<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 2000
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 9, 2000
----------------
Highlands Insurance Group, Inc.
<PAGE>
HIGHLANDS INSURANCE GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 9, 2000
To the Stockholders of Highlands Insurance Group, Inc.:
NOTICE IS HEREBY GIVEN THAT the 2000 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
Tuesday, May 9, 2000, at 10:00 a.m., local time, for the following purposes:
(1) to elect three Class II directors, each to serve until the 2003
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 2000; 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 24, 2000 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 SOLICITED 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
March 31, 2000
<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 2000 Annual Meeting of Stockholders of the Company (the "Meeting"), and at
any adjournment or postponement thereof, to be held on Tuesday, May 9, 2000,
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 March 31, 2000.
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
three persons to serve on the Board of Directors of the Company as Class II
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 2000; 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 24, 2000 (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 5,028 holders of record of
Common Stock with 13,633,412 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 2000. If any other matters should properly come before the
Meeting, 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 office, 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. Shares represented by proxies that reflect abstentions or
"broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the Meeting, but with respect to which such broker or nominee
is not empowered to vote on a particular proposal) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum. Abstentions are counted as negative votes in tabulations of the
votes cast on proposals presented to stockholders, other than the election of
directors. Broker non-votes will not be counted for purposes of determining
the number of votes cast with respect to the particular proposal on which the
broker has expressly not voted. Broker non-votes with respect to the proposals
in this proxy statement will not be considered votes cast and accordingly will
not affect the determination as to whether a majority of votes cast has been
obtained with respect to a particular matter. 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 $5,000.00,
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 1999 Annual Report which
includes the Company's 1999 annual report to the Securities and Exchange
Commission on Form 10-K. The 1999 Annual Report contains a description of the
Company's business during 1999, together with the audited financial statements
of the Company.
Forward Looking Information
The statements included in this Proxy Statement and 1999 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 1999 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, beneficially own, or have the right to
acquire within 60 days of March 13, 2000, 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) 25.1%
201 Main Street
Fort Worth, TX 76102
Insurance Partners Offshore (Bermuda), L.P. (5).... 2,518,009(6) 15.6%
Cedar House
41 Cedar Avenue
P.O. Box HM1179
Hamilton, Bermuda
Waveland Partners (7).............................. 1,383,700 10.1%
227 West Monroe, Suite 4800
Chicago, IL 60606
FMR Corp. (8)...................................... 1,191,270 8.7%
82 Devonshire Street
Boston, MA 02109
Dimensional Fund Advisors Inc. (9)................. 831,610 6.1%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Blavin & Company, Inc. (10)........................ 793,321 5.8%
8800 North Gainey Center Drive, Suite 260
Scottsdale, AZ 85258
David L. Babson & Co. Inc. (11).................... 741,800 5.4%
One Memorial Drive
Cambridge, MA 02142
</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 13,663,412 shares of Common Stock outstanding at the close of
business on March 13, 2000.
(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.
3
<PAGE>
(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) Represents shared beneficial ownership by the following related entities:
Waveland International, Ltd., a Cayman Island exempted company, Waveland
Partners L.P., an Illinois limited partnership, Waveland Capital
Management, L.P., an Illinois limited partnership, Clincher Capital
Corporation, an Illinois corporation, Waveland Capital Management, LLC,
an Illinois limited liability company and Waveland Partners, Ltd., a
Cayman Islands exempted company.
(8) Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and an investment advisor is the beneficial owner
of 1,159,060 shares or 8.304% of the Common Stock outstanding of the
Company as a result of acting as investment adviser to various investment
companies. The ownership of one investment company, Fidelity Equity-
Income Fund, amounted to 787,590 shares or 5.642% of the Common Stock
outstanding. Edward C. Johnson 3d, FMR Corp., through its control of
Fidelity and the funds each has sole power to dispose of the 1,159,060
shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d,
Chairman of FMR Corp., has the sole power to vote or direct the voting of
the shares owned directly by the Fidelity Funds, which power resides with
the Funds' Boards of Trustees. Fidelity carries out the voting of the
shares under written guidelines established by the Funds' Boards of
Trustees. Fidelity Management Trust Company, a wholly-owned subsidiary of
FMR Corp., is the beneficial owner of 32,210 shares or 0.23% of the
Common Stock outstanding of the Company as a result of its serving as
investment manager of the institutional account(s). Edward C. Johnson 3d
and FMR Corp., through its control of Fidelity Management Trust Company,
each has sole dispositive power over 32,210 shares and sole power to vote
or to direct the voting of 14,330 shares, and no power to vote or to
direct the voting of 17,880 shares of Common Stock owned by the
institutional account(s) as reported above. Strategic Advisers, Inc., a
wholly-owned subsidiary of FMR Corp. and an investment adviser, provides
investment advisory services to individuals. It does not have sole power
to vote or direct the voting of shares of certain securities held for
clients and has sole dispositive power over such securities. As such, FMR
Corp.'s beneficial ownership may include shares beneficially owned
through Strategic Advisers, Inc.
(9) Dimensional Fund Advisors, Inc., an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940, provides investment
advice to four investment companies registered under the Investment
Company Act of 1940, and serves as investment manager to certain other
commingled group trusts and separate accounts. These investment
companies, trusts and accounts are the "Funds". In its role as investment
adviser or manager, Dimensional possesses voting and/or investment power
over the securities of the Company that are owned by the Funds. All
securities are owned by the Funds, no one of which, individually, owns
more than 5% of the class. Dimensional Fund Advisors Inc. disclaims
beneficial ownership of such securities.
(10) Shares reported are beneficially owned by investment adviser Blavin &
Company, Inc. ("BCI"), Paul W. Blavin as principal, and four institutional
clients for which BCI acts as investment advisor. To the knowledge of BCI,
no one advisory client owns more than 5% of the common stock of the
Company.
(11) David L. Babson & Co., Inc. ("DLB"), in its capacity as investment adviser,
may be deemed the beneficial owner of 741,800 shares of Common Stock of the
Company which are owned by several investment clients.
4
<PAGE>
The following table sets forth information with respect to the numbers of
shares of Common Stock that the following persons beneficially own, or have
the right to acquire within 60 days of March 13, 2000: (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 13, 2000:
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name Ownership(1) Class(1)
- ---- ------------ ----------
<S> <C> <C>
Willis T. King, Jr.............................. 774,546(2) 5.7%
Richard M. Haverland............................ 825,286(3)(5) 5.7%
Robert A. Spass................................. --(4) *
Bradley E. Cooper............................... 3,000(4) *
W. Bernard Pieper............................... 18,356 *
Kenneth S. Crews................................ 12,326 *
Philip J. Hawk.................................. 12,826 *
Robert W. Shower................................ 12,326 *
Charles J. Bachand.............................. 79,316(3)(5) *
Stephen J. Greenberg............................ 15,076(2) *
All Directors and executive officers as a group
(10 persons)................................... 1,753,058(2)(3)(5) 12.0%
</TABLE>
- --------
* Less than 1%.
(1) Based on 13,663,412 shares of Common Stock outstanding at the close of
business on March 13, 2000.
(2) Includes 250,000 shares issued to Mr. King and 6,461 shares issued to Mr.
Greenberg under the 1997 Restricted Stock Plan. See "Executive Officers--
Executive Compensation."
(3) 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: 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.
(4) 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."
(5) Includes the following shares issuable pursuant to stock options: Mr.
Haverland--300,000 and Mr. Bachand--20,000.
5
<PAGE>
BOARD OF DIRECTORS
Election of Directors
The Board of Directors of the Company consists of eight directors divided
into three classes serving staggered terms of three years each. Five of the
Company's current directors are serving in Class I or Class III with terms
that continue beyond the Meeting and such directors are not subject to
election at the Meeting. The three Class II directors are nominees for
reelection at the Meeting.
Each of the Class II directors to be elected at the Meeting will serve a
term of three years to expire at the 2003 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.
Proxies received from holders of Common Stock, in the absence of contrary
instructions, will be voted at the Meeting for the election of Willis T. King,
Jr., Richard M. Haverland and Robert W. Shower as Class II 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 II Directors With Terms of Office Expiring at the 2003
Annual Meeting of Stockholders
<TABLE>
<CAPTION>
Name of Nominees for Class II Business Experience During Past Five
Directors Age Years and Other Information
----------------------------- --- ------------------------------------
<C> <C> <S>
Willis T. King, Jr.................. 56 Chairman, President and Chief
Executive Officer of the Company,
June 1, 1999 to present; Vice
Chairman, Guy Carpenter & Co.,
Inc., March 1997 to May 1999;
Chairman & Chief Executive Officer,
Willcox Inc. Reinsurance, March
1984 to March 1997. Mr. King is
currently a director of the
Company.
Richard M. Haverland (1)............ 58 Insurance Consultant, December 1994
to present; Chairman, President and
Chief Executive Officer of the
Company, January 1996 to June 1,
1999. Mr. Haverland is currently a
director of the Company.
Robert W. Shower.................... 62 Executive Vice President and Chief
Financial Officer, Seagull Energy
Corporation, 1994 to April 1996.
Mr. Shower is a director of Lear
Corporation, Edge Petroleum
Corporation and Nuevo Energy
Company. Mr. Shower is currently a
director of the Company.
</TABLE>
Continuing Class III Directors With Terms of Office Expiring at the 2001
Annual Meeting of Stockholders
<TABLE>
<CAPTION>
Business Experience During Past Five
Name of Class III Directors Age Years and Other Information
--------------------------- --- ------------------------------------
<C> <C> <S>
Robert A. Spass (1)................. 43 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, Ceres Group, Inc. and
Universal American Financial
Corporation.
</TABLE>
6
<PAGE>
<TABLE>
<C> <C> <S>
Bradley E. Cooper (1)............... 33 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., Ceres Group, Inc. and
Universal American Financial
Corporation.
Kenneth S. Crews.................... 51 Managing Director, Warburg Dillon
Read & Co., Inc., 1992 to present;
Managing Director, Lehman Brothers
Incorporated, 1990-1992.
</TABLE>
Continuing Class I Directors with Terms of Office Expiring at the 2002 Annual
Meeting of Stockholders
<TABLE>
<CAPTION>
Business Experience During Past Five
Name of Class I Directors Age Years and Other Information
------------------------- --- -------------------------------------
<C> <C> <S>
W. Bernard Pieper................... 67 Vice Chairman of Halliburton, 1992 to
January 1996; President and Chief
Executive Officer of Brown & Root,
Inc., 1990-1992.
Philip J. Hawk...................... 46 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.
</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 so 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 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 550,000 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
7
<PAGE>
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 are 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 the Debentures, such individuals will not be entitled to participate in
the Directors Plan or any similar plan.
Pursuant to the Directors Plan, Mr. King was issued an option to purchase
150,000 shares of Common Stock during 1999. Except for Options granted to Mr.
King, the exercise price of the Options is equal to $14.69 per share. The
exercise price of Mr. King's Options is $11.00 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 909 shares of Common Stock under the
Directors Plan in 1999.
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 1999.
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 four times in 1999.
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, King and Shower (Chairman). The Committee met once in
1999.
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 five times in 1999.
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>
Willis T. King, Jr......... 56 Chairman, President and Chief Executive Officer
of the Company (June 1, 1999 to Present); see
also "Election of Directors--Names of Class II
Directors" for additional information regarding
Business experience.
Richard M. Haverland....... 58 Chairman, President and Chief Executive Officer
of the Company (until June 1, 1999); see also
"Election of Directors--Names of Class II
Directors" for additional information regarding
business experience.
Charles J. Bachand......... 47 Vice President and Treasurer of the Company; and
Senior Vice President and Chief Financial
Officer of the subsidiaries of the Company,
November 1993 to present.
Stephen J. Greenberg....... 58 Vice President and Secretary of the Company;
Executive Vice President and General Counsel of
the subsidiaries of the Company, May 1997 to
present; Executive Vice President and General
Counsel of Vik Brothers Insurance, Inc.,
January 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
1999 (collectively, the "named executive officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Years Salary ($) Bonus ($) Compensation Award ($) Options (#) Compensation ($)(1)
------------------ ----- ---------- --------- ------------ ---------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Willis T. King, Jr...... 1999 $254,692 $210,000 -- $2,750,000(2) 150,000 --
Director, President and
Chief Executive Officer
of the Company
Richard M. Haverland.... 1999 $525,000 $231,000 -- -- -- $ 5,000
Director, President and 1998 $525,000 -- -- -- -- $16,262
Chief Executive Officer 1997 $525,000 $630,000 $96,115(3) -- -- $ 4,750
of the Company
Charles J. Bachand...... 1999 $188,500 -- 85,436(3) -- 6,000 $ 3,360
Vice President and 1998 $182,500 $ 10,000 -- -- -- $14,325
Treasurer of the 1997 $170,500 $ 55,924 -- -- -- $ 4,750
Company
Stephen J. Greenberg.... 1999 $300,000 -- -- $ 85,608(2) 24,000(4) $ 5,000
Vice President and 1998 $300,000 $ 5,000 -- -- -- $11,400
Secretary 1997 $199,625 $ 75,004 -- 200,000(2) 30,000 $ 1,288
of the Company
</TABLE>
- --------
(1) The amounts shown for Messrs. Haverland, Bachand and Greenberg are
matching and profit sharing contributions under 401(k) plan.
(2) Represents the market price of shares issued under the Restricted Stock
Plan at time of issuance, see "Restricted Stock Plan." The Restricted
Stock award to Mr. Greenberg in 1999 was in exchange for the Restricted
Shares issued to Mr. Greenberg in 1997. The value of Mr. King's 250,000
Restricted Shares at December 31, 1999 was $2,360,000 and the value of Mr.
Greenberg's 6,461 Restricted Shares at December 31, 1999 was $60,992.
(3) $94,415 of the amount paid to Mr. Haverland represents reimbursement of
relocation expenses. Amounts paid to Mr. Bachand represent reimbursement
of relocation expenses.
(4) Represents options to purchase 22,500 shares of Common Stock issued in
exchange for options to purchase 30,000 shares, pursuant to an exchange
offer conducted in 1999, and options to purchase an additional 1,500
shares issued in 1999.
9
<PAGE>
Stock Option Grants in the Last Fiscal Year. The following table sets forth
certain information with respect to stock options to purchase shares of the
Company's Common Stock that were granted to each of the named executive
officers during the fiscal year ended December 31, 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Annual Appreciation
Individual Grants for Option Term(2)
- ---------------------------------------------------------------------- ---------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees Price Expiration
Name Granted(1) in Fiscal Year ($/Sh.) Date 5% ($) 10% ($)
---- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Willis T. King, Jr...... 150,000 33.5 11.00 5/10/09 $1,037,676 $2,629,675
Stephen J. Greenberg.... 22,500 5.0 13.25 3/12/09 187,489 475,135
1,500 .3 9.50 9/10/09 8,962 22,711
Charles J. Bachand...... 5,000 1.1 12.81 2/16/09 40,281 102,079
1,000 .2 9.50 9/10/09 5,975 15,141
</TABLE>
(1) These options were granted at an exercise price equal to the per share
market value of the Common Stock on the grant date. The options (except
for Mr. Greenberg's exchanged options for 22,500 shares, whose vesting is
described under "Compensation Vehicles") become exercisable 33 1/3 percent
each year beginning 1 year after the date of grant.
(2) The potential realizable value is calculated based on the term of the
option (ten years) at its date of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option; however, the
optionee will not actually realize any benefit from the option unless the
market value of the Company's Common Stock in fact increases over the
option price.
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, 1999.
1999 Option Exercises And Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised In-
Unexercised Options Held The-Money Options Held at
at December 31, 1999 December 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Willis T. King, Jr.......... 0 150,000 $ 0 $ 0
Richard M. Haverland........ 300,000 -- $ 0 0
Charles J. Bachand.......... 20,000 6,000 $ 0 0
Stephen J. Greenberg........ 0 24,000 $ 0 0
</TABLE>
Option Repricings. The following table sets forth certain information
concerning repricing of stock options held by any executive officer during the
last ten fiscal years.
Ten-Year Option Repricings
<TABLE>
<CAPTION>
Length of
Number of Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Time Remaining at
Options Time of of Repricing New Date of
Repriced or Repricing or or Exercise Repricing
Name Date Amended (#) Amendment ($) Amendment ($) Price ($) or Amendment
---- -------------- ----------- ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Greenberg.... March 12, 1999 22,500 $13.25 $19.38 $13.25 1 year
</TABLE>
10
<PAGE>
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 1999, the Restricted Stock Plan was amended (i) to permit participants to
have a one-time opportunity to exchange restricted stock for new restricted
stock equal to 75% of the number of shares surrendered for exchange and (ii)
to allow for the issuance of an additional 250,000 shares. 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. In 1999, the 8,615 Restricted Shares
were exchanged for 6,461 shares of Restricted Shares pursuant to the exchange
offer described above. Pursuant to his employment agreement, Mr. King
purchased at least 250,000 Qualifying Shares at $11.00 per share and was
issued 250,000 Restricted Shares in 1999.
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. Matching contributions by the Company to executive officers under the
Retirement Plan for 1999, 1998, and 1997 are set forth in the Summary
Compensation Table. It is not possible to estimate the amount of benefits
payable at retirement under the Retirement Plan to Messrs. King, 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 Contracts. During 1999, the Company entered into a three-year
Employment Agreement with Willis T. King, Jr., under which Mr. King became and
serves as Chairman, President and Chief Executive Officer of the Company.
Under the terms of the Employment Agreement, Mr. King is paid an annual salary
of $420,000, and an annual bonus of up to 150% of annual salary but no less
than $210,000 for 1999 and 2000, to be determined by the Board of Directors of
the Company. The Company also granted Mr. King options to purchase 150,000
shares of Common Stock at an exercise price of $11.00 per share, which was the
closing price of the Common Stock on the New York Stock Exchange on the date
of the Employment Agreement. Mr. King purchased $5 million of Common Stock of
the Company at a price of $11.00 per share. Mr. King also received 250,000
shares of Restricted Shares under the Restricted Stock Plan, with a base price
of $11.00 per share.
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 served 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 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 personal recourse and is secured
by a
11
<PAGE>
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.
On June 1, 1999, the Company entered into a Retirement and Release Agreement
with Mr. Haverland whereby Mr. Haverland resigned from all offices with the
Company and its subsidiaries and all directorships with subsidiaries of the
Company. Under the Agreement, Mr. Haverland continued as a member of the Board
of Directors of the Company and was available as a consultant through December
31, 1999. Under the Agreement, Mr. Haverland continued to receive his salary
until December 31, 1999 and was paid a bonus equal to $231,000. Under the
terms of the Agreement, Mr. Haverland may continue to participate in the
Company's health insurance plans until the earlier of May 31, 2001 or his
obtaining employment with another company. If Mr. Haverland's membership on
the Board of Directors of the Company terminates, such termination will be
treated as a retirement at the normal retirement age in connection with the
1995 Directors' Stock Plan Nonstatutory Stock Option Agreement dated January
4, 1996 between the Company and Mr. Haverland. In addition, the Company agreed
to treat Mr. Haverland as an employee of the Company in connection with the
Purchase, Redemption and Bonus Agreement dated January 23, 1996 between the
Company and Mr. Haverland on the fifth anniversary of such agreement. See
"Certain Relationships and Related Transactions."
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. Ranges for officer
positions are established based on competitive market data. These ranges allow
an officer to be placed above or below the midpoint according to that
officer's overall performance.
12
<PAGE>
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 13, 2000, almost all Company employees had been
granted options.
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.
On February 22, 1999, the Stock Option Plan was amended so that each
employee was given the one-time opportunity to exchange his or her stock
options for Performance-Based Stock Options exercisable for 75% of the shares
covered by the options surrendered for exchange. The Performance-Based Stock
Options will fully vest three years after issuance, with intermediate vesting
subject to the Company's meeting certain combined ratio goals. The exercise
price of Performance-Based Stock Options was 100% of the fair market value of
the Company's common stock on the date the options were issued. The Committee
amended the Plan to allow for the exchange because it believed that the
options of many employees prior to the exchange did not provide meaningful
incentives.
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
Willis T. King has been President, Chief Executive Officer and Chairman of
the Company since June 1, 1999. The Compensation Committee used the same
compensation policy described above for all employees to determine Mr. King's
1999 compensation. In setting both the cash-based and the equity based
elements of Mr. King's overall compensation, the Compensation Committee made
an overall assessment of Mr. King's leadership ability to lead the Company in
reaching its long-term strategic and business goals.
Richard M. Haverland was President, Chief Executive Officer and Chairman of
the Company until June 1, 1999. The Compensation Committee used the same
compensation policy described above for all employees to determine Mr.
Haverland's 1999 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
13
<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 13, 2000, 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 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.
14
<PAGE>
Performance Graph
COMPARISON OF 1999, 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 1999, 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:
1/12/96 12/31/97 12/31/98 12/31/99
------- -------- -------- --------
Highland Insurance
Group, Inc.......... 100 134 62 45
S&P 500............... 100 164 211 255
S&P Insurance
(Property-
Casualty)........... 100 177 164 123
<TABLE>
<CAPTION>
December 31,
January 12, --------------
1996* 1997 1998 1999
----------- ---- ---- ----
<S> <C> <C> <C> <C>
Highlands Insurance Group, Inc.................... 100 134 62 45
S&P 500........................................... 100 164 211 255
S&P Insurance (Property-Casualty)................. 100 177 164 123
</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, 1998 and 1999.
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.
15
<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 2000. Such appointment is being 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 2000.
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.
STOCKHOLDERS' PROPOSALS
From time to time, stockholders of the Company may submit proposals that
they believe should be voted upon at the annual meeting. Pursuant to Rule 14a-
8 under the Securities Exchange Act of 1934, some stockholder proposals may be
eligible for inclusion in the Company's proxy statement and form of proxy for
its 2001 annual meeting. Any such stockholder proposals must be received by
the Secretary of the Company at its executive office at 1000 Lenox Drive,
Lawrenceville, New Jersey 08648 on or before December 1, 2000. The submission
of a stockholder proposal does not guarantee that it will be included in the
Company's proxy statement.
Alternatively, a proposal that the stockholder does not seek to include in
the Company's proxy statement and form of proxy pursuant to Rule 14a-8 may be
submitted in writing to the Secretary of the Company for the 2001 annual
meeting of stockholders not less than 45 days before the date in 2001 which is
the same as the date on which the Company first mailed its proxy materials for
the 2000 Annual Meeting, unless the date of the 2001 annual meeting of
stockholders is advanced by more than 30 days or delayed (other than as a
result of adjournment) by more than 30 days from the anniversary of the 2000
Annual Meeting. For the Company's 2001 annual meeting of stockholders, this
means that any such proposal must be submitted no later than February 15,
2001. If the date of the 2001 annual meeting of stockholders is advanced by
more than 30 days or delayed (other than as a result of adjournment) by more
than 30 days from the anniversary of the 2000 Annual Meeting, the stockholder
must submit any such proposal a reasonable time before the Company mails its
proxy materials for the 2001 annual meeting. The stockholder's submission must
include certain specified information concerning the proposal and information
as to the stockholder's ownership of Common Stock of the Company. Proposals
not meeting these requirements will not be entertained at the annual meeting
of stockholders. If the stockholder does not also comply with the requirements
of Rule 14a-4 under the Securities Exchange Act of 1934, the Company may
exercise discretionary voting authority under proxies it solicits to vote in
accordance with the best judgment on any such proposal submitted by a
stockholder.
16
<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
Meeting of Stockholders of Highlands Insurance Group, Inc., a Delaware
corporation (the "Company"), to be held at the principal executive office of the
Company, 1000 Lenox Drive, Lawrenceville, New Jersey on Tuesday, May 9, 2000, at
10:00 a.m. local time (the "Meeting"), and the Proxy Statement in connection
therewith 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
respect to all of the shares of Common Stock standing in the name of the
undersigned, 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 prior proxy 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 pursuant to this
Proxy.
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 II directors, each
to serve until the 2003 Annual Meeting of Stockholders and until their
successors are elected and qualified; (2) FOR ratification of the appointment of
KPMG LLP as independent public accountants for the Company and its subsidiaries
for 2000; and (3) 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.)
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Please mark
your votes as [X]
indicated in
this example
<S> <C>
Item 1. For the election as a Class II director of NOMINEES,
Willis T. King, Jr., Richard M. Haverland and Robert W.
Shower, each to serve until the 2003 Annual Meeting of
Stockholders and until their successors are elected and
qualified:
FOR nominees listed above WITHHOLD AUTHORITY INSTRUCTION: To withhold authority to vote
(except as marked to the to vote for nominees for individual nominees, write their name(s) in
contrary) listed above the space below:
[_] [_] ------------------------------------------------
Item 2. To ratify the appointment of KPMG FOR AGAINST ABSTAIN
LLP as independent public accountants [_] [_] [_]
for the Company and its subsidiaries
for 2000.
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,
sign by authorized person.
No postage is required.
Signature_______________________________ Signature___________________________________ Date______________
Please mark, sign, date and promptly return this proxy card in the enclosed envelope.
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