders or (ii) a proposal relating to other than nominations for and
election of directors, otherwise than pursuant to Rule 14a-8 of the proxy rules
of the SEC, such
42
shareholder must comply with the provisions for shareholder proposals set
forth in Section 2.07 of the Company's Bylaws, including the delivery of such
proposal in writing to the Company's Secretary, 100 Erie Insurance Place, Erie,
Pennsylvania 16530, no earlier than December 3, 2003 and no later than January
2, 2004 as follows:
Section 2.07 Shareholders Proposals.
(a) Shareholder Proposals Relating to Candidates for Election as
Directors.
(1) A Shareholder, whether or not entitled to vote in the
election of Directors, may propose to the Nominating Committee of the Board of
Directors one or more persons who the Shareholder believes would be appropriate
candidates for election by Shareholders as a Director at any meeting of
Shareholders at which Directors are to be elected. Such proposal shall be made
by notice in writing, delivered in person or by first class United States mail
postage prepaid or by reputable overnight delivery service, to the Nominating
Committee of the Board of Directors of the corporation to the attention of the
Secretary of the corporation at the principal office of the corporation, within
the time limits specified herein and otherwise in accordance with this Section
2.07(a).
(2) In the case of an annual meeting of Shareholders, any such
written proposal by a Shareholder must be received by the Nominating Committee
not less than 90 calendar days nor more than 120 calendar days before the first
anniversary of the date on which the corporation first mailed its proxy
statement to Shareholders for the annual meeting of Shareholders in the
immediately preceding year; provided, however, that in the case of an annual
meeting of Shareholders that is called for a date which is not within 30
calendar days before or after the first anniversary date of the annual meeting
of Shareholders in the immediately preceding year, any such written proposal by
a Shareholder must be received by the Nominating Committee within 5 business
days after the earlier of the date the corporation shall have mailed notice to
its Shareholders that an annual meeting of Shareholders will be held, issued a
press release, filed a periodic report with the Securities and Exchange
Commission (the "SEC"), or otherwise publicly disseminated notice that an annual
meeting of Shareholders will be held.
(3) In the case of a special meeting of Shareholders, any such
written proposal by a Shareholder must be received by the Nominating Committee
within 5 business days after the earlier of the date that the corporation shall
have mailed notice to its Shareholders that a special meeting of Shareholders
will be held, issued a press release, filed a periodic report with the SEC, or
otherwise publicly disseminated notice that a special meeting of Shareholders
will be held.
(4) Such written proposal by a Shareholder shall set forth (A)
the name and address of the Shareholder who has made the proposal, (B) the name,
age, business address and, if known, residence address of each person so
proposed, (C) the principal occupation or employment for the past five years,
(D) the number of shares of capital stock of the corporation beneficially owned
within the meaning of SEC Rule 13d-3 by each person so proposed and the earliest
date of acquisition of any such capital stock, (E) a description of any
arrangement or understanding between each person so proposed and the proposing
Shareholder with respect to such person's proposal, election as a Director, and
actions to be proposed or taken by such person if elected as a Director, (F) the
written consent of each person so proposed to serve as a Director if nominated
and elected as a Director and
43
(G) such other information regarding each such person as would be required under
the proxy solicitation rules of the SEC if proxies were to be solicited for the
election as a Director of each person so proposed.
(5) If a written proposal by a Shareholder submitted to the
Nominating Committee fails, in the reasonable judgment of the Nominating
Committee, to contain the information specified in clause (4) hereof or is
otherwise deficient, the Chairperson of the Nominating Committee shall, as
promptly as is practicable under the circumstances, provide written notice to
the Shareholder of such failure or deficiency in the written proposal by a
Shareholder and such Shareholder shall have 5 business days from receipt of such
notice to submit a revised written proposal that corrects such failure or
deficiency in all material respects.
(b) Shareholder Proposals Relating to Matters Other Than Candidates
for Election as Directors.
(1) A Shareholder of the corporation may bring a matter (other
than a proposal to the Nominating Committee of a candidate for election as
a Director by shareholders which is covered by subsection (a) of this Section
2.07) before a meeting of Shareholders only if (A) such matter is a proper
matter for Shareholder action and such Shareholder shall have provided notice in
writing, delivered in person or by first class United States mail postage
prepaid or by reputable overnight delivery service, to the Secretary of the
corporation at the principal office of the corporation, within the time limits
specified herein or (B) the Shareholder complies with the provisions of Rule
14a-8 under the Securities Exchange Act of 1934 (as amended) relating to
inclusion of shareholder proposals in the corporation's proxy statement.
(2) In the case of an annual meeting of Shareholders, any such
written notice of presentation of a matter by a Shareholder must be received by
the Secretary of the corporation not less than 90 calendar days nor more than
120 days before the first anniversary of the date on which the corporation first
mailed its proxy statement to Shareholders for the annual meeting of
Shareholders in the immediately preceding year; provided, however, that in the
case of an annual meeting of Shareholders that is called for a date which is not
within 30 calendar days before or after the first anniversary date of the annual
meeting of Shareholders in the immediately preceding year, any such written
notice of presentation by a Shareholder of a matter must be received by the
Secretary of the corporation within 5 business days after the earlier of the
date the corporation shall have mailed notice to its Shareholders that an annual
meeting of Shareholders will be held, issued a press release, filed a periodic
report with the SEC, or otherwise publicly disseminated that an annual meeting
of Shareholders will be held.
(3) In the case of a special meeting of Shareholders, any such
written notice of presentation of a matter by a Shareholder must be received by
the Secretary of the corporation within 5 business days after the earlier of the
date the corporation shall have mailed notice to its Shareholders that a special
meeting of Shareholders will be held, issued a press release, filed a periodic
report with the SEC, or otherwise publicly disseminated notice that a special
meeting of Shareholders will be held.
(4) Such written notice of presentation of a matter by a
Shareholder shall set forth information regarding such matter equivalent to the
information regarding such matter that would be
44
required under the proxy solicitation rules of the SEC if proxies were solicited
for Shareholder consideration of such matter at a meeting of Shareholders.
(5) If a written notice of presentation of a matter submitted
by a Shareholder to the Board of Directors fails, in the reasonable judgment of
the Board of Directors, to contain the information specified in clause (4)
hereof or is otherwise deficient, the Chairperson of the Board of Directors
shall, as promptly as is practicable under the circumstances, provide written
notice to the Shareholder who submitted the written notice of presentation of a
matter of such failure or deficiency in the written notice of presentation of a
matter and such Shareholder shall have 5 business days from receipt of such
notice to submit a revised written notice of presentation of a matter that
corrects such failure or deficiency in all material respects.
(6) Only matters submitted in accordance with the foregoing
provisions of this Section 2.07(b) shall be eligible for presentation of such
meeting of Shareholders, and any matter not submitted to the Board of Directors
in accordance with such provisions shall not be considered or acted upon at such
meeting of Shareholders.
OTHER MATTERS
The Board of Directors does not know of any matter to be presented for
consideration at the Annual Meeting other than the matters described in the
Notice of Annual Meeting and in this Proxy Statement under the caption "Mrs.
Hagen's Shareholder Proposals," but if any matters are properly presented,
execution of the proxy enclosed herewith shall confer discretionary authority
upon the persons named to vote on any other matter presented at the Annual
Meeting unless prohibited by applicable provisions of the Exchange Act.
By Order of the Board of Directors,
/s/ Jan R. Van Gorder
Jan R. Van Gorder,
Senior Executive Vice President,
Secretary and General Counsel
April 1, 2003
Erie, Pennsylvania
45
APPENDIX A
----------
ERIE INDEMNITY COMPANY
LONG-TERM INCENTIVE PLAN
1. GENERAL
--------------
1.1 Purpose.
--------
The purposes of the Long-Term Incentive Plan (the "Plan") are: (a) to
enhance the growth and profitability of Erie Indemnity Company, a
Pennsylvania business corporation ("Erie"), and its subsidiaries and
affiliates by providing the incentive of long-term rewards to key
employees who are capable of having a significant impact on the
performance of Erie and its subsidiaries and affiliates; (b) to attract
and retain employees of outstanding competence and ability and (c) to
further align the interests of such employees with those of
shareholders of Erie.
1.2 Definitions.
------------
For the purpose of the Plan, the following terms shall have the
meanings indicated:
(a) "Board of Directors" or "Board" shall mean the Board of
Directors of Erie.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended, including any successor law thereto.
(c) "Company" shall mean Erie and any corporation, partnership, or
other organization of which Erie, directly or indirectly, owns
or controls not less than 50% of the total combined voting
power of all classes of stock or other equity interests. For
purposes of this Plan, the terms "Erie" and "Company" shall
include any successor thereto.
(d) "Common Stock" shall mean the Class A (non-voting) Common
Stock of Erie and a "share of Common Stock" shall mean one
share of Common Stock.
(e) "Disability" shall mean total and permanent disability within
the meaning of Section 22(e)(3) of the Code.
(f) "Fair Market Value" of shares of Common Stock on any given
date(s) shall be: (a) the daily average of the high and low
sales prices on the Nasdaq National Market System of such
shares on the date(s) in question, or, if the shares of Common
Stock shall not have been traded on any such date(s), the
closing price on the Nasdaq National Market System on the
first day prior thereto on which the shares of Common Stock
were so traded; or (b) if the shares of Common Stock are not
traded on the Nasdaq National Market System, such other amount
as may be determined by the Plan Administrator by any fair and
reasonable means.
(g) "Participant" shall mean any key employee who has met the
eligibility requirements set forth in Section 1.4 hereof and
to whom a grant has been made and is outstanding under the
Plan.
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(h) "Performance Period" shall mean, in relation to Phantom Share
Units, any period, for which performance objectives have been
established pursuant to Article 2.
(i) "Phantom Share Unit" shall mean a right granted to a
Participant pursuant to Article 2.
(j) "Plan Administrator" shall mean: (i) the Executive
Compensation and Development Committee of the Board of
Directors (the "Committee"), or its functional successor,
unless some other Board committee has been designated by the
Board of Directors to administer the Plan or any portion of
the Plan; or (ii) in the event that the Committee is not
comprised of two or more "Non-Employee Directors" within the
meaning of Rule 16b-3(a)(3) promulgated under Section 16 of
the Securities Exchange Act of 1934, then the Plan
Administrator shall, with respect to officers and directors
subject to Section 16, be the Board.
(k) "Restricted Share" shall mean a share of Common Stock granted
to a Participant pursuant to Article 3, subject to the
restrictions set forth in Section 3.1 hereof.
(l) "Retirement" shall mean the cessation of employment with the
Company after reaching age 55 and having completed at least 5
years of service.
(m) "Vesting Period" shall mean in relation to Restricted Shares
receivable in payment for Phantom Share Units, the period of
time during which such shares are subject to restrictions on
transferability and may be forfeited if the Participant's
employment is terminated during such period.
1.3 Administration.
---------------
The Plan shall be administered by the Plan Administrator and the Plan
Administrator shall act in accordance with the procedures established
under Erie's Articles of Incorporation, Bylaws and under any resolution
of the Board. Subject to the provisions of the Plan, the Plan
Administrator shall have sole and complete authority to: (i) subject to
Section 1.4 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the
number of Phantom Share Units or Restricted Shares subject to each
grant; (iii) determine the time or times when grants are to be made or
are to be effective; (iv) determine the terms and conditions, including
the performance objectives, subject to which grants may be made; (v)
extend the term of any grant; (vi) prescribe the form or forms of the
instruments evidencing any grants made hereunder, provided that such
forms are consistent with the Plan; (vii) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (viii) construe and interpret the Plan and
all rules, regulations, and instruments utilized thereunder; and (ix)
make all determinations deemed advisable or necessary for the
administration of the Plan. All determinations by the Plan
Administrator shall be final and binding.
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1.4 Eligibility and Participation.
-------------------------------
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried key employees of
the Company as identified by the Plan Administrator to participate in
the Plan.
2. PROVISIONS APPLICABLE TO PHANTOM SHARE UNITS
--------------------------------------------------
2.1 Performance Periods.
--------------------
The Plan Administrator shall establish Performance Periods applicable
to Phantom Share Units. Each such Performance Period shall commence
with the beginning of a fiscal year in which performance objectives are
established and have a duration of not less than three consecutive
fiscal years.
2.2 Performance Objectives.
-----------------------
The Plan Administrator shall establish one or more performance
objectives for each Performance Period, provided that such performance
objectives shall be established prior to the grant of any Phantom Share
Units with respect to such period. Performance objectives shall be
based on one or more of the following measures: (i) retained earnings
per share plus dividends, (ii) earnings or earnings per share, (iii)
assets or return on assets, (iv) shareholders' equity or return on
shareholders' equity, (v) revenues, (vi) costs, (vii) gross profit
margin, (viii) investment earnings, (ix) loss ratio, (x) combined
ratio, or (xi) any other measure determined by the Plan Administrator
to be in the best interests of the Company. The Plan Administrator may,
in its discretion, establish performance objectives for the Company as
a whole or for only the business unit of the Company in which a given
Participant is involved, or a combination thereof.
2.3 Grants of Phantom Share Units.
------------------------------
The Plan Administrator may select employees to become Participants
(subject to the provisions of Section 1.4 hereof) and grant Phantom
Share Units to such Participants at any time prior to or during the
first fiscal year of a Performance Period. Before making grants, the
Plan Administrator shall receive the recommendations of the Chief
Executive Officer of the Company, which will take into account such
factors as level of responsibility, current and past performance, and
performance potential. Each grant to a Participant shall be evidenced
by a written instrument stating the number of Phantom Share Units
granted, the target value of each Phantom Share Unit, the Performance
Period, the performance objective or objectives, the Vesting Periods
and restrictions applicable to Restricted Shares receivable in payment
for Phantom Share Units and any other terms, conditions and rights with
respect to such grant.
2.4 Adjustment With Respect to Phantom Share Units.
-----------------------------------------------
Any other provision of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time adjust performance objectives (up or
down), adjust the way performance
A-3
objectives are measured, or shorten any Performance Period, if it is
determined that conditions, including, but not limited to, changes in
the economy, changes in competitive conditions, changes in laws or
governmental regulations, changes in generally accepted accounting
principles, changes in the Company's accounting policies, acquisitions
or dispositions, stock redemptions, reductions or increases in the
management fee rate payable to Erie by Erie Insurance Exchange,
reductions to shareholders' equity due to reductions or increases in
net unrealized gains on available-for-sale securities or the
occurrence of other events impacting the performance objectives, so
warrant; provided, however, that the Plan Administrator may not make
any such adjustment that would increase the economic benefit to any
"covered employee" as defined in Section 162(m) of the Code.
2.5 Maximum Annual Award.
---------------------
The maximum value of Phantom Share Units that may be earned by any
Participant in any year shall not exceed $1,000,000.
2.6 Payment for Phantom Share Units.
--------------------------------
Within 90 days after the end of any Performance Period, the Plan
Administrator shall determine the total dollar value of Phantom Share
Units held by each Participant for such Performance Period. Payment for
Phantom Share Units shall be in the form of Restricted Shares and shall
be subject to the terms and conditions of Section 3 hereof. Such Common
Stock shall be purchased in the open market, provided however, that if
the Common Stock of the Company is not readily available in the
marketplace, or purchase of the Common Stock for Restricted Shares
would artificially affect the price of the Common Stock, in the sole
discretion of the Plan Administrator, Restricted Shares shall be
payable in deferred stock units equal in value to the number of shares
of Common Stock that would have been paid to the Participant had the
Common Stock been available in the marketplace. The number of
Restricted Shares (or stock unit equivalents) granted shall be equal to
the actual total value of the Phantom Share Units at the end of the
Performance Period divided by the average price of the Fair Market
Value of the Common Stock for the month following the end of the
Performance Period, rounded up to the nearest whole share.
2.7 Termination of Employment.
--------------------------
(a) Prior to the end of a Performance Period:
(i) Death, Disability or Normal Retirement: If a Participant
ceases to be an employee of the Company prior to the
end of a Performance Period by reason of death, Disability
or Normal Retirement (as defined in the Company's qualified
Retirement Plan for Employees), the Performance Period for
outstanding Phantom Share Units shall be deemed to end as of
the end of the fiscal year in which such event occurred. The
total dollar value of Phantom Share Units held by such
Participant shall be based upon performance during the
reduced Performance Period and will be paid in the form of
shares of Common Stock in the manner provided for by Section
2.6. Any shares of Common Stock payable pursuant to this
Section 2.7 shall be free of any
A-4
restrictions or risk of forfeiture under the Plan and
shall be registered in the name of the Participant or the
Participant's beneficiary or estate, as the case may be,
as soon as practicable after the end of the applicable
Performance Period.
(ii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Performance Period for any
reason other than death, Disability or Normal Retirement,
the Participant shall immediately forfeit all Phantom Share
Units previously granted under the Plan. The Plan
Administrator may, however, in its sole discretion, permit a
Participant to retain all or a portion of the Participant's
Phantom Share Units if it finds that the circumstances in
the particular case so warrant.
(b) After the end of a Performance Period, but prior to
the end of a Vesting Period:
(i) Death or Disability: If a Participant ceases to be an
employee of the Company by reason of death or Disability,
the Vesting Period shall be deemed to have ended and shares
of Common Stock held by the Company with respect to
Restricted Shares earned by such Participant shall be paid
as soon as practicable in the manner set forth in Section
3.4 hereof.
(ii) Retirement: The Retirement of a Participant shall not
constitute a termination of employment for purposes of this
Section 2.7(b), and such Participant shall not forfeit any
Common Stock held by the Company with respect to Restricted
Shares earned by such Participant.
(iii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Vesting Period for any reason
other than death, Disability or Normal Retirement, the
Participant shall immediately forfeit all unvested
Restricted Shares previously granted with respect to such
Vesting Period in accordance with the provisions of Section
3.2(c) hereof, unless the Plan Administrator, in its sole
discretion, finds that the circumstances in the particular
case so warrant and allows a Participant whose employment
has so terminated to retain any or all of the Restricted
Shares granted to such Participant.
3. PROVISIONS APPLICABLE TO RESTRICTED SHARES
------------------------------------------------
3.1 Vesting Periods.
----------------
At the time a Phantom Share Unit award is made, the Plan Administrator
shall establish a Vesting Period applicable to Restricted Stock which
shall not be more than three years. The Plan Administrator may provide
for the lapse of all or a portion of such Vesting Period in
installments and may accelerate or waive such Vesting Period, in whole
or in part, based on such factors as the Plan Administrator may
determine.
A-5
3.2 Rights and Restrictions Governing Restricted Shares.
----------------------------------------------------
At the time of payment in Restricted Shares, subject to the receipt by
the Company of any applicable consideration for such Restricted Shares,
one or more certificates representing the appropriate number of shares
of Common Stock granted to a Participant shall be registered either in
the Participant's name or for the Participant's benefit either
individually or collectively with others, but shall be held by the
Company for the account of the Participant. The Participant shall have
all rights of a holder as to such shares of Common Stock, including the
right to receive dividends, subject to the following restrictions: (a)
the Participant shall not be entitled to delivery of certificates
representing such shares of Common Stock and any other such securities
until the expiration of the applicable Vesting Period; (b) none of the
Restricted Shares may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the applicable Vesting
Period; and (c) all of the Restricted Shares shall be forfeited and all
rights of the Participant to such Restricted Shares shall terminate
without further obligation on the part of the Company unless the
Participant remains in the continuous employment of the Company for the
entire Vesting Period or portion thereof in relation to which such
Restricted Shares were granted, except as otherwise allowed by Section
2.7 hereof. At the time of payment in Restricted Shares, if the Common
Stock of the Company is not readily available in the marketplace, or
purchase of the Common stock would artificially affect the price of the
Common Stock, in the sole discretion of the Plan Administrator, then in
that event, the Company shall have the option to pay to the Participant
in cash the Fair Market Value of the Restricted Shares on such payment
date.
3.3 Adjustment with Respect to Restricted Shares.
---------------------------------------------
Any other provisions of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time shorten any Vesting Period, if it
determines that conditions, including but not limited to, changes in
the economy, changes in competitive conditions, changes in laws or
governmental regulations, changes in generally accepted accounting
principles, changes in the Company's accounting policies, acquisitions
or dispositions, or the occurrence of other unusual, unforeseen, or
extraordinary events, so warrant.
3.4 Payment of Restricted Shares.
-----------------------------
In the event that a Participant is still employed by the Company at the
end of the Vesting Period or portion thereof, all applicable
restrictions shall lapse as to Restricted Shares granted in relation to
such Vesting Period, and one or more stock certificates for the
appropriate number of shares of Common Stock, free of restrictions,
shall be delivered to the Participant or such shares shall be credited
to a brokerage account if the Participant so directs.
3.5 Deferral of Payment.
---------------------
The Plan Administrator may, in its sole discretion, offer a Participant
the right, by execution of a written agreement, to defer the receipt of
all or any portion of the payment, if any, for Restricted Shares. If
such an election to defer is made, the Common Stock receivable in
payment for Restricted Shares shall be deferred as stock units equal in
number to the number
A-6
of shares of Common Stock that would have been paid to the
Participant. Such stock units shall represent only a contractual right
and shall not give the Participant any interest, right, or title to
any Common Stock during the deferral period. The cash receivable in
payment for fractional shares receivable for Restricted Shares shall
be deferred as cash units. Deferred cash units may be credited
annually with an appreciation factor specified in the deferred
compensation agreement, which will include dividend equivalents. At
the end of the deferral period, deferred stock units and cash units
shall be paid in Common Stock, except that any payment attributable to
fractional shares shall be paid in cash. All other terms and
conditions of deferred payments shall be as contained in a written
deferred compensation agreement.
4.MISCELLANEOUS
--------------------
4.1 Designation of Beneficiary.
---------------------------
A Participant may designate, in a writing delivered to the Company
before the Participant's death, a person or persons to receive, in the
event of the Participant's death, any rights to which the Participant
would be entitled under the Plan. A Participant may also designate an
alternate beneficiary to receive payments if the primary beneficiary
does not survive the Participant. A Participant may designate more than
one person as the Participant's beneficiary or alternate beneficiary,
in which case such persons would receive payments as joint tenants with
a right of survivorship. A beneficiary designation may be changed or
revoked by a Participant at any time by filing a written statement of
such change or revocation with the Company. If a Participant fails to
designate a beneficiary, then the Participant's estate shall be deemed
to be the Participant's beneficiary.
4.2 Employment Rights.
------------------
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant,
and a grant under the Plan shall not be construed as giving any
Participant any right to be retained in the employ of the Company.
4.3 Nontransferability.
-------------------
A Participant's rights under the Plan, including the right to any
amounts or shares payable, may not be assigned, pledged, or otherwise
transferred except, in the event of a Participant's death, to the
Participant's designated beneficiary or, in the absence of such a
designation, by will or the laws of descent and distribution.
4.4 Withholding.
-------------
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to
any brokerage account, to deduct or withhold from any payment under the
Plan any federal, state, local or other taxes, including transfer
taxes, required by law to be withheld or to require the Participant or
the Participant's beneficiary or estate, as the case may be, to pay any
amount, or the balance of any amount, required to be withheld.
A-7
If and to the extent withholding of any federal, state or local tax is
required in connection with the lapse of restrictions with respect to
Restricted Shares earned pursuant to Phantom Share Units, the
Participant may elect to pay such amount in cash or: (i) have the
Company hold back from the shares to be delivered, stock having a value
calculated to satisfy such withholding obligations; (ii) deliver
previously-owned shares of Common Stock held by the Participant having
a value equal to the tax withholding obligation provided that the
previously owned shares have been held for at least six months; or
(iii) utilize a combination of the foregoing procedures.
4.5 Relationship to Other Benefits.
--------------------------------
No payment under the Plan shall be taken into account in determining
any benefits under any retirement, group insurance, or other employee
benefit plan of the Company. The Plan shall not preclude the
shareholders of Erie, the Board of Directors or any committee thereof,
or the Company from authorizing or approving other employee benefit
plans or forms or incentive compensation, nor shall it limit or prevent
the continued operation of other incentive compensation plans or other
employee benefit plans of the Company or the participation in any such
plans by Participants in the Plan.
4.6 No Trust or Fund Created.
-------------------------
Neither the Plan nor any grant made hereunder shall create or be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company and a Participant or any other person.
To the extent that any person acquires a right to receive payments from
the Company pursuant to a grant under the Plan, such right shall be no
greater than the right of any unsecured general creditor of the
Company.
4.7 Expenses.
---------
The expenses of administering the Plan shall be borne by the Company.
4.8 Indemnification.
----------------
Service on the Committee shall constitute service as a member of the
Board of Directors so that members of the Committee shall be entitled
to indemnification and reimbursement as directors of the Company
pursuant to its Articles of Incorporation, ByLaws, or resolutions of
its Board of Directors or shareholders.
4.9 Tax Litigation.
----------------
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is
related to the Plan and that the Company believes to be important to
Participants in the Plan and to conduct any such contest or any
litigation arising therefrom to a final decision.
A-8
4.10 Antidilution.
---------------
Phantom Share Units and Restricted Shares shall be subject to
appropriate adjustment by the Plan Administrator as to the number and
price of shares of Common Stock or other considerations subject to such
grants in the event of changes in the outstanding shares by reason of
stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, combinations, exchanges, or other relevant
changes in capitalization occurring after the date of grant.
5. AMENDMENT AND TERMINATION
--------------------------------
The Board of Directors may modify, amend, or terminate the Plan at any
time except that no modification, amendment, or termination of the Plan
shall adversely affect the rights of a Participant under a grant
previously made to a Participant without the consent of such
Participant.
6. INTERPRETATION
--------------------
6.1 Governmental and Other Regulations.
-----------------------------------
The Plan and any grant hereunder shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by
any regulatory or governmental agency that may, in the opinion of the
counsel for the Company, be required.
6.2 Governing Law.
---------------
The Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the Commonwealth of
Pennsylvania applicable to contracts entered into and performed
entirely in such Commonwealth.
7. EFFECTIVE DATE AND SHAREHOLDER APPROVAL
---------------------------------------------
The Plan shall be effective as of January 1, 1997.
A-9
APPENDIX B
------------
ERIE INDEMNITY COMPANY
AUDIT COMMITTEE CHARTER
I. Audit Committee Purpose
The Audit Committee shall be appointed by the Board of Directors of Erie
Indemnity Company (hereafter "the Company") to assist the Board in overseeing
(1) the integrity of the financial statements of the Company provided to
shareholders and others; (2) the compliance by the Company with financial
accounting and legal and regulatory requirements; (3) the independence and
performance of the Company's internal and independent auditors; and (4) the
systems of control over financial reporting. In this context, the Company shall
also include Erie Insurance Exchange, and its affiliated companies, for which
Erie Indemnity Company is the attorney-in-fact.
II. Audit Committee Appointment, Composition, and Meeting Protocol
The members of the Audit Committee shall be appointed by the Board, and shall
meet independence and experience requirements of the applicable federal
securities law, the Pennsylvania Insurance Holding Company Law, and the NASDAQ
Stock Market of the National Association of Securities Dealers, Inc. (hereafter
"NASDAQ" or "NASD").
The Audit Committee shall be comprised of at least three directors, the exact
number to be determined by the Board, each of whom shall be independent
directors as required by applicable statutory requirements and each member of
the Audit Committee shall be free from any relationship that would interfere
with the exercise of his or her independent judgment.
All members of the Audit Committee shall be able to read and understand the
financial statements, including the Company's balance sheet, income statements,
and cash flow statements, or become able to do so within a reasonable period of
time after his or her appointment to the Audit Committee. At least one member of
the Audit Committee shall be a financial expert as defined by the Securities and
Exchange Commission. Audit Committee members shall not simultaneously serve on
the audit committees of more than two other public companies.
The Audit Committee Chair shall be designated by the Board.
The Audit Committee shall meet at least four times annually or more frequently
as necessary and appropriate. A quorum of committee members shall be present at
any meeting at which final action or approval is to be taken or made. A quorum
shall be present if a majority of committee members are present in person or by
other means and in the case of an Audit Committee of three or four members, by
the attendance, in person or otherwise, of two or more committee members. An
agenda for each meeting shall be prepared in advance of each meeting and may be
developed in consultation with management, other committee members, and/or the
independent auditors. The Audit Committee may request any officer or employee of
the Company or the Company's outside legal counsel or independent auditor to
attend a meeting of the Committee or to meet with members of, or consultants to,
the Committee.
B-1
III. Audit Committee Responsibilities and Duties
The Audit Committee shall have the following responsibilities and duties:
1. Review and reassess the adequacy of this Charter at least annually and
recommend any proposed changes to the Board for approval.
2. Review the annual audited financial statements prior to filing or
distribution. The review should include discussions with management and the
independent auditors of any significant issues regarding accounting principles,
practices and judgments.
3. Consider the integrity of the Company's financial reporting processes and
controls in consultation with management, the independent auditors and the
internal auditors. Discuss significant financial risk exposures and the steps
management has taken to monitor, control, and report such exposures and to
identify any payments or procedures that might be deemed illegal or improper.
Review significant findings presented by the independent auditors and the
internal audit department together with management's responses.
4. Review with management and the independent auditors, the Company's quarterly
financial statements prior to the public release of earnings and the filing or
distribution of the quarterly financial statements. The review shall encompass
discussion of any significant issues arising during the independent auditors'
limited review procedures.
5. Review and discuss any significant changes to the Company's accounting
principles and any items required to be communicated by the independent auditors
in accordance with the American Institute of Certified Public Accountants
Statements of Auditing Standards.
6. Select, evaluate, and, if appropriate, replace the independent auditor. The
independent auditors are ultimately accountable to the Board of Directors and
the Audit Committee, as representatives of shareholders.
7. Approve the fees and other significant compensation to be paid to the
independent auditors for the purpose of preparing or issuing an audit report or
related work. The Company shall provide for appropriate funding, as determined
by the Audit Committee, for payment of fees and other significant compensation
to the independent auditor.
8. Preapprove all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Company by its independent
auditor, subject to the de minimis exceptions for non-audit services described
in the Securities Exchange Act of 1934. The Committee may delegate preapproval
authority to a member provided that decisions of such member shall be presented
to the full Audit Committee at its next scheduled meeting.
9. Review and discuss with the independent auditors annually all significant
relationships they have with the Company that could impair the auditors'
independence.
10. Review the independent auditors' audit plan and engagement letter to
determine if it is sufficiently detailed and covers any significant areas of
concern the Audit Committee may have. This
B-2
review should include the scope, staffing, locations, reliance upon management
and internal audit and general audit approach.
11. Review and discuss the fourth quarter and year-end earnings with the
independent auditors prior to the public release of the year-end results.
12. Review and consider the independent auditors' judgment regarding the quality
and appropriateness of the Company's accounting principles as applied in its
financial reporting.
13. Discuss with the independent and internal auditors whether there are any
reportable instances of internal control weaknesses.
14. Review management's assertion on its assessment of the effectiveness of
internal controls as of the end of the most recent fiscal year and the
independent auditors' report on management's assertion.
15. Establish procedures for the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employee of
concerns regarding questionable accounting or auditing matters.
16. Review with management the appointment, performance and replacement of the
senior internal audit executive.
17. Review with the Company's General Counsel on at least an annual basis, i.)
any legal matters that could have a significant impact on the Company's
financial statements, ii.) the Company's compliance with applicable laws and
regulations, and iii.) inquiries received from regulators or governmental
agencies.
18. Prepare annually a report to shareholders, to be included in the Company's
annual proxy statement, as required by the SEC. The report should include a
statement that the Audit Committee has reviewed and discussed the audited
financial statements with management; discussed with the independent auditors,
the matters required to be discussed by Statements of Auditing Standards;
reviewed the written disclosure from the independent auditors regarding their
independence; and recommended to the Board of Directors that the audited
financial statements be filed with the SEC.
19. File and attach the Audit Committee Charter as an appendix to the proxy
statement at least once every three years.
20. Obtain from the independent auditor, assurance that Section 10A of the
Securities Exchange Act of 1934, as amended (relating to the disclosure of
illegal acts), has not been implicated.
21. Prepare and maintain minutes of its meetings.
22. Periodically report to the Board of Directors on significant results of its
activities.
23. Perform such other duties and activities consistent with the intent and
spirit of this charter, the Company's bylaws, and governing law, as the Audit
Committee deems necessary or appropriate.
B-3
ERIE INDEMNITY COMPANY
CLASS B COMMON STOCK
PROXY
----------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 29, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints F. William Hirt, Jan R. Van
Gorder and Jeffrey A. Ludrof and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all of the shares of the
Class B Common Stock of Erie Indemnity Company (the "Company") that the
undersigned may be entitled to vote at the Annual Meeting of Shareholders of the
Company to be held at the Auditorium of the F. W. Hirt-Perry Square Building,
100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530 on
April 29, 2003 at 3:00 p.m., and at any adjournment, postponement or
continuation thereof, as follows:
1. ELECTION OF DIRECTORS
[ ] FOR all candidates listed below [ ] WITHHOLD AUTHORITY
to vote for the candidates
listed below
INSTRUCTION: To withhold authority to vote for any individual candidate,
strike a line through the candidate's name in the list below.
Kaj Ahlman, John T. Baily, Samuel P. Black, III, J. Ralph Borneman, Jr.,
Wilson C. Cooney, Patricia Garrison-Corbin, John R. Graham, C. Scott Hartz,
Susan Hirt Hagen, F. William Hirt, Samuel P. Katz, Claude C. Lilly, III,
Jeffrey A. Ludrof, Jan R. Van Gorder, Robert C. Wilburn.
2. PROPOSAL TO APPROVE A CHANGE TO THE COMPANY'S LONG-TERM INCENTIVE PLAN
TO INCREASE THE MAXIMUM VALUE OF PHANTOM SHARE UNITS THAT MAY BE EARNED
BY A PARTICIPANT IN ANY PERFORMANCE PERIOD FROM $500,000 TO $1,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies, on behalf of and at the direction of the Board
of Directors of the Company, are authorized to vote with respect to matters
incident to the conduct of the Annual Meeting and upon such other business as
may properly come before the Annual Meeting, pursuant to Securities and Exchange
Commission Rules and any adjournment, postponement or continuation thereof.
This proxy will be voted as specified. If a choice is not specified, the proxy
will be voted FOR the candidates for Director named above and FOR the approval
of the change to the Company's Long-Term Incentive Plan.
This proxy should be dated, signed by the shareholder(s) and returned promptly
to the Company in the enclosed envelope. Persons signing in a fiduciary capacity
should so indicate.
_________________________________(SEAL)
_________________________________(SEAL)
---------------------------------------
Date: ____________, 2003