<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED].
For the fiscal year ended December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission file number
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below: Highlands Insurance Group Employees' Retirement
and Savings Plan.
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office: Highlands Insurance Group, Inc., 1000
Lenox Drive, Lawrenceville, New Jersey 08648.
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
ANNUAL REPORT ON FORM 11-K
December 31, 1999
INDEX
PAGE
----
AUDITED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT AUDITORS........................................... ii
Exhibits....................................................... iv
i
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Financial Statements and Schedule
December 31, 1999 and 1998
(With Independent Auditors'
Report Thereon)
ii
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 1
Statements of Net Assets Available for Plan Benefits -
December 31, 1999 and 1998 2
Statement of Changes in Net Assets Available for Plan Benefits -
Year ended December 31, 1999 3
Notes to Financial Statements 4-9
SCHEDULE
Schedule of Assets Held for Investment Purposes at End of Year -
December 31, 1999 10
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Administrative Committee of the
Highlands Insurance Group
Employees' Retirement and Savings Plan:
We have audited the accompanying statements of net assets available for plan
benefits of Highlands Insurance Group Employees' Retirement and Savings Plan
(the Plan) as of December 31, 1999 and 1998, and the related statement of
changes in net assets available for plan benefits for the year ended December
31, 1999. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Highlands
Insurance Group Employees' Retirement and Savings Plan as of December 31, 1999
and 1998, and the changes in net assets available for plan benefits for the year
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of assets held for
investment purposes at end of year is presented for the purpose of additional
analysis and is not a required part of the basic financial statements but is
supplementary information required by the Department of Labor Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated, in all material respects, in relation to the basic
financial statements taken as a whole.
KPMG LLP
Houston, Texas
June 6, 2000
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statements of Net Assets Available for Plan Benefits
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Assets:
Investments at fair value (note 2):
Mutual funds $59,375,989 59,323,515
Common stock 1,460,030 763,552
Participants loans 1,457,850 1,416,666
----------- -----------
Total investments at fair value 62,293,869 61,503,733
----------- -----------
Receivable - employer's profit sharing
contribution income - 191,960
Income receivable 4,102 -
Cash 30,082 191,202
----------- -----------
Total assets 62,328,053 61,886,895
Accrued liabilities 54,412 114,370
----------- -----------
Net assets available for plan benefits $62,273,641 61,772,525
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statement of Changes in Net Assets Available for Plan Benefits
Year ended December 31, 1999
Additions to net assets:
Contributions:
Employer $ 836,577
Employee 2,587,303
Rollover 148,640
-----------
Total contributions 3,572,520
Investment income - interest and dividend income 1,515,481
Net appreciation in fair value of investments 4,054,303
Net realized gains 2,207,455
-----------
Net unrealized and realized appreciation in
fair value of investments 6,261,758
-----------
Total investment income 7,777,239
-----------
Total additions 11,349,759
Deductions from net assets:
Benefits paid on behalf of participants 10,843,093
Administrative expenses 5,550
-----------
Total deductions 10,848,643
-----------
Net increase in net assets available for plan benefits 501,116
Net assets available for plan benefits - beginning of year 61,772,525
-----------
Net assets available for plan benefits - end of year $62,273,641
-----------
See accompanying notes to financial statements.
<PAGE>
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
(1) SUMMARY OF THE PLAN
The following brief description of the Highlands Insurance Group Employees'
Retirement and Savings Plan (the Plan) is provided for general information
purposes only. Participants should refer to the Plan agreement for more
complete information.
The Plan is a defined contribution plan covering eligible employees of
Highlands Insurance Group, Inc., a Delaware corporation, and its
subsidiaries (the Company). The record keeping and administrative services
provided for the Plan were transferred to State Street Bank and Trust (the
Trustee) effective April 1, 1997. In addition, in connection with this
transfer, the available investment options for participants were changed
based on the options offered by the Trustee.
Effective July 1, 1998, as approved by the Board of Directors, American
Reliance, Inc. Retirement Plan was merged into the Plan, as amended.
PARTICIPATION
An employee is eligible for participation in the Plan on the first day of
employment. Prior to January 1, 1997, an employee was eligible to
participate in the Plan on the first day of the month following the
completion of one year of service with the employer. The administrative
committee of the Plan consists of members appointed by the board of
directors of the Company.
CONTRIBUTIONS
The Plan allows the participant to contribute between 1% and 15% of
compensation up to an annual maximum of $10,000 in 1999 and 1998, in a
calendar year, which is nontaxable income. The total nontaxable
contribution in any year is subject to certain limitations set forth in the
Internal Revenue Code. The Company's matching contributions are equal to
the percent declared for the year, if any, by the Company's Board of
Directors, up to 6% of the participant's eligible compensation contributed
to the Plan. For 1999, the Company provided a match of 50% on the first 6%
of pay contributed to the Plan. The Company may also make a discretionary
annual profit sharing contribution at the Plan's year end as determined by
the Board of Directors. There was no discretionary profit sharing
contribution for the 1999 Plan year.
In order to be eligible for the discretionary annual profit sharing
contribution, the participant must have completed one year of service and
be actively employed by the employer on December 31 of the Plan year for
which the contribution applies unless the participant meets certain other
conditions specified by the Plan.
Participants may elect to make after-tax contributions to the Plan, in
addition to their pre-tax contribution, not to exceed 15% in total for 1999
and 1998, respectively, of their eligible earnings during the Plan year.
After tax contributions are not subject to company match and/or profit
sharing contributions.
(Continued)
4
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
INVESTMENT OPTIONS
From January 1, 1997 through March 31, 1997, the following investment options
were available to Plan participants:
. BALANCED GROWTH PORTFOLIO - Amounts invested in this fund are invested
with a view toward providing capital appreciation from stocks, balanced
with stable income from bonds.
. LIFE SOLUTIONS GROWTH FUND - Amounts invested in this fund are invested
with a view toward providing capital growth by investing primarily in
stocks.
. STABLE VALUE INCOME FUND - Amounts invested in this fund are invested with
a view toward preserving principal and provide a rate of return
competitive with other fixed income investments by investing primarily in
investment contracts.
Effective April 1, 1997, the following additional investment options were
made available to Plan participants:
. INCOME AND GROWTH PORTFOLIO - Amounts invested in this fund are invested
primarily with a view toward providing stable income and opportunity for
moderate growth in a highly diversified portfolio of stocks and bonds.
. MATRIX EQUITY FUND - Amounts invested in this fund are invested with a
view toward producing returns that exceed the S&P 500 Index by investing
primarily in common stock.
. ACTIVE INTERNATIONAL FUND - Amounts invested in this fund are invested
with a view toward providing long-term capital appreciation primarily
through investments in international stocks.
Effective July 1, 1998, the Plan was amended to include the following
investment options to participants:
. AMERICAN BOND FUND OF AMERICA - This bond fund seeks a high level of
current income by investing primarily in investment grade corporate bonds,
U.S. government bonds and money market securities.
. FRANKLIN SMALL CAP GROWTH FUND - This aggressive growth stock fund seeks
maximum capital appreciation by investing in domestic small companies with
market capitalizations generally under $1 billion.
. TEMPLETON FOREIGN FUND I - This international stock fund seeks long-term
capital growth by investing primarily in stocks and, to a lesser degree,
debt obligations of companies and governments outside the United States.
(Continued)
5
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
. Highlands Insurance Group Stock Fund - This single stock fund seeks growth
over the long-term through appreciation in the value of Highlands
Insurance Group, Inc. common stock. The Fund provides an opportunity to
become an owner in the Company and share directly in its future
performance.
In addition, the following three investment options were no longer available
to plan participants:
. Income and Growth Portfolio
. Balanced Growth Portfolio
. Active International Fund
Net assets invested in the Active International Fund as of July 1, 1998 were
transferred to the Templeton Foreign Fund.
BENEFITS PAID TO PARTICIPANTS
Upon application and approval by the administrative committee, a participant
may withdraw, during active employment, all or part of his/her after-tax
employee contribution account balance and, under certain conditions, such as
hardship withdrawals, the vested portion of his/her employer contribution
account balance. Participants have a vested interest in the employer
contribution account based on years of service as follows:
VESTED
YEARS OF SERVICE PERCENTAGE
---------------------- -----------------
Less than 3 0%
At least 3 but less than 4 33-1/3
At least 4 but less than 5 66-2/3
5 or more 100
The right to benefits under the Plan is nonforfeitable upon the attainment of
normal retirement age (age 65 effective July 1, 1998), permanent disability
or death. A retired or disabled participant or the beneficiary of a deceased
participant is entitled to receive the total amounts in the participant and
employer contribution accounts as of the date of retirement, permanent
disability, or death, whether his/her interest in such accounts is vested or
not. A participant which has terminated employment is entitled to receive
the total amounts in the participant contribution accounts and his/her vested
interest in the amounts in the employer contribution account.
(Continued)
6
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
FORFEITURES
Forfeitures represent the nonvested portion of a terminated participant's
employer contribution account. Forfeitures are allocated at each year end
($540,169 and $81,176 in 1999 and 1998, respectively) to all active
participants eligible for an employer contribution for such year. The
allocation is based on the same method as that of the employer contribution
discussed above. Forfeited employer tax deferred contributions are used to
reduce future company matching contributions.
PARTICIPANT LOANS
Effective April 1, 1997, the Plan agreement was amended to add provisions for
loans to be made to participants subject to ERISA and Company guidelines.
Prior to the Plan's amendment, the Plan agreement did not provide for
participant loans. A participant may request a loan for up to 50% of the
participant's vested interest up to a maximum of $50,000. No more than two
loans may be outstanding at any time with $1,000 as a minimum loan amount.
The term of the loan cannot exceed five years and requires level amortization
with payments not less frequently than quarterly. The loan interest rate for
1999 and 1998 is the prime rate plus 1%. All loans are due and payable from
the participant's account upon termination of employment.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and an allocation of the Company's matching contribution, Plan earnings,
forfeitures and administrative expenses.
FEES AND EXPENSES
Administrative expenses, which are related to compliance and operational
activities as defined by the Department of Labor, may be charged against the
Plan assets at the discretion of the Plan administrator and in accordance
with the terms of the Plan. Such expenses were $166,496 and $103,273 in 1999
and 1998, respectively, and are primarily investment expenses, which are
presented with investment income.
PLAN AMENDMENT, MODIFICATION, AND TERMINATION
The Board of Directors of the Company may amend, modify, or terminate the
Plan at any time. No such termination is contemplated, but if it should
occur, the accounts of all participants would be immediately fully vested and
paid in accordance with the terms of the Plan.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
The Plan's investments are stated at fair value. Quoted market prices are
used to value investments. Shares of mutual funds are valued at the net
asset value of shares held by the Plan at year end.
Purchases and sales of securities are recorded on a trade-date basis.
Dividends are recorded on the ex-dividend date. Participant loans are stated
at cost which approximates their fair value.
(Continued)
7
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
ACCRUED LIABILITIES
Accrued liabilities represent amounts owed for Plan expenses including
investment expenses, as of the end of the year.
(3) INVESTMENTS
In September 1999, the American Institute of Certified Public Accountants
issued Statement of Position 99-3, Accounting for and Reporting of Certain
Defined Contribution Plan Investments and Other Disclosure Matters (SOP 99-
3). SOP 99-3 simplifies the disclosure for certain investments and is
effective for plan years ending after December 15, 1999 with earlier
application encouraged. The Plan adopted SOP 99-3 during the Plan year
ending December 31, 1999. Accordingly, information previously required to be
disclosed about participant-directed fund investment programs is not
presented in the Plan's 1999 financial statements. The Plan's 1998 financial
statements have been reclassified to conform with the current year's
presentation.
Individual investments in excess of 5% of net assets available for plan
benefits are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Small Cap Fund $ 6,545,957 -
Life Solutions Growth Fund 15,690,855 20,876,706
Stable Value Income Fund 20,966,050 18,413,090
Matrix Equity Fund 12,465,867 14,635,844
================= =================
</TABLE>
During 1999, the Plan's investments (including gains and losses on
investments bought and sold, as well as held during the year) appreciated in
value by $6,261,758, as follows:
Mutual funds 6,477,370
Common stock (215,612)
-----------
$ 6,261,758
===========
(Continued)
8
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HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 1999 and 1998
(4) NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to the nonparticipant-directed investments is
as follows:
DECEMBER 31,
-------------------------------
1999 1998
--------------- -------------
Net assets:
Common stock $1,460,030 $763,552
YEAR ENDED
DECEMBER 31,
1999
-----------------
Changes in net assets:
Contributions $ 895,931
Dividends 1,634
Net appreciation (215,612)
Benefits paid to participants (131,564)
Transfers to participant-directed investments 146,149
Administrative expenses (60)
-----------------
$ 696,478
=================
(5) FEDERAL INCOME TAX MATTERS
The Plan obtained its latest determination letter on August 14, 1996, in
which the Internal Revenue Service (IRS) stated that the Plan, as then
designed, was in compliance with the applicable requirements of the Internal
Revenue Code (the Code). The Plan has been amended since receiving the
determination letter. However, the Plan Administrator and the Plan's tax
counsel believe that the Plan is designed and is currently being operated in
compliance with the applicable provisions of the Code.
9
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SCHEDULE
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Schedule of Assets Held for Investment Purposes at End of Year
December 31, 1999
<TABLE>
<CAPTION>
IDENTITY OF ISSUE, BORROWER, CURRENT
LESSOR, OR SIMILAR PARTY DESCRIPTION OF INVESTMENT COST VALUE
-------------------------------- ------------------------------------ --------------- ----------------
<S> <C> <C> <C>
* State Street Bank and Trust American Bond Fund of America $ 1,608,616 1,660,208
* State Street Bank and Trust Life Solutions Growth Fund 13,503,037 15,690,855
* State Street Bank and Trust Stable Value Income Fund 18,893,225 20,966,050
* State Street Bank and Trust Franklin Small Cap Growth Fund 4,253,302 6,545,957
* State Street Bank and Trust Matrix Equity Fund 9,858,156 12,465,867
* State Street Bank and Trust Templeton Foreign Fund I 1,659,343 2,047,052
* State Street Bank and Trust Highlands Insurance Group Stock
Fund 1,518,939 1,460,030
* Participant loans (Bearing interest at rates between
8.75% and 9.50% maturing in
years 2000 through 2004) 1,457,850 1,457,850
-------------- ---------------
$ 52,752,468 62,293,869
============== ===============
</TABLE>
* Represents party-in-interest transactions.
See accompanying independent auditors' report.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Plan administrators have duly caused this annual report to be signed on the
Plan's behalf by the undersigned hereunto duly authorized.
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Dated: June 26, 2000 By: /s/ Georgean M. Wardzinski
-----------------------------------
Georgean M. Wardzinski,
Plan Administrator
iii
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EXHIBIT INDEX
Exhibit
23 Consent of KPMG LLP
iv
