<PAGE>
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] 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 Rule 14a-11(c) or Rule 14a-12
HIGHLANDS INSURANCE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
----------------
PROXY STATEMENT
FOR THE 1999
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 10, 1999
----------------
Highlands Insurance Group, Inc.
<PAGE>
HIGHLANDS INSURANCE GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 10, 1999
To the Stockholders of Highlands Insurance Group, Inc.:
NOTICE IS HEREBY GIVEN THAT the 1999 Annual Meeting of Stockholders (the
"Meeting") of Highlands Insurance Group, Inc., a Delaware corporation (the
"Company"), will be held at 1000 Lenox Drive, Lawrenceville, New Jersey on
Monday, May 10, 1999, at 10:00 a.m., local time, for the following purposes:
(1) to elect two Class I directors, each to serve until the 2002 Annual
Meeting of Stockholders and until their successors are elected and
qualified;
(2) to ratify the appointment of independent public accountants for the
Company and its subsidiaries for 1999; and
(3) to transact such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
The Board of Directors of the Company has fixed the close of business on
March 25, 1999 as the record date for determining the stockholders entitled to
notice of, and to vote at, the Meeting and any adjournment or postponement
thereof. Stockholders who execute proxies solicited by the Board of Directors
of the Company retain the right to revoke them at any time. Unless so revoked,
the shares of the Company's Common Stock represented by such proxies will be
voted at the Meeting in accordance with the directions given therein. If a
stockholder does not specify a choice on such Stockholder's proxy, the proxy
will be voted in favor of proposal 2 described above and in favor of the Board
of Directors' nominees for directors.
Further information regarding the Meeting is set forth in the accompanying
Proxy Statement.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. HOWEVER, WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON, PLEASE PROMPTLY COMPLETE, DATE, SIGN AND
MAIL THE ENCLOSED PROXY, WHICH IS BEING REQUESTED BY THE BOARD OF DIRECTORS.
AN ADDRESSED RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES IS ENCLOSED FOR THAT PURPOSE. THE PROXY IS REVOCABLE AND WILL NOT BE
USED IF YOU ARE PRESENT AT THE MEETING AND PREFER TO VOTE IN PERSON.
By Order of the Board of Directors
Sincerely,
Stephen J. Greenberg
Vice President and Secretary
April 1, 1999
i
<PAGE>
----------------
PROXY STATEMENT
----------------
THE MEETING
Time, Date and Place of the Meeting
This Proxy Statement is furnished to the stockholders of Highlands Insurance
Group, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at
the 1999 Annual Meeting of Stockholders of the Company (the "Meeting"), and at
any adjournment or postponement thereof, to be held on Monday, May 10, 1999,
at 10:00 a.m. local time at 1000 Lenox Drive, Lawrenceville, New Jersey.
The Company's principal executive office is located at 1000 Lenox Drive,
Lawrenceville, New Jersey 08648. The approximate date on which this Proxy
Statement and the form of proxy are first being sent or given to stockholders
of the Company is April 1, 1999.
Purpose of the Meeting
At the Meeting, the holders of shares of the Company's Common Stock (the
"Common Stock") will be asked to consider and vote upon (i) the election of
two persons to serve on the Board of Directors of the Company as Class I
directors, each for a three-year term; (ii) a proposal to ratify the Board of
Directors' appointment of KPMG LLP as independent certified public accountants
for the Company and its subsidiaries for 1999; and (iii) such other proposals
as may properly come before the Meeting or any adjournment or postponement
thereof.
Record Date and Outstanding Shares
The Board of Directors of the Company has fixed the close of business on
March 25, 1999 (the "Record Date") as the date for the determination of
stockholders of record entitled to notice of and to vote at the Meeting and
any adjournment or postponement thereof.
On the Record Date, there were approximately 6,356 holders of record of
Common Stock with 12,941,425 shares of Common Stock issued and outstanding.
Each share of Common Stock entitles the holder thereof to one vote on each
matter submitted for stockholder approval. See "Stock Ownership of Certain
Beneficial Owners and Management" for information regarding persons known to
the management of the Company to be the beneficial owners of more than 5% of
the outstanding Common Stock.
Voting and Revocation of Proxies
All properly executed proxies that are not revoked will be voted at the
Meeting in accordance with the instructions contained therein. If a holder of
Common Stock executes and returns a proxy and does not specify otherwise, the
shares represented by such proxy will be voted (i) FOR the Board of Directors'
nominees for directors and (ii) FOR the proposal to ratify the Board of
Directors' appointment of KPMG LLP as the Company's independent public
accountants for 1999. If any other matters should properly come before the
Meeting, it is intended that the shares represented by proxies will be voted
with respect to such matters in accordance with the judgment of the persons
voting such proxies. At the date of this Proxy Statement, the Board of
Directors of the Company does not know of any business to be presented at the
Meeting other than as set forth in the notice accompanying this Proxy
Statement.
As a matter of policy, proxies, ballots and voting tabulations that identify
individual stockholders will be kept private by the Company. Such documents
are available for examination only by the inspector of the election and
certain personnel associated with processing proxy cards and tabulating the
vote at the Meeting.
<PAGE>
A stockholder of the Company who has executed and returned a proxy may
revoke it at any time before it is voted at the Meeting by (i) executing and
returning a proxy bearing a later date, (ii) filing written notice of such
revocation with the Secretary of the Company, as appropriate, stating that the
proxy is revoked or (iii) attending the Meeting and voting in person (although
attendance at the Meeting will not, in and of itself, constitute a revocation
of a proxy). Any written notice revoking a proxy should be sent to the
Secretary of the Company at the Company's principal executive offices, 1000
Lenox Drive, Lawrenceville, New Jersey 08648, attention Secretary.
Quorum; Vote Required
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of Common Stock entitled to vote at the
meeting will constitute a quorum for the transaction of business. Under the
Amended and Restated Bylaws of the Company and applicable laws and
regulations, the affirmative vote of the holders of at least a majority of the
shares of Common Stock represented at the Meeting, in person or by proxy, is
required for the approval of each of the proposals to be considered and voted
upon at the Meeting. In determining whether each of the proposals voted upon
has received the requisite number of affirmative votes, abstentions and broker
non-votes will have the same effect as a vote against such proposal. With
respect to the election of directors, the nominees, up to the number of
directors to be elected, receiving the highest number of votes cast by the
holders of Common Stock represented at the Meeting, in person or by proxy,
will be elected.
Solicitation of Proxies
The cost of this proxy solicitation will be borne by the Company. It is
expected that the solicitation of proxies will be primarily by mail, telephone
and telegraph. The Company has arranged for ChaseMellon Shareholder Services,
L.L.C. to solicit proxies in such manner at an estimated cost of $5,000, plus
out-of-pocket expenses. Proxies may also be solicited personally by directors,
officers and other regular employees of the Company in the ordinary course of
business and at nominal cost. Proxy materials will be provided for
distribution through brokers, custodians and other nominees or fiduciaries to
beneficial owners of Common Stock. The Company expects to reimburse such
parties for their reasonable out-of-pocket expenses incurred in connection
with such distribution.
Annual Report
Accompanying this Proxy Statement is the Company's 1998 Annual Report which
includes the Company's 1998 annual report to the Securities and Exchange
Commission on Form 10-K. The 1998 Annual Report contains a description of the
Company's business during 1998, together with the audited financial statements
of the Company.
Forward Looking Information
The statements included in this Proxy Statement and 1998 Annual Report
regarding future financial performance and results and the other statements
that are not historical facts are forward-looking statements. The words
"expect," "project," "estimate," "predict," "anticipate," "believes" and
similar expressions are also intended to identify forward-looking statements.
Such statements are subject to numerous risks, uncertainties and assumptions,
including but not limited to, the uncertainties relating to industry and
market conditions, natural disasters and other catastrophes, and other risks
and uncertainties described in this Proxy Statement and 1998 Annual Report and
in the Company's other filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially
from those indicated.
2
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to persons or groups
who, to the Company's knowledge, own, or have the right to acquire within 60
days of March 12, 1999, more than five percent of the Common Stock.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner Ownership(1)(2) Class(1)(2)
------------------------------------ --------------- -----------
<S> <C> <C>
Insurance Partners, L.P. (3)........................ 4,568,759(4) 26.0%
201 Main Street
Fort Worth, TX 76102
Insurance Partners Offshore (Bermuda), L.P.(5)...... 2,518,009(6) 16.3%
Cedar House
41 Cedar Avenue
P.O. Box HM1179
Hamilton, HMEX, Bermuda
FMR Corp.(7)........................................ 1,283,320 9.9%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- --------
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Unless otherwise
stated below, each such person has sole voting and investment power with
respect to all such shares.
(2) Based on 12,941,425 shares of Common Stock outstanding at the close of
business on March 12, 1999.
(3) The general partner of Insurance Partners, L.P. is Insurance GenPar L.P.,
a Delaware limited partnership; the general partner of the latter is
Insurance GenPar MGP, L.P., a Delaware limited partnership; and the
general partner of the latter is Insurance GenPar MGP, Inc., a Delaware
corporation. Forty percent of the voting stock of Insurance GenPar MGP,
Inc. is owned by Robert A. Spass (a director of the Company), and Steven
Gruber and Daniel Doctoroff each own 30% of such voting stock.
(4) Represents the number of shares of Common Stock issuable upon conversion
of the Company's 10% Convertible Subordinated Debentures due December 31,
2005 (the "Debentures") and exercise of the Company's Common Stock
Subscription Warrants, Series A (the "Series A Warrants") owned of record
by Insurance Partners, L.P.
(5) The general partner of Insurance Partners Offshore (Bermuda), L.P. ("IP
Bermuda") is Insurance GenPar (Bermuda), L.P., a Bermuda, limited
partnership; the general partner of the latter is Insurance GenPar
(Bermuda) MGP, L.P.; and the general partner of the latter is Insurance
GenPar (Bermuda) MGP, Ltd., a Bermuda corporation. Forty percent of the
voting stock of Insurance GenPar (Bermuda) MGP, Ltd. is owned by Robert A.
Spass (a director of the Company), and Steven Gruber and Daniel Doctoroff
each own 30% of such voting stock.
(6) Represents the number of shares of Common Stock issuable upon conversion
of the Debentures and exercise of the Series A Warrants owned of record by
IP Bermuda. Shares acquirable by IP Bermuda upon conversion or exercise of
Debentures or Series A Warrants or Common Stock Subscription Warrants,
Series B (the "Series B Warrants", and collectively with the Series A
Warrants, the "Warrants") will be Series B Common Stock, which have
reduced voting rights until such shares are transferred by IP Bermuda or
the occurrence of certain events.
(7) Such shares are beneficially owned as follows: Fidelity Management &
Research Company ("Fidelity") 1,160,860; and Fidelity Management Trust
Company ("FMTC") 122,460. Fidelity's beneficial ownership of 1,160,860
shares of Common Stock is as a result of its acting as investment adviser
to various investment companies (the "Fidelity Funds"). One such Fidelity
Fund, Fidelity Equity-Income Fund, owns 787,590 shares of Common Stock.
Edward C. Johnson III (the Chairman of FMR Corp. and a significant holder
of the voting securities of FMR Corp.), FMR Corp., through its control of
Fidelity, and each Fidelity Fund has sole power to dispose of the
1,160,860 shares of Common Stock owned by the Fidelity Funds. The Board of
Trustees of each Fidelity Fund has the sole power to direct the vote of
shares of Common Stock held by each Fund. Edward C. Johnson III and FMR
Corp., through its control of FMTC, each has sole dispositive power over
122,460 shares of Common Stock and sole power to vote or to direct the
voting of 103,110 shares, and no power to vote or direct the voting of
19,350 shares owned by the institutional accounts for which FMTC serves as
investment manager.
3
<PAGE>
The following table sets forth information with respect to the numbers of
shares of Common Stock that the following persons own, or have the right to
acquire within 60 days of March 12, 1999: (i) each director of the Company,
(ii) each executive officer of the Company named in the table entitled
"Summary Compensation Table" and (iii) all executive officers and directors of
the Company as a group at March 12, 1999:
<TABLE>
<CAPTION>
Number of
Shares Percent
Beneficially of
Name Owned(1) Class(1)
- ---- ------------ --------
<S> <C> <C>
Richard M. Haverland.................................. 750,285(2) 5.6%
Robert A. Spass....................................... --(3) --
Bradley E. Cooper..................................... 3,000(3) *
W. Bernard Pieper..................................... 17,447 *
Kenneth S. Crews...................................... 11,417 *
Philip J. Hawk........................................ 11,917 *
Robert W. Shower...................................... 11,417 *
Charles J. Bachand.................................... 67,998(2) *
Stephen J. Greenberg.................................. 27,230(4) *
All Directors and executive officers as a group (9
persons)............................................. 900,711(2)(4) 6.7%
</TABLE>
- --------
* Less than 1%.
(1) Based on 12,941,425 shares of Common Stock outstanding at the close of
business on March 12, 1999.
(2) Includes the following numbers of shares of Common Stock issuable upon
exercise of the Series A Warrants and the Company's Common Stock
Subscription Warrants, Series A-2 Warrants and conversion of the
Debentures and the Company's 10% Convertible Subordinated Debentures due
December 31, 2005, Series 2 respectively, held by the following members of
management: Richard M. Haverland--126,343, 132,660, 123,762 and 129,950;
and Charles J. Bachand--12,003, 12,003, 11,757 and 11,757.
(3) Does not include shares owned beneficially by Insurance Partners, L.P. and
IP Bermuda. See the prior table under "Stock Ownership of Certain
Beneficial Owners and Management."
(4) Includes 8,615 shares issued to Mr. Greenberg under the 1997 Restricted
Stock Plan. See "Executive Officers--Executive Compensation."
4
<PAGE>
BOARD OF DIRECTORS
Election of Directors
The Board of Directors of the Company consists of seven directors divided
into three classes serving staggered terms of three years each. Five of the
Company's current directors are serving in Class II or Class III with terms
that continue beyond the Meeting and such directors are not subject to
election at the Meeting. The two Class I directors are nominees for reelection
at the Meeting.
Each of the Class I directors to be elected at the Meeting will serve a term
of three years to expire at the 2002 Annual Meeting of Stockholders of the
Company or until his successor is elected and qualified. The nominees, up to
the number of directors to be elected, receiving the highest number of votes
cast by holders of Common Stock, in person or by proxy, will be elected.
It is intended that proxies received from holders of Common Stock, in the
absence of contrary instructions, will be voted at the Meeting for the
election of W. Bernard Pieper and Philip J. Hawk as Class I directors.
Although the Company does not contemplate that any of the nominees will be
unable to serve, decline to serve or otherwise be unavailable as a nominee at
the time of the Meeting, in such event the proxies will be voted in accordance
with the authority granted therein for such other candidate or candidates as
may be nominated by the Board of Directors of the Company.
Further information concerning the nominees for election as directors at the
Meeting, including their business experience during the past five years,
appears below.
Nominees for Class I Directors With Terms of Office Expiring at the 2002
Annual Meeting of Stockholders
<TABLE>
<CAPTION>
Name of Nominees for Class Business Experience During Past Five Years and
I Directors Age Other Information
- -------------------------- --- ------------------------------------------------
<S> <C> <C>
W. Bernard Pieper......... 66 Vice Chairman of Halliburton, 1992 to January
1996;
President and Chief Executive Officer of Brown
&
Root, Inc., 1990-1992. Mr. Pieper was a
director of
Highlands prior to the Distribution. Mr. Pieper
is currently a director of the Company.
Philip J. Hawk............ 45 Chairman and Chief Executive Officer of Team,
Inc. 1998 to present; President and Chief
Executive Officer of EOTT Energy Partners,
L.P., 1993 to 1998. Mr. Hawk is currently a
director of the Company.
Continuing Class II Directors With Terms of Office Expiring at the 2000
Annual Meeting of Stockholders
<CAPTION>
Business Experience During Past Five Years and
Name of Class II Directors Age Other Information
- -------------------------- --- ------------------------------------------------
<S> <C> <C>
Richard M. Haverland (1).. 57 Chairman, President and Chief Executive Officer
of the Company, January 1996 to present;
Insurance Consultant, December 1994 to present;
Vice Chairman, Chief Executive Officer
Designate, Continental Corporation, October-
December 1994; Executive Vice President
Insurance Operations, American Premier
Underwriters, Inc., 1991-1994.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name of Class II Business Experience During Past Five Years and
Directors Age Other Information
---------------- --- ------------------------------------------------
<S> <C> <C>
Robert W. Shower......... 61 Executive Vice President and Chief Financial
Officer, Seagull Energy Corporation, 1994 to
April 1996; Senior Vice President and Chief
Financial Officer, Seagull Energy Corporation,
1992-1993; Senior Vice President, Corporate
Development, Albert Fisher, Inc., 1991-1992;
Vice President Finance and Chief Financial
Officer, AmeriServ Food Company, 1990-1991. Mr.
Shower is a director of Lear Corporation, Edge
Petroleum Corporation, Breed Technologies, Inc.
and Nuevo Energy Company.
Continuing Class III Directors With Terms of Office Expiring at the 2001
Annual Meeting of Stockholders
<CAPTION>
Name of Class III Business Experience During Past Five Years and
Directors Age Other Information
----------------- --- ------------------------------------------------
<S> <C> <C>
Robert A. Spass (1)...... 42 Deputy Chairman of the Board of Capital Z
Management, Inc. and Capital Z Partners, Ltd.,
1998 to present; Managing Partner of Insurance
Partners Advisors, L.P., 1994 to present;
President and Chief Executive Officer of
International Insurance Advisors, Inc., 1990-
1994. Mr. Spass is a director of Superior
National Insurance Group, Inc., MMI Companies
and Ceres Group, Inc.; he served as director of
NACOLAH Holding Corporation until March 1996
and of National Re Corporation until October
1996.
Bradley E. Cooper (1).... 32 Senior Vice President of Capital Z Management,
Inc. and Capital Z Partners, Ltd., 1998 to
present; Partner of Insurance Partners
Advisors, L.P., 1994 to present; Vice President
of International Insurance Advisors, Inc.,
1990-1994. Mr. Cooper is a director of Superior
National Insurance Group, Inc. and Ceres Group,
Inc.
Kenneth S. Crews......... 50 Managing Director, Warburg Dillon Read & Co.,
Inc., 1992 to present; Managing Director,
Lehman Brothers Incorporated, 1990-1992.
</TABLE>
- --------
(1) The Debentures obligate the Company to nominate, and recommend the
election of, persons designated by a majority in interest of the holders
of the Debentures so that the number of persons so designated will at all
times constitute, if elected, at least 28% of the Board of Directors.
Messrs. Haverland, Spass and Cooper were elected to the Board of Directors
of the Company.
The Board of Directors recommends a vote FOR each of the director nominees.
Compensation of Directors
Directors who are employees of the Company are not paid any fees or
additional compensation for service as members of the Board or any committee
thereof. Directors who are not employees of the Company ("Non-Employee
Directors"), other than Messrs. Spass and Cooper, receive a retainer fee of
$10,000, payable annually, as well as a fee of $750 per day for attendance at
meetings of the Board and any committee meetings held on the same day as a
Board meeting and a fee of $500 per day for attendance at committee meetings
not held on the same day as a Board meeting. In addition, all Directors are
reimbursed for reasonable out-of-pocket expenses incurred in connection with
traveling to any Board or committee meeting. Messrs. Spass and Cooper have
waived
6
<PAGE>
any right to receive compensation as Directors in the form of cash or stock
and, accordingly, although they are not employees of the Company, the term
Non-Employee Directors defined above is deemed not to include them. Each Non-
Employee Director of the Company as of January 1996 was granted an option to
purchase 10,000 shares of Common Stock under the 1995 Directors' Stock Plan
(the "Directors Plan"). Moreover, under the Directors Plan, commencing with
the first annual meeting of the Board of Directors of the Company after
January 1996, and at each annual meeting thereafter, each Non-Employee
Director is automatically granted shares of Common Stock having a fair market
value at the time of grant of $10,000.
The purposes of the Directors Plan are to (i) encourage the Directors to own
shares of Common Stock and thereby align their interests more closely with the
interests of other stockholders of the Company, (ii) encourage the highest
level of Director performance by providing the Directors with a direct
interest in the Company's attainment of its financial goals and continuing
success, and (iii) provide a financial incentive that will help attract and
retain the most qualified Directors. Pursuant to the Directors Plan, the
Company may grant options and issue stock with respect to an aggregate of up
to 400,000 shares. No individual will receive more than 300,000 shares of
Common Stock in the aggregate upon the issuance of stock and the exercise of
options granted under the Directors Plan. Options granted under the Directors
Plan are non-qualified stock options ("Options") and shares of Common Stock
issued under the Directors Plan will be from authorized and unissued shares.
As noted above, Messrs. Spass and Cooper have elected not to participate in
any stock awards to Directors of the Company. An agreement among the Company,
Insurance Partners, L.P. ("IP") and IP Bermuda provides that, in the event of
election of certain individuals associated with IP and IP Bermuda to the Board
of Directors pursuant to the terms of the Investment Agreement among the
Company, Halliburton Company and the Investors therein dated October 10, 1995
and Debentures, such individuals will not be entitled to participate in the
Directors Plan or any similar plan.
Pursuant to the Directors Plan, Options to purchase shares of Common Stock
have been granted to the following Directors: Messrs. Haverland (300,000),
Crews (10,000), Hawk (10,000), Pieper (10,000) and Shower (10,000). The
exercise price of the Options is equal to $14.69 per share. Except for Options
granted to Mr. Haverland, Options granted under the Directors Plan will vest
and become exercisable as to 33 1/3%, 66 2/3% and 100% of the shares of Common
Stock subject thereto on each of the first, second and third anniversaries of
the option grant. Options granted under the Directors Plan to Mr. Haverland
will vest and become exercisable as to 25%, 50%, 75% and 100% of the shares of
Common Stock subject thereto on each of the first, second, third and fourth
anniversaries, respectively, of the Option grant. Messrs. Crews, Hawk, Pieper
and Shower have each been issued 1,417 shares of Common Stock under the
Directors' Plan.
Each Option is evidenced by a stock option agreement which may contain such
terms and conditions as may be determined by the Committee and are not
inconsistent with the Directors Plan. The term of an Option is ten years from
the date of grant. During a Directors' lifetime, an Option granted pursuant to
the Directors Plan will be exercisable only by the Director. The Option will
not be transferable by a Director other than by will or the laws of descent
and distribution.
Committees of Board of Directors
The Board of Directors has the following standing committees:
Audit Committee. The functions of the Audit Committee include:
recommendations to the Board of Directors regarding the appointment of
independent auditors; approval of the scope of the annual audit by the
independent auditors; examination, reviews of, and recommendations to the
Board of Directors regarding, the Company's financial policies and accounting
systems and controls; and approval of the duties and compensation of the
independent auditors, both with respect to audit and non-audit services. The
Committee also reviews the Company's compliance with its code of business
conduct. The Committee meets from time to time with the independent auditors
outside the presence of Company management or other employees, to discuss
matters of concern, receive recommendations or suggestions for change and
exchange relevant views and information. The Audit Committee consists of four
Non-Employee Directors: Messrs. Pieper, Crews, Hawk and Shower (Chairman). The
Committee met three times in 1998.
7
<PAGE>
Compensation Committee. Duties of the Compensation Committee include
developing and approving an overall compensation philosophy consistent with
corporate objectives and stockholder interests; acting as a salary and
promotions committee with respect to officers of the Company and certain
officers of subsidiaries; administering and granting options pursuant to the
Stock Option Plan; administering and making awards under Company incentive
plans; and acting as a committee for administration of other forms of non-
salary compensation. The Compensation Committee consists of Messrs. Pieper,
Crews, Hawk and Spass (Chairman). The Committee met twice in 1998.
Investment Committee. Duties of the Investment Committee include reviewing
and making recommendations to the Board of Directors regarding the nature and
composition of the investments of the Company in all forms of financial
securities and obligations, denominated in any and all currencies, issued by
banks or companies domiciled inside or outside of the United States of
America, including, but not limited to, stocks, bonds, notes, certificates of
deposit and non-negotiable time deposits. The Investment Committee consists of
the Messrs. Cooper, Haverland and Shower (Chairman). The Committee met once in
1998.
The Board of Directors of the Company may, from time to time, establish
other committees to facilitate its work. The Company does not have a
Nominating Committee; the Board of Directors nominates persons for election as
directors.
The Board of Directors met four times in 1998. During 1998 Mr. Crews did not
attend 75 percent of the aggregate of the total number of meetings of the
Board of Directors and of meetings held by all Committees of the Board on
which he served.
8
<PAGE>
EXECUTIVE OFFICERS
General
Set forth below are the names, ages and titles of the executive officers of
the Company:
<TABLE>
<CAPTION>
Title and Business Experience During Past Five
Name Age Years
---- --- ------------------------------------------------
<S> <C> <C>
Richard M. Haverland....... 57 Chairman, President and Chief Executive Officer
of the Company; see also "Election of
Directors--Names of Class II Directors" for
additional information regarding business
experience.
Charles J. Bachand......... 46 Vice President and Treasurer of the Company;
Senior Vice President and Chief Financial
Officer of Highlands Insurance Company
("Highlands"), November 1993 to present;
Partner, KPMG, 1988 to October 1993.
Stephen J. Greenberg....... 57 Vice President and Secretary of the Company;
Executive Vice President and General Counsel of
American Reliance, Inc., a subsidiary of the
Company, May 1997 to present; Executive Vice
President and General Counsel of Vik Brothers
Insurance, Inc., 1993 to April 1997.
</TABLE>
Executive Compensation
Summary Compensation Table. The following table sets forth information
concerning compensation for services in all capacities to the Company and its
subsidiaries during each of the last three years of those persons who were the
Company's Chief Executive Officer and its other two executive officers during
1998 (collectively, the "named executive officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------ -----------------------
Restricted Securities
Other Annual Stock Underlying All Other
Years Salary($) Bonus($) Compensation Award($) Options(#) Compensation($)(4)
----- --------- -------- ------------ ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Haverland.... 1998 $525,000 -- -- -- -- $ 16,262
Director, President and
Chief 1997 $525,000 $630,000 $96,115(2) -- -- $ 4,750
Executive Officer of
the 1996 $485,371 $500,000(1) -- -- 300,000(3) $ 4,750
Company
Charles J. Bachand...... 1998 $182,500 $ 10,000 -- -- -- $ 14,325
Vice President and
Treasurer 1997 $170,500 $ 55,924 -- -- -- $ 4,750
of the Company; Senior
Vice 1996 $169,945 $ 14,209 -- -- 20,000 $167,685
President and Chief
Financial
Officer of Highlands
Stephen J. Greenberg.... 1998 $300,000 $ 5,000 -- -- -- $ 11,400
Vice President and 1997 $199,625 $ 75,004 -- $200,000(5) 30,000 $ 1,288
Secretary of the
Company,
Executive Vice
President
and General Counsel,
American Reliance, Inc.
</TABLE>
- --------
(1) Includes $250,000 in Common Stock awarded in 1997 at the market price,
when 1996 bonuses were paid, of $22 1/2 per share, for a total of 11,299
shares.
(2) $94,415 represents reimbursement of moving expenses.
(3) Awarded under the Company's Directors Plan.
(4) The amounts shown for Messrs. Haverland and Greenberg are matching
contributions under 401(k) plans. The amounts shown for Mr. Bachand are
contributions under a 401(k) plan and an employment retirement and savings
plan, and $156,785 paid during 1996 in connection with the distribution of
the Company's shares to the stockholders of Halliburton Company.
(5) Represents the market price of shares issued under the Restricted Stock
Plan, see "Restricted Stock Plan."
9
<PAGE>
Option Grants. No options were granted to the named executive officers
during 1998.
Option Exercises and Year-End Option Holdings. The following table
summarizes the number and value of the unexercised options to purchase Common
Stock held by the named executive officers at December 31, 1998.
1998 Option Exercises And Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised
Unexercised Options Held In-The-Money Options Held
at December 31, 1998 at December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard M. Haverland........ 150,000 150,000 $ 0 0
Charles J. Bachand.......... 13,334 6,666 $ 0 0
Stephen J. Greenberg........ 10,000 20,000 $ 0 0
</TABLE>
Restricted Stock Plan. In 1997, the Company adopted the 1997 Restricted
Stock Plan (the "Restricted Stock Plan"), which authorized grants of up to
100,000 shares of restricted Common Stock (the "Restricted Shares") to
officers of the Company's subsidiaries selected by the Compensation Committee.
In order to be issued Restricted Shares, a grantee must purchase an equal
number of shares of Common Stock at market price ("Qualifying Shares").
Restricted Shares vest five years after the date of grant, provided the
following conditions are satisfied: (i) the grantee remains employed by the
Company or one of its subsidiaries until at least three years from the date of
grant; (ii) the grantee does not resign from the Company and its subsidiaries,
and is not terminated for cause, before the vesting date; and (iii) the market
price of the Common Stock on the vesting date is at least 40% greater than on
the date of grant. If the market price has increased at least 40% but less
than 50%, 25% of the Restricted Shares vest, if the increase is at least 50%
but less than 61%, 50% vest, and if the market price increases at least 61%,
100% vest. In 1997, Mr. Greenberg purchased 8,615 Qualifying Shares at $23.22
per share and was issued 8,615 Restricted Shares.
Employees' Retirement and Savings Plan. The Company makes annual
contributions to the Highlands Insurance Group Employees' Retirement and
Savings Plan (the "Retirement Plan") for the benefit of qualified employees.
The amount of each year's contribution, if any, is determined by the Board of
Directors of the Company in its discretion. Before-tax contributions up to 6%
of compensation are matched by the Company at a 50% rate under the Retirement
Plan. Contributions to executive officers under the Retirement Plan for 1998,
1997 and 1996 are set forth in a footnote to the Summary Compensation Table.
It is not possible to estimate the amount of benefits payable at retirement
under the Retirement Plan to Messrs. Haverland, Bachand and Greenberg because
of some or all of the following: (i) amounts contributed in the future will be
contingent on future discretionary contributions by the Company as well as
contribution levels of the participant; (ii) earnings on trust fund assets
will vary; (iii) trust fund assets may appreciate or depreciate in value; (iv)
the compensation of the individual may vary; (v) age at date of retirement may
vary; and (vi) the Retirement Plan may be changed or discontinued.
Employment Contract. In 1996, the Company entered into a three-year
Employment Agreement with Richard M. Haverland, an investor in and consultant
to IP, under which Mr. Haverland became and serves as Chairman and Chief
Executive Officer of the Company. Under the terms of the Employment Agreement,
Mr. Haverland was paid an annual salary of $525,000, and for 1996 and 1997, an
annual bonus of no less than $250,000, to be determined by the Board of
Directors of the Company. Pursuant to the Employment Agreement, the Company
has granted Mr. Haverland options to purchase 300,000 shares of Common Stock
at an exercise price of $14.69 per share. Pursuant to the Employment
Agreement, the Company sold to Mr. Haverland (i) $2,100,000 in principal
amount of the Company's 10% Convertible Subordinated Debentures due December
31, 2005, together with Series A and Series B Common Stock Warrants and (ii)
Management Debentures, together with Common Stock Subscription Warrants,
Series A-2 and Common Stock Subscription Warrants, Series B-2 in exchange for
a promissory note in the principal amount of $2,100,000. Such promissory note
is without
10
<PAGE>
personal recourse and is secured by a pledge of the Management Securities
purchased thereby. See "Certain Relationships and Related Transactions." Mr.
Haverland notified the Board in late 1998 that he did not intend to renew the
contract.
Report of the Compensation Committee
The Company applies a consistent philosophy for all employees, including
senior management. This philosophy is based on the premise that the
achievements of the Company result from the coordinated efforts of all
individuals working toward common objectives. The Company strives to achieve
these objectives through teamwork that is focused on meeting the expectations
of customers and stockholders.
The goals of the compensation program are to align compensation with
business objectives and performance, and to enable the Company to attract,
retain and reward executive officers whose contributions are critical to the
long-term success of the Company. The Company's compensation program for
executive officers is based on the same two principles applicable to
compensation decisions for all employees of the Company.
.The Company pays competitively.
The Company is committed to maintaining a pay program that helps attract and
retain the best people in the industry. To ensure that pay is competitive, the
Company will regularly compare its pay practices with those of other regional
companies and set its pay parameters based on this review.
.The Company pays for sustained performance.
Executive officers and senior managers are rewarded based upon corporate
performance or business unit performance and individual performance. Corporate
performance and business unit performance are primarily evaluated by
determining the extent to which annually established accident year combined
operating ratios are met. Individual performance is evaluated by reviewing
performance against set objectives and goals and the degree to which Company
values are fostered.
Compensation Vehicles
The Company's compensation program consists of cash and equity based
compensation. The Company believes that having such a compensation program
allows the Company to attract and retain key employees, which in turn permits
the Company to provide useful products and services to customers, enhance
stockholder value, motivate technological innovation, foster teamwork and
adequately reward employees. The Company's principal compensation vehicles are
as follows:
Cash-based Compensation-Salary and Bonus. The Company establishes salary
ranges for employees by reviewing the aggregate of base salary and annual
bonus for competitive positions in the market. During 1998, the Company
performed an assessment of individual positions in an effort to identify
appropriate market salary ranges for all positions. The Company attempts to
set its competitive salary midpoint for an officer position above the median
level compared to those companies it surveys. The range allows an officer to
be placed above or below the midpoint, according to that officer's overall
individual performance. As described above, overall individual performance is
measured against the achievement of specific goals, including profitability
goals for those individuals controlling key profit centers.
Equity-based Compensation Stock Option Program. The purpose of this program
is to provide additional incentives to employees to work to maximize
stockholder value. The Company also recognizes that a stock incentive program
is a necessary element of a competitive compensation package for its
employees. The program utilizes vesting periods to encourage key employees to
continue in the employ of the Company and thereby acts as a retention device
for key employees. The Company believes that the program encourages employees
to maintain a long-term perspective. The Company grants stock options to a
broad-based group. As of March 12, 1999, almost all Company employees had been
granted options.
11
<PAGE>
In determining the size of an option award for an executive officer, the
Compensation Committee's primary considerations are the "grant value" of the
award and the expected or actual performance of the officer measured against
the same performance criteria described above under "Cash-based Compensation"
which is used to determine salary and bonus. In addition to considering the
grant value and the officer's performance, the Compensation Committee also
considers the number of outstanding unvested options which the officer holds
and the size of previous option awards to that officer. The Compensation
Committee does not assign specific weights to these items.
Other Considerations
Certain Limitations on Deductibility of Executive Compensation. Section
162(m) of the Internal Revenue Code, enacted in 1993, generally disallows a
tax deduction to public companies for compensation over $1 million paid to the
Company's Chief Executive Officer or any of the four other most highly
compensated executive officers. Certain performance-based compensation,
however, is specifically exempt for the deduction limit. The Company does not
have a policy that requires or encourages the Compensation Committee to
qualify stock options or restricted stock awarded to executive officers for
deductibility under Section 162(m) of the Internal Revenue Code (the "Code").
CEO Compensation
Richard M. Haverland has been President, Chief Executive Officer and
Chairman of the Company since January 1996. The Compensation Committee used
the same compensation policy described above for all employees to determine
Mr. Haverland's 1998 overall compensation. In setting both the cash-based and
the equity-based elements of Mr. Haverland's overall compensation, the
Compensation Committee made an overall assessment of Mr. Haverland's
leadership in achieving the Company's long-term strategic and business goals.
COMPENSATION COMMITTEE
Robert A. Spass (Chairman)
Kenneth S. Crews
Philip J. Hawk
W. Bernard Pieper
12
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, when the Company's shares were distributed as a dividend to
the shareholders of its then parent, Halliburton Company, Richard M. Haverland
and Charles J. Bachand acquired, respectively, $2.1 million and $190,000 in
principal amount of the Debentures, together with Warrants.
In addition, the Company issued to Mr. Haverland and Mr. Bachand,
respectively, an additional $2.1 million and $190,000 in principal amount of
the Company's 10% Convertible Subordinated Debentures due December 31, 2005,
Series 2 (the "Management Debentures") together with detachable Common Stock
Subscription Warrants, Series A-2 and Series B-2 (the "Management Warrants,"
and collectively with the Management Debentures, the "Management Securities").
The Management Securities contain terms and provisions substantially similar
to the Debentures and the Warrants.
The Management Securities were issued pursuant to a Purchase, Redemption and
Bonus Agreement (the "Purchase Agreement") among the Company, Messrs.
Haverland and Bachand and members of the then management of the Company. The
consideration paid by Messrs. Haverland and Bachand for the Management
Securities consists of individual promissory notes (each, a "Note" and,
collectively, the "Notes") in the principal amounts of $2.1 million and
$190,000, respectively, made by Messrs. Haverland and Bachand, without
personal liability and secured by a pledge of the Management Securities. The
Notes have a term of five years and bear interest at a rate of 10%, payable
annually on the anniversary date of their issuance. The Notes may be prepaid
at any time without penalty. As of March 12, 1999, the principal amount
outstanding of Mr. Haverland's Note was $2.0 million and of Mr. Bachand's Note
was $190,000.
The Purchase Agreement provides that the Management Securities of each of
Messrs. Haverland and Bachand may be redeemed by the Company at their fair
market value (as determined by the Board of Directors of the Company in good
faith, reflecting any discount for lack of liquidity or the fact that the
Management Securities represent a minority interest in the Company) if Mr.
Haverland's or Mr. Bachand's respective employment with the Company is
terminated for cause (as defined in the Purchase Agreement), or without cause
or by resignation at any time before the third anniversary of the Purchase
Agreement.
The Purchase Agreement further provides for bonuses to be paid to Messrs.
Haverland and Bachand on the fifth anniversary of the Purchase Agreement if
the average closing price of the Common Stock is equal to or greater than
prices expressed as a percentage of the exercise price of the Series A
Warrants (as adjusted from time to time) and specified in the Purchase
Agreement (the "Bonus Trigger Stock Price"). The amount of the bonus is stated
as a percentage of a maximum bonus amount separately determined for each of
Messrs. Haverland and Bachand and equal to the aggregate principal amount of
his Note. The bonus is 25% of the maximum bonus amount if the Bonus Trigger
Stock Price is at least 1.40 times (but less than 1.50 times) the Series A
Warrant exercise price, 50% of the maximum bonus amount if the Bonus Trigger
Stock Price is at least 1.50 times (but less than 1.61 times) the Series A
Warrant exercise price and 100% if the Bonus Trigger Stock Price is 1.61 times
the Series A Warrant exercise price or higher. The bonus amounts may be
subject to the $1.0 million annual deduction limitation imposed by Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), on
compensation payable to certain executives.
Assuming conversion and exercise of the Debentures, Management Debentures,
Warrants and Management Warrants, Messrs. Haverland and Bachand will acquire,
respectively, 512,715 and 47,520 shares of Common Stock, representing on a
fully diluted basis, respectively 2.4% and 0.2% of the outstanding Common
Stock.
13
<PAGE>
Performance Graph
COMPARISON OF 1998, 1997 and 1996 CUMULATIVE TOTAL RETURN*
OF HIGHLANDS INSURANCE GROUP, INC., S&P 500 INDEX
AND S&P INSURANCE (PROPERTY-CASUALTY) INDEX
Set forth below is a line graph comparing the 1998, 1997 and 1996 cumulative
stockholder return on the Common Stock, based on the market price of the
Common Stock, with the cumulative total return on the Standard & Poor's 500
Stock Index and the Standard & Poor's Insurance (Property-Casualty) Index:
[Graph
appears
here]
<TABLE>
<CAPTION>
January 12, 1996* December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Highlands Insurance
Group, Inc............. 100 96 134 62
S&P 500................. 100 123 164 211
S&P Insurance (Property-
Casualty).............. 100 122 177 164
</TABLE>
- --------
* Total assumes $100 invested on January 12, 1996 in Common Stock, the
Standard & Poor's 500 Index and the Standard & Poor's Insurance (Property-
Casualty) Index, including reinvestment of dividends with respect to the
two indices. The Company did not pay dividends in 1996, 1997 and 1998.
Neither the foregoing Compensation Committee Report nor the foregoing
Performance Graph will be deemed incorporated by reference into any other
filing, absent an express reference thereto.
14
<PAGE>
OTHER MEETING ITEMS
Ratification of Appointment of Independent Certified Public Accountants
The Board of Directors of the Company has appointed KPMG LLP ("KPMG") as
independent certified public accountants for the Company and it subsidiaries
for 1999. It is intended that such appointment be submitted to the
stockholders for ratification at the Meeting. Although the submission of this
matter to the stockholders is not required, the Board of Directors will
reconsider its selection of independent certified public accountants if this
appointment is not ratified by the stockholders. Ratification will require the
affirmative vote of the majority of shares of Common Stock represented at the
meeting in person or by proxy.
The Board of Directors recommends a vote FOR the approval of KPMG LLP as
independent certified public accountants for the Company and its subsidiaries
for 1999.
It is expected that representatives of KPMG will be present at the Meeting
with an opportunity to make a statement should they desire to do so and to
respond to appropriate questions from stockholders.
Other Matters
While management has no reason to believe that any other business will be
presented at the Meeting, if any other matters should properly come before the
Meeting, the proxies will be voted as to such matters in accordance with the
best judgment of the proxy holders. The approval of such other matters will
require the affirmative vote of the majority of the shares of Common Stock
represented at the Meeting, in person or by proxy.
STOCKHOLDERS' PROPOSALS
Pursuant to the Securities and Exchange Act and the regulations promulgated
thereunder, individual stockholders of the Company have a limited right to
propose for inclusion in the Company's proxy statement a single proposal for
action to be taken at the Annual Meeting of the stockholders of the Company.
Any proposals of stockholders intended to be presented at the Annual Meeting
to be held in 2000 must be received at the Company's principal executive
offices no later than January 12, 2000. Such proposals may be addressed to the
Secretary of the Company at 1000 Lenox Drive, Lawrenceville, New Jersey 08648.
15
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Please mark
your votes as [X]
indicated in
this example
Item 1. For the election as a Class I director of both NOMINEES, W. Bernard
Pieper and Philip J. Hawk, each to serve until the 2002 Annual Meeting of
Stockholders and until their successors are elected and qualified:
FOR both nominees listed WITHHOLD AUTHORITY INSTRUCTION: To withhold
above (except as marked to to vote for both nominees listed authority to vote for individual
the contrary) above nominees, write their name(s)
in the space below:
[ ] [ ]
------------------------------------
Item 2. To ratify the appointment of KPMG Peat Marwick LLP as independent FOR AGAINST ABSTAIN
public accountants for the Company and its subsidiaries for 1999. [ ] [ ] [ ]
Item 3. To transact such other business as may properly come before the [ ] [ ] [ ]
Meeting or any adjournment(s) or postponement(s) thereof.
I PLAN TO ATTEND THE MEETING [ ]
Please sign exactly as your name(s) appear(s) on your stock certificate(s).
When signing as attorney, executor, administrator, trustee, or guardian,
please give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership name
by authorized person.
No postage is required.
Signature ____________________________________ Signature ________________________________ Date _______________________________
Please mark, sign, date and promptly return this proxy card in the enclosed envelope.
- -----------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
<PAGE>
PROXY
HIGHLANDS INSURANCE GROUP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice of Annual Meet-
ing of Stockholders of Highlands Insurance Group, Inc., a Delaware corporation
(the "Company"), to be held at the principle executive office of the Company,
1000 Lenox Drive, Lawrenceville, New Jersey on Monday, May 10, 1999, at 10:00
a.m. local time (the "Meeting"), and the Proxy Statement in connection there-
with and (2) appoints Charles J. Bachand and Stephen L. Kibblehouse and each
of them, as the undersigned's Proxies with full power of substitution for and
in the name, place and stead of the undersigned, to vote upon and act with re-
spect to all of the shares of Common Stock standing in the name of the under-
signed, or with respect to which the undersigned is entitled to vote and act,
at the Meeting and at any adjournment(s) or postponement(s) thereof.
The undersigned hereby revokes any proxy heretofore given to vote or act with
respect to the Common Stock and hereby ratifies and confirms all that the
Proxies, their substitutes, or any of them may lawfully do by virtue hereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy
will be voted (1) FOR the Board of Directors' nominees for Class I directors,
each to serve until the 2002 Annual Meeting of Stockholders and until their
successors are elected and qualified; (2) FOR ratification of the appointment
of KPMG Peat Marwick LLP as independent public accountants for the Company and
its subsidiaries for 1999; and (3) FOR the transaction of such other business
as may properly come before the Meeting or any adjournment(s) or
postponement(s) thereof in accordance with the discretion of the persons
designated above with respect to any other business properly before the
Meeting.
(This Proxy must be dated and signed on the reverse side.)
FOLD AND DETACH HERE
