SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period
from ______________ to ____________.
0-16533
(Commission File Number)
Old Guard Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2852984
(State of Incorporation) (IRS Employer ID Number)
2929 Lititz Pike, Lancaster, PA 17604
(Address of Principal Executive Offices) (Zip Code)
717-569-5361
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of Shares Outstanding as of July 31, 1998:
Common Stock (No Par Value) 4,110,919
(Title of Class) (Outstanding Shares)
Page 1 of 21
PAGE 1
<PAGE>
OLD GUARD GROUP, INC
Form 10-Q
For the Quarter Ended June 30, 1998
Contents
Page No.
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Income for the
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Shareholders'
Equity for the Six Months Ended June 30,
1998 6
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and
1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8 - K 17
PAGE 2
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(UNAUDITED)
As of As of
June 30, 1998 December 31, 1997
<S> <C> <C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost $36,248,944 $38,382,722
Available for sale, at fair value 54,418,919 57,237,836
Preferred stocks, available for sale, at fair value 5,667,440 4,626,565
Common stocks, available for sale, at fair value 13,965,730 12,208,318
Other invested assets 7,069,092 5,668,025
Total investments 117,370,125 118,123,466
Cash and cash equivalents 6,997,053 10,214,908
Receivables:
Premiums 9,018,885 7,945,218
Reinsurance 13,255,550 10,767,770
Investment income 1,212,868 1,236,186
Affiliates 2,253,455 1,093,062
Prepaid reinsurance premiums 3,263,225 6,285,844
Deferred policy acquisition costs 9,124,375 7,318,767
Deferred income taxes - 262,750
Property and equipment 13,390,731 10,112,212
Goodwill 744,451 772,023
Other assets 3,316,515 1,266,509
Total assets $179,947,233 $175,398,715
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses 49,921,751 48,718,666
Unearned premiums 40,474,868 36,535,108
Accrued expenses 1,529,841 2,541,896
Capital lease obligations 447,657 796,558
Deferred income taxes 442,038 -
ESOP liability 3,702,029 3,840,566
Other liabilities 1,664,319 3,662,423
Total liabilities 98,182,503 96,095,217
Minority Interest 692,030 649,125
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized;
0 issued and outstanding) - -
Common Stock (15,000,000 shares authorized;
4,239,459 and 4,204,910 shares issued; 4,110,919
and 4,084,370 shares outstanding; no par) 38,641,398 38,317,908
Additional paid-in capital 4,750,206 4,787,703
Deferred compensation (5,728,340) (6,277,553)
Retained earnings 40,977,643 40,259,736
Net unrealized investment gains, net of deferred
income taxes 4,875,826 3,856,612
Treasury stock, at cost (128,540 and
120,540 shares) (2,444,033) (2,290,033)
Total shareholders' equity 81,072,700 78,654,373
Total liabilities and shareholders' equity $179,947,233 $175,398,715
============ ============
</TABLE> <PAGE 3>
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 4
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(UNAUDITED)
For the Three For the Three
Months Ended Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Revenue:
Net premiums written $21,864,934 $18,061,209
Change in unearned premiums (3,417,596) (2,260,382)
Net premiums earned 18,447,338 15,800,827
Investment income, net of expenses 1,548,070 1,560,761
Net realized investment gains 936,818 415,829
Other revenue 609,562 142,800
Total revenue 21,541,788 17,920,217
=========== ===========
Expenses:
Losses and loss adjustment expenses incurred 14,274,556 10,046,229
Operating expenses 8,178,437 6,150,051
Interest expense 103,504 159,352
Total expenses 22,556,497 16,355,632
Income (loss) before income tax (benefit)
and minority interest (1,014,709) 1,564,585
Income tax expense (benefit) (374,757) 635,824
Income (loss) before minority interest (639,952) 928,761
Minority interest in earnings of consolidated
subsidiary 9,818 4,501
Net income (loss) (649,770) 924,260
Other comprehensive income, before tax:
Unrealized holding gains 393,929 3,490,785
Less: Reclassification adjustment for gains
included in net income 936,818 415,829
Other comprehensive income (loss), before tax (542,889) 3,074,956
Income tax expense (benefit) related to items
of other comprehensive income (190,355) 1,095,717
Other comprehensive income (loss), net of tax (352,534) 1,979,239
Comprehensive income (loss) $(1,002,304) $2,903,499
Earnings (loss) per share =========== ==========
Basic (0.17) 0.24
Diluted (0.17) 0.24
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 5
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(UNAUDITED)
For the Six For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Revenue:
Net premiums written $43,139,144 $34,813,770
Change in unearned premiums (6,962,379) (4,305,997)
Net premiums earned 36,176,765 30,507,773
Investment income, net of expenses 3,051,824 2,933,997
Net realized investment gains 1,744,199 883,087
Other revenue 1,208,213 231,690
Total revenue 42,181,001 34,556,547
Expenses:
Losses and loss adjustment expenses incurred 23,814,571 18,931,456
Operating expenses 16,680,045 12,006,807
Interest expense 215,213 295,881
Total expenses 40,709,829 31,234,144
=========== ===========
Income before income tax and minority interest 1,471,172 3,322,403
Income tax expense 500,113 1,254,714
Income before minority interest 971,059 2,067,689
Minority interest in earnings of consolidated
subsidiary 42,905 14,775
Net income 928,154 2,052,914
Other comprehensive income, before tax:
Unrealized holding gains 3,287,742 2,458,326
Less: Reclassification adjustment for gains
included in net income 1,744,199 883,087
Other comprehensive income, before tax 1,543,543 1,575,239
Income tax expense related to items of other
comprehensive income 524,329 533,683
Other comprehensive income, net of tax 1,019,214 1,041,556
Comprehensive income $1,947,368 $3,094,470
Earnings per share ========== ==========
Basic 0.25 0.54
Diluted 0.24 0.54
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 6
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Six Months Ended June 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Investment
Additional Gains, Net of
Common Stock Paid-In Deferred Retained Deferred Treasury
Shares Amount Capital Compensation Earnings Income Taxes Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 4,084,370 $38,317,908 $4,787,703 $(6,277,553) $40,259,736 $3,856,612 $(2,290,033) $78,654,373
Comprehensive income:
Net income 928,154 928,154
Unrealized gains on
investments, net of
reclassification
adjustment 1,019,214 1,019,214
Comprehensive income 1,947,368
Dividends ($.05 per
share) (210,247) (210,247)
Exercise of common stock
options 32,349 323,490 323,490
Purchase of treasury stock (8,000) (154,000) (154,000)
MRP stock-based
compensation 2,200 (162,632) 410,676 248,044
ESOP compensation earned 125,135 138,537 263,672
Balance, June 30, 1998 4,110,919 $38,641,398 $4,750,206 $(5,728,340) $40,977,643 $4,875,826 $(2,444,033) $81,072,700
========= =========== ========== =========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statement.
PAGE 7
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
[CAPTION]
<TABLE>
For the Six For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 928,154 $ 2,052,914
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 606,880 711,485
Net realized investment gains (1,741,199) (883,087)
Deferred income tax provision 180,458 475,164
Non-cash compensation expense 511,716 120,034
Other 39,905 14,775
(Increase) decrease in assets:
Receivables (4,698,522) (2,058,445)
Prepaid reinsurance premiums 3,022,619 1,497,773
Deferred policy acquisition costs (1,805,608) (944,047)
Other assets (2,000,006) 152,467
Increase (decrease) in liabilities:
Losses and loss adjustment expenses 1,203,085 (2,217,575)
Unearned premiums 3,939,760 1,994,551
Accrued expenses (1,012,055) (846,322)
Other liabilities (678,757) 466,445
Net cash provided (used) by operating activities (1,503,570) 536,132
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity (4,991,611) (28,987,512)
Available for sale (7,700,659) -
Proceeds from sales of fixed income securities
Available for sale 10,820,521 3,911,883
Proceeds from maturities of fixed income securities
Held to maturity 7,072,238 -
Available for sale 1,022,511 5,226,743
Cost of equity securities acquired (4,139,288) (4,795,895)
Proceeds from sales of equity securities 3,190,235 3,320,106
Cost of purchases of other invested assets (50,000) (2,640,000)
Proceeds from sales of other invested assets (1,250,000) 588,582
FDIC acquisition, net of cash acquired - (626,175)
Cost of purchases of property and equipment (3,843,692) (2,747,445)
Proceeds from sales of property and equipment 3,000 -
Net cash provided (used) by investing activities 133,255 (26,749,713)
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs 323,490 33,772,098
Purchase of treasury stock (1,473,345) -
Payment of dividends (210,247) -
Proceeds from bank loans - 5,054,770
Payments on principal of capital lease or bank loan (487,438) (2,005,230)
Net cash provided (used) by financing activities (1,847,540) 36,821,638
Net increase (decrease) in cash and cash equivalents (3,217,855) 10,608,057
<PAGE 8>
Cash and cash equivalents at beginning of period 10,214,908 5,668,369
Cash and cash equivalents at end of period $ 6,997,053 $ 16,276,426
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 9
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The consolidated financial statements include the accounts
of Old Guard Group, Inc. (OGGI) and its wholly-owned subsidiaries
(the Group), Old Guard Insurance Company (Old Guard), Old Guard
Fire Insurance Company (Old Guard Fire), First Patriot Insurance
Company (First Patriot), Old Guard Insurance Management Company
(OGIM), 2929 Service Corporation and OGGI's 80% owned subsidiary,
First Delaware Insurance Company (First Delaware).
The Group is a regional insurance holding company that, on
February 11, 1997, completed a subscription offering in which it
raised $38.3 million, net of issuance costs of $3.7 million, in
exchange for 4.2 million shares of no par common stock.
Concurrent with the offering and in accordance with a plan of
conversion, Old Guard, Old Guard Fire and First Patriot
(collectively, the Insurance Companies) were converted from
mutual to stock insurance companies and issued shares of common
stock to the Group in exchange for $16.0 million. As a result of
the conversion, the Insurance Companies are wholly-owned
subsidiaries of the Group.
2. Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations,
and cash flows for the interim periods. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the full year.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
for the year ended December 31, 1997 included in the Group's 1997
Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Certain amounts in the 1997 financial statements have been
reclassified to conform with the current year presentation.
3. Earnings Per Share
The following table reconciles the numerator and denominator
used in basic earnings per share to diluted earnings per share
for the six months ended:
<PAGE 10>
June 30, 1998 June 30, 1997
Net income - for basic and
diluted earnings per share $ 928,154 $2,052,914
Common shares outstanding 3,720,243 3,802,235
Dilutive shares
Treasury stock in MRP trust 126,682 -
Outstanding stock options 98,900 -
Total common and dilutive
shares 3,945,825 3,802,235
4. Supplemental Cash Flow Disclosure
Interest paid for the six months ended June 30, 1998 and
1997 was $215,213 and $271,095, respectively. Net income taxes
paid for the six months ended June 30, 1998 and 1997 was
$1,322,200 and $271,095, respectively.
5. New Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards
(SFAS) No. 130, "Comprehensive Income," was issued. SFAS No. 130
establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses,
gains and losses). SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a
statement of financial position. The effects of adopting SFAS
No. 130 are included in the consolidated financial statements
included herein.
In June 1997, SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997.
The Group is currently in the process of determining the effect
of SFAS No. 131 upon its financial reporting requirements and
<PAGE 11> will adopt SFAS No. 131 for its year-end 1998 financial
reporting.
In June 1998, SFAS No. 133 was issued. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and
for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure of
variable cash flows of a forecasted transaction, or (iii) a hedge
of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation. SFAS
No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. While the Group is presently
evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Group's
financial condition or results of operations.
PAGE 12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Premiums. Gross premiums written increased $996,000, or
4.1%, to $25.4 million, and $5.6 million, or 12.5%, to
$50.6 million for the three and six month ends June 30, 1998,
compared to the three and six months ended June 30, 1997. The
primary cause of this increase was the assumption of 100% of the
net premiums of New Castle Mutual Insurance Company (New Castle),
which is affiliated with the Group through a management contract.
Assumed premiums from New Castle amounted to $1,428,000 in the
second quarter of 1998 versus $206,000 in 1997 and $5,815,000 for
the first six months of 1998 versus $504,000 in 1997. Of the
$5,815,000 of premiums assumed from New Castle, $3,015,000 is
attributable to the one time transfer of New Castle's unearned
premium reserve as of January 1, 1998.
Premiums ceded to reinsurers decreased $2,781,000, or 44.1%,
to $3,529,000, and $2,920,000, or 28.7%, to $7,266,000 for the
three and six months ended June 30, 1998 compared to the three
and six months ended June 30, 1997. The decrease in premiums
ceded was attributable to the elimination, on a run-off basis, of
the quota share reinsurance agreement effective January 1, 1998.
As a result, no premiums are ceded under the quota share
reinsurance treaty in 1998. This compares to $3,098,000 and
$4,131,000 of ceded premiums ceded under this treaty for the
three and six months ended June 30, 1997, respectively, and
negative ceded premiums of $1,395,000 under the surplus
reinsurance treaty during the six months ended June 30, 1997 as a
result of its cancellation.
Net premiums written increased $3,804,000, or 21.1%, to
$21,865,000, and $8,325,000, or 23.9%, to $43,139,000 for the
three and six months ended June 30, 1998 compared to the three
and six months ended June 30, 1997. Net premiums earned
increased $2,647,000, or 16.8%, to $18,447,000, and $5,659,000,
or 18.6%, to $36,177,000 during the three and six months ended
June 30, 1998 compared to the three and six months periods ended
June 30, 1997. The increases in net premiums written and earned
were directly attributable to the effects of the changes
instituted in the Group's reinsurance program and increases in
gross premiums written as previously discussed.
Net Investment Income. Cash and invested assets decreased
$3,971,000 million, or 3.1%, to $124.4 million on June 30, 1998
from $128.3 million on December 31, 1997. This decrease is
primarily a result of additional investments in computer software
and hardware and constructions costs associated with the Group's
home office expansion in Lancaster, Pennsylvania offset by gross
unrealized gains on the investment portfolio that are carried at
fair value of approximately $1,544,000. For the six months ended
June 30, 1998, the yield on average cash and invested assets was
5.1% compared to 5.2% for the comparable period of 1997. Despite
the overall decrease in invested assets and yield, net investment
<PAGE 13> income for the six months ended June 30, 1998 increased
$118,000 over the comparable period in 1997 because the proceeds
from the Group's subscription offering completed in the first
quarter of 1997 were invested for the entire six months of 1998.
Net Realized Investment Gains. Net realized investment
gains were $937,000 and $1,744,000 for the three and six months
ended June 30, 1998, respectively, compared to $416,000 and
$883,000 for the comparable periods in 1997. The increase can be
attributed to profits taken in both the Group's fixed income and
equity portfolios.
Other Revenue. Other revenue increased $467,000, or 326.9%,
to $610,000, and $977,000, or 421.5%, to $1,208,000 for the three
and six months ended June 30, 1998 compared to the three and six
months ended June 30, 1997. The increase is attributable to the
management agreement entered into with New Castle effective
January 1, 1998.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred increased by $4,228,000, or 42.1%,
to $14,275,000, and $4,883,000, or 25.8%, to $23,815,000 for the
three and six months ended June 30, 1998 compared to the three
and six months ended June 30, 1997. The loss and loss adjustment
expense ratio was 77.4% and 65.8% for the three and six months
ended June 30, 1998, respectively, versus 63.6% and 62.1% for the
comparable periods in 1997. The increase in the loss and loss
adjustment expenses can be attributed to nearly $3,400,000 of
losses from tornadoes and severe thunderstorms during the first
week of June 1998 and more losses being retained by the Group as
a result of the termination of the quota share reinsurance
treaty.
Operating Expenses. Operating expenses increased by
$2,028,000, or 33.0%, to $8,178,000 and $4,673,000, or 38.9% to
$16,680,000 for the three and six months ended June 30, 1998
compared to the three and six months ended June 30, 1997. The
increases are primarily the result of the loss of commission
income because of the unwinding of the quota share reinsurance
agreement in 1998 and additional commission expense on the
assumed business from New Castle.
Federal Income Tax Expense. Federal income tax as a
percentage of pre-tax income was 34.0% and 37.8% for the six
months ended June 30, 1998 and 1997, respectively. The decrease
in effective tax rate is primarily attributable to additional tax
exempt interest on the investment portfolio in 1998.
Liquidity and Capital Resources
The principal sources of the Group's cash flow are premiums,
investment income, maturing investments and proceeds from sales
of invested assets. In addition to the need for cash flow to
meet operating expenses, the liquidity requirements of the Group
relate primarily to the payment of losses and loss adjustment
<PAGE 14> expenses. The short and long-term liquidity
requirements of the Group vary because of the uncertainties
regarding the settlement dates for liabilities for unpaid claims
and because of the potential for large losses, either
individually or in the aggregate.
The Group and its subsidiaries have in place unsecured lines
of credit with a local financial institution under which they may
borrow up to an aggregate of $1.5 million. As of June 30, 1998,
no amounts were borrowed against these lines of credit.
Net cash provided (used) by operating activities was
$(1,504,000) and $536,000 during the first six months of 1998 and
1997, respectively. The change in cash flow from operating
activities from 1997 to 1998 is primarily attributable to reduced
operating profitability as a result of the tornadoes and severe
thunderstorms in June of 1998, prepaid premium taxes and an
increase in reinsurance receivables from New Castle.
In 1998, cash used by investing activities was minimal as
the Group utilized the net proceeds from activity in its
investment portfolio to finance its home office expansion. In
1997, cash used for investing activities was $26.7 million
because the Group invested the net proceeds from the subscription
offering and made continuing investments in computer systems.
In 1998, cash used by financing activities was $1,848,000 as
the Group purchased treasury stock and paid cash dividends. In
1997, cash provided by financing activities of $36.8 million
resulted primarily from the net proceeds from the subscription
offering less repayments of capital leases and other debt.
The principal source of liquidity for Old Guard Group, Inc.
(OGGI) will be dividend payments and other fees received from its
subsidiaries. OGGI's insurance subsidiaries are restricted by
the insurance laws of the state of domicile as to the amount of
dividends or other distributions they may pay to the OGGI without
the prior approval of the state regulatory authority. Under
Pennsylvania law, the maximum amount that may generally be paid
by an insurance company during any twelve-month period after
notice to, but without prior approval of, the Pennsylvania
Insurance Department, cannot exceed the greater of 10% of the
insurance company's statutory surplus as reported on the most
recent annual statement filed with the Department, or the net
income of the insurance company for the period covered by such
annual statement. However, the Insurance Companies are further
restricted as to the amount of dividends that may be paid to
OGGI. These restrictions do not allow the Insurance Companies to
pay a dividend to OGGI without prior approval of the Pennsylvania
Insurance Department for a 36 month period following the
conversion.
OGGI's Employee Stock Ownership Plan (ESOP) borrowed
$4.1 million from an unaffiliated lender and $100,000 from OGGI
to purchase 10% of the common stock issued in the Conversion.
<PAGE 15> The loans bear an 8.45% interest rate, and will require
the ESOP to make monthly payments of approximately $49,000 for a
term of 10 years. The loans are secured by the shares of common
stock purchased and the earnings thereon. Shares purchased with
such loan proceeds will be held in a suspense account for
allocation among participants as the loan is repaid. OGGI
expects to contribute sufficient funds to the ESOP to repay such
loan, plus such other amounts as the OGGI's Board of Directors
may determine at its discretion.
In February 1996, OGIHC and American Technologies, Inc., a
California based software lessor, entered into a lease financing
agreement in connection with the acquisition by the Group of a
new policy processing software system for approximately
$2.5 million. The terms of the lease financing agreement provide
for an aggregate lease facility up to $1.5 million. The implied
interest rate under the lease is 9.5%. As of December 31, 1996,
the lease facility was fully utilized. Under the terms of the
lease financing agreement, OGIHC is required to make payments of
approximately $57,000 per month for 24 months.
In July 1998, the Group secured a $3,500,000 mortgage to
finance its home office expansion. The terms of the mortgage
require principal payments over fifteen years and interest
floating monthly at LIBOR plus 1.5%. $2,000,000 of the mortgage
was converted to a fixed rate of 7.70% over fifteen years through
the use of an interest rate swap.
Effects of Inflation
The effects of inflation on the Group are implicitly
considered in estimating reserves for unpaid losses and loss
adjustment expenses, and in the premium rate-making process. The
actual effects of inflation on the Group's results of operations
cannot be accurately known until the ultimate settlement of
claims. However, based upon the actual results reported to date,
it is management's opinion that the liability for losses and LAE,
including losses that have been incurred but not yet reported,
make adequate provision for the effects of inflation.
Year 2000 Issue
The unprecedented advances in computer technology over the
past several decades have resulted in dramatic changes in the way
companies do business. Most of these developments have been
beneficial, but some have proven costly, as businesses have
struggled to adapt to various features of the new technological
landscape. One such well-publicized problem has arisen out of
the worldwide use of the so called "Year 2000" programming
convention, in which two digit numbers were generally used
instead of four digit numbers to identify the years used in
dates. As a consequence, most computers require relatively
costly reprogramming to enable them to correctly perform data
operations involving years 2000 or later, a problem anticipated
<PAGE 16> to have substantial repercussions on the business world
because computer operations involving date calculations are
pervasive.
Beginning in 1991, the Group began evaluating and
reprogramming its own computer systems to address the Year 2000
problem. By the end of 1992, all necessary programming work was
completed and implemented. With the completion of these changes,
Year 2000 issues are not likely to result in any material adverse
disruption in the Group's computer systems or its internal
business operations. The cost of this work through 1992 was
approximately $140,000.
To ensure that all software applications are Year 2000
compliant, the Group is currently testing all applications in a
true Year 2000 environment. This testing is being conducted on
hardware and system operating software that has the operating
system date beyond 1999. This project is scheduled to be
completed by December 31, 1998. It is estimated that the total
remaining cost to complete this phase and become Year 2000
compliant will be approximately $10,000.
Many experts now believe that the Year 2000 problem may have
a material adverse impact on the national and global economy
generally. In addition, it seems likely that if businesses are
materially damaged as a result of Year 2000 problems, at least
some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies.
And, although management has concluded that under a fair reading
of the various policies of insurance issued by it no coverage for
Year 2000 problems should be considered to exist, it is not
possible to predict whether or to what extent any such coverage
could ultimately be found to exist by courts in the various
jurisdictions. Accordingly, important factors which could cause
actual results to differ materially from those expressed in the
forward looking statements include, but are not limited to, the
inability of the Group to accurately estimate the impact of the
Year 2000 problem on the insurance issued by, or other business
operations of the Group.
Forward-Looking Statements
Certain statements contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations and
other statements made throughout this report constitute "forward-
looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Such forward-looking
statements involve certain assumptions, risks and uncertainties
that could cause actual results to differ materially from those
included in or contemplated by the statements. These
assumptions, risks and uncertainties include, but are not limited
to those associated with factors affecting the property-casualty
insurance industry generally, including price competition, size
and frequency of claims, escalating damage awards, natural
disasters, fluctuations in interest rates and general business
<PAGE 17> conditions; the Group's dependence on investment
income; the geographic concentration of the Group's business in
the Northeast United States, the adequacy of the Group's
liability for losses and loss adjustment expenses; government
regulation of the insurance industry and the other risks and
uncertainties discussed or indicated in all documents filed by
the Group with the Securities and Exchange Commission. The Group
expressly disclaims any obligation to update any forward-looking
statements as a result of developments occurring after the
release of this report.
PAGE 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. In February, 1997, four policyholders, purportedly on
behalf of all policyholders, filed an action against the Group,
the Insurance Companies, and their directors in the United States
District Court for the Eastern District of Pennsylvania.
Plaintiffs seek damages for the loss of their alleged equity
interest in the Insurance Companies as a result of the
conversion, based on numerous theories including breach of
fiduciary duty and civil rights claims. In April 1997,
defendants filed a motion to dismiss for failure to state a cause
of action. The motion to dismiss was granted as to two counts
and denied as to the remaining nine counts. In January 1998,
plaintiffs filed a motion for class certification and in July
1998, defendants filed a motion for summary judgment, which
motions are currently pending before the Court.
ITEM 2. Change in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders -
The 1998 Annual Meeting of Shareholders (the "Meeting") of
the Group was held on May 12, 1998. Notice of the Meeting was
mailed to shareholders on or about April 15, 1998.
The meeting was held for the following purposes:
1. To elect three Class II directors to hold office for
three years from the date of election and until their
successors are elected and qualified, and to elect two
Class I directors to hold office for two years from the
date of election and until their successors are elected
and qualified (Matter No. 1);
2. To ratify the appointment by the Group's Board of
Directors of PricewaterhouseCoopers L.L.P., as the
Group's independent auditors for the fiscal year ending
December 31, 1998 (Matter No. 2).
There was no solicitation in opposition to the nominees of
the Board of Directors. All nominees of the Board of Directors
were elected. The number of votes cast for or against, as well
<PAGE 19> as the number of abstentions for each of the nominees
for election to the Board of Directors were as follows:
ELECTION OF CLASS II DIRECTORS
Nominee For Withheld
James W. Appel 3,394,100 12,000
M. Scott Clemens 3,358,528 47,572
G. Arthur Weaver 3,368,200 37,900
ELECTION OF CLASS I DIRECTORS
Nominee For Withheld
Karen M. Balaban 3,351,600 54,500
Noah W. Kreider, Jr. 3,370,887 35,213
Matter No. 2 was approved by Shareholders at the Meeting.
The votes cast for this Matter were as follows:
Abstentions and
For Against Broker Non-Votes
3,384,089 11,656 10,355
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K - None
PAGE 20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
OLD GUARD GROUP, INC.
Date: August 14, 1998 /s/ Henry J. Straub
Henry J. Straub,
Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting
officer) <PAGE 21>
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