SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the transition period
from N/A to __________.
Commission File Number 0-16533
OLD GUARD GROUP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2852984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2929 Lititz Pike, Lancaster, Pennsylvania 17601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (717) 569-5361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of class)
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 .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$45,290,215 at March 25, 1999. As of March 25, 1999, the
Registrant had 4,256,327 shares of Common Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement with respect to its 1999 annual
meeting of shareholders is incorporated by reference into Part
III hereof.
<PAGE>
Item 1. BUSINESS.
THE COMPANY
General
Old Guard Group, Inc. (Company) was incorporated under the
laws of the Commonwealth of Pennsylvania in May 1996 for the
purpose of serving as a holding company for Old Guard Insurance
Company (Old Guard), Old Guard Fire Insurance Company (Old Guard
Fire), and First Patriot Insurance Company (First Patriot).
On February 11, 1997, the Company became a holding company
for Old Guard, Old Guard Fire and First Patriot upon the
completion of their Conversion from Pennsylvania mutual insurance
companies to Pennsylvania stock insurance companies and the
simultaneous acquisition of their capital stock by the Company
pursuant to a Joint Plan of Conversion adopted by the Boards of
Directors of each company on May 31, 1996, as amended and
restated on July 19, 1996 and January 10, 1997 (the Plan).
On February 11, 1997, pursuant to the Plan, the Company
completed the sale of 4,204,910 shares of its common stock, no
par value per share (the "Common Stock") at the price of $10.00
per share in contemporaneous subscription and community offerings
(collectively the "Offering") for gross proceeds of approximately
$42,049,100, including the conversion of a $1.5 million surplus
note into Common Stock. The conversion from mutual to stock
form, the issuance of capital stock to the Company and the
Offering are collectively referred to herein as the "Conversion".
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601, and its main telephone
number is (717) 569-5361. Old Guard Group, Inc. and its
subsidiaries are collectively referred to herein as "OGGI".
Old Guard Insurance
Old Guard, Old Guard Fire and First Patriot are each
Pennsylvania-chartered insurance companies that converted from
mutual to stock form on February 11, 1997. They are wholly-owned
subsidiaries of the Company and operate as members of Old Guard
Insurance (OGI), a group of insurance companies under common
management. OGI also includes First Delaware Insurance Company
(see "First Delaware Insurance Company Acquisition"), New Castle
Insurance Company of Delaware (see "New Castle Insurance Company
of Delaware Investment"), and through common management,
Neffsville Mutual Fire Insurance Company (Neffsville). The
members of OGI are property and casualty insurers of farms, small
and medium-sized businesses and residences primarily in rural and
suburban communities in Pennsylvania, Maryland and Delaware. OGI
markets farmowners, homeowners and businessowners policies, as
well as personal and commercial automobile, workers' compensation
<PAGE 1> and commercial multi-peril coverages through
approximately 500 independent agents.
Old Guard, Old Guard Fire and First Patriot operate under an
intercompany reinsurance pooling agreement pursuant to which all
premium revenue, loss and loss adjustment expense are ceded to
Old Guard and a fixed percentage of those items is retroceded by
Old Guard to Old Guard Fire and First Patriot. The allocation of
pooled revenue and expense is determined by the parties and is
currently as follows: Old Guard - 60%, Old Guard Fire - 29% and
First Patriot - 11%. Investment income and investment gains and
losses are not pooled. In addition, Neffsville reinsures 90% of
its book of business with Old Guard Fire.
Old Guard. Old Guard was originally chartered in 1896. At
December 31, 1998, Old Guard had total assets of $127.0 million
(prior to the elimination of intercompany accounts in
consolidation) and equity of $38.1 million.
Old Guard Fire. Old Guard Fire was originally chartered in
1872. At December 31, 1998, Old Guard Fire had total assets of
$44.0 million (prior to the elimination of intercompany accounts
in consolidation) and equity of $17.6 million.
First Patriot. First Patriot was originally chartered in
1843. At December 31, 1998, First Patriot had total assets of
$24.0 million (prior to the elimination of intercompany accounts
in consolidation) and equity of $6.9 million.
First Delaware. First Delaware was originally chartered in
1987. At December 31, 1998, First Delaware had total assets of
$8.8 million (prior to the elimination of intercompany accounts
in consolidation) and equity of $4.4 million.
New Castle. New Castle was originally chartered in 1849.
At December 31, 1998, New Castle had total assets of $8.6 million
(prior to elimination of intercompany accounts in consolidation)
and equity of $2.5 million.
The members of OGI are subject to examination and
comprehensive regulation by Insurance Regulatory Authorities.
See "Business -- Regulation."
Strategy
OGGI's principal strategies for the future are to:
-- Achieve geographic diversification of risk by
acquisition of other insurance companies or licensing
its insurance subsidiaries in other jurisdictions with
reduced or different loss exposure;
-- Improve the mix of business by increasing personal
automobile and other casualty coverages in order to
<PAGE 2> enhance profitability and lessen the impact of
property losses on overall results and provide total
property and casualty insurance on larger commercial
accounts, also to lessen the impact of catastrophe
losses on overall results; and
-- Improve efficiency and maintain the high level of
personal service delivered to agents and insureds
through continued enhancement of OGGI's management
information systems (MIS).
Geographic Diversification. OGGI's goal is to achieve
geographic diversification of risk outside Pennsylvania to areas
with reduced or different catastrophic loss exposure and in which
management believes insurers generally have been permitted to
manage risk selection and pricing without undue regulatory
interference. Concentration of property insurance in
Pennsylvania has caused Old Guard, Old Guard Fire and First
Patriot to be susceptible to localized catastrophic events
primarily related to severe weather. OGGI continues to diversify
geographically, principally through acquisition, but expects also
to seek authority for its insurance subsidiaries to do business
in additional jurisdictions. The acquisition of First Delaware
Insurance Company (First Delaware) and New Castle Insurance
Company of Delaware (New Castle) represent initial steps to
diversify geographically. (See "First Delaware Insurance Company
Acquisition" and "New Castle Insurance Company of Delaware"
herein.)
OGGI plans to seek additional acquisitions outside
Pennsylvania. OGGI is currently targeting companies located in
jurisdictions adjacent to its current markets and in the upper
Midwest. On March 5, 1999, OGGI completed its acquisition of
Investors Southern Corporation and its principal operating
subsidiary, Southern Title Insurance Corporation (collectively
referred to herein as Southern). Southern provides title
insurance and related services through a network of agencies in
Virginia, North Carolina, the District of Columbia, Ohio and
Pennsylvania. The acquisition of Southern furthers OGGI's
strategy of diversifying both geographically and by product line.
Insurance companies acquired may be added to the existing
intercompany reinsurance pool. The determination whether to add
acquired companies to the intercompany reinsurance pooling
arrangement will be made on a case by case basis as acquisitions
are completed. Some of the factors considered in evaluating an
acquired company for possible inclusion in the reinsurance pool
will include the acquired company's capital position, the quality
of the book of business, liabilities for losses and loss
adjustment expenses, claims settlement practices, the lines of
business written, existing reinsurance relationships, the level
of control which management of OGGI will have over the operations
of the acquired company, and rating agency considerations.
<PAGE 3>
Diversification of Lines of Business. OGGI has taken, and
will continue to take, steps to increase commercial and casualty
premium volume, both to reduce property loss exposure and to
provide greater product diversification from personal into
commercial lines that may provide a countercyclical balance to
personal lines.
OGGI has reorganized its underwriting departments in three
distinct strategic business units (SBU): Commercial Risk
Solutions, Agri-Business Solutions and Personal Insurance Group.
In addition, First Delaware will remain a separate SBU and
continue its focus on construction related commercial accounts in
Delaware and Maryland. It is management's belief that the
development of autonomous business units will enable each SBU
manager to focus on the development of markets, products and
distribution systems.
During 1998, the Personal Insurance Group has been focusing
on cross selling. OGGI's ratio of homeowners to personal
automobile is 3:1. In order to encourage the sale of more
personal automobile policies to existing homeowner accounts, we
have emphasized cross-policy discounts and implemented incentive
programs with our agents that encourage the placement of the
automobile risk with OGGI. Commercial Risk Solutions and Agri-
Business Solutions have targeted larger accounts where there is
more opportunity to underwrite and price.
Management believes that it has the opportunity to increase
the volume of casualty business by focused marketing to existing
agents. For instance, New Castle began writing personal
automobile business in 1997 and First Patriot began to do so in
1998. Management believes an increasing share of this market is
desirable and attainable given the existing relationships among
OGGI, its agents and its insureds.
Service Capabilities. Management believes that OGI has a
strong reputation for personal attention to agents and insureds.
OGGI has undertaken a program to enhance its MIS capabilities,
with the goal of improving efficiency, internal reporting and
service to agents and insureds, as well as facilitating
acquisitions. OGGI has been actively involved in the search,
review, selection, customization and testing of a new policy
processing software system since the second quarter of 1994. The
licensing rights for the new software system were acquired from
Inspire, an insurance industry software specialty company. The
software system is a personal computer database system designed
to eliminate most paperwork required in traditional systems.
Claims, billing and accounting functions are also fully
integrated in the new software system. The ability to operate
multiple companies, maintain on-line remote offices and
enhancements in the quality and timeliness of management
information are additional benefits of the new software system.
Effective January 1, 1997, personal automobile was the first line
of business phased into the new software system. During the
<PAGE 4> second quarter of 1999, management expects to integrate
homeowners into the new software system and by the end of 1999
expects to have workers' compensation and commercial lines of
business processed on a new software system. This new MIS
environment should permit a greater volume of business to be
processed by the same or fewer number of staff and has
successfully passed Year 2000 compliance testing. It will also
allow direct agent interface to enhance service to agents and
insureds and build upon OGGI's reputation in this area.
First Delaware Insurance Company Acquisition
On February 14, 1997, the Company, pursuant to an agreement
with First Delaware and International Corporation (IC), First
Delaware's sole shareholder, acquired 80% of the capital stock of
First Delaware. The acquisition was made through a combination of
(i) a $1.5 million cash investment in First Delaware in exchange
for a number of shares of First Delaware common stock equal to
$1.5 million divided by 1.5 times the GAAP book value per share
of First Delaware as of December 31, 1996 and (ii) the purchase
from IC for cash of a number of additional shares of First
Delaware at a price per share equal to 1.5 times the GAAP book
value per share of First Delaware. The Company now holds 80% of
the stock of First Delaware. The total acquisition price equaled
approximately $3.3 million.
At closing of the acquisition, the Company and IC executed a
shareholder agreement that, among other things, prohibits IC from
transferring its remaining 20% interest in First Delaware prior
to December 31, 2003 to anyone other than the Company or one of
its affiliates. The shareholder agreement also gives the parties
certain "put" and "call" rights prior to December 31, 2003 during
specified periods with respect to the remaining 20% of the common
stock of First Delaware held by IC at a purchase price of between
1 and 1.5 times then current GAAP book value per share. The
exercise price of the put or call varies depending upon the time
period when the put or call is exercised and is payable in cash
or common stock at the election of the party exercising the put
or call right. In addition, after December 31, 1999, IC can
relinquish its put right and extinguish the Company's call right
in exchange for a payment from the Company to IC of 10% of the
put price.
Following closing, the First Delaware Board of Directors was
expanded to consist of five members, three of whom were elected
by the Company. David E. Hosler, the Chairman of the Company,
became Chairman of First Delaware. First Delaware and Old Guard
Insurance Management, Co. (OGIM), a subsidiary of the Company,
also executed a management agreement pursuant to which OGIM
provides management advice on actuarial services, reinsurance
purchasing, investment management, management information
systems, security custody services, independent
accounting/auditing services, human resource services and
employee benefits. In order to retain the services of the two
<PAGE 5> principals of First Delaware, First Delaware entered
into employment agreements acceptable to the Company with such
principals.
The acquisition of First Delaware furthers OGGI's strategic
goals of geographic and product line diversification because
First Delaware's business is principally commercial lines,
including surety business in the Delaware and Maryland markets.
New Castle Insurance Company of Delaware Investment
Effective October 1, 1998, the Company's $2.5 million
surplus note investment in New Castle Mutual Insurance Company
was converted into 1,500 shares of common stock in conjunction
with a conversion from mutual to stock form by New Castle. New
Castle, now known as New Castle Insurance Company of Delaware,
converted into stock form pursuant to a plan of conversion
approved by policyholders and the Delaware Insurance Department.
Effective with the conversion, the Company owns 100% of the
outstanding common stock of New Castle.
During 1998, Old Guard maintained a quota share reinsurance
agreement with New Castle whereby Old Guard reinsured 100% of New
Castle's premiums and losses in return for a 35% ceding
commission.
The investment in New Castle furthers OGGI's strategic goal
of geographic diversification because New Castle's business is
principally located in the Delaware market.
Products
OGGI's insurance subsidiaries offer a variety of property
and casualty insurance products primarily designed to meet the
insurance needs of the rural and suburban communities in which
OGGI does business, including their agricultural clients. The
following tables set forth the direct premiums written, net
premiums earned, net loss ratios, expense ratios and combined
ratios by product line for the periods indicated:
<PAGE 6>
<TABLE>
<CAPTION>
Year Ended December 31
% of % of % of % of % of
Direct Premiums Written: 1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Farmowners $18,397 21.0% $17,819 21.0% $16,365 20.6% $15,494 20.2% $16,080 20.7%
Homeowners 22,009 25.2 21,142 25.0 21,577 27.2 21,157 27.6 20,509 26.3
Businessowners and commercial
multi-peril 12,741 14.6 12,605 14.9 10,577 13.3 11,083 14.4 10,587 13.6
Personal automobile 21,074 24.1 19,949 23.6 18,617 23.5 16,810 21.9 15,928 20.5
Commercial automobile 2,486 2.8 2,201 2.6 886 1.1 776 1.0 815 1.0
Workers' compensation 6,574 7.5 6,245 7.4 5,912 7.4 5,432 7.1 5,562 7.1
Fire, allied, inland marine 2,374 2.7 2,850 3.4 4,078 5.2 3,668 6.1 7,073 9.1
Surety 33 - - 113 0.1 - - - - - - - - - - - -
Other liability 1,790 2.1 1,740 2.0 1,372 1.7 1,317 1.7 1,331 1.7
Total $87,478 100.0% $84,664 100.0% $79,384 100.0% $75,737 100.0% $77,885 100.0%
======= ====== ======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
Year Ended December 31
% of % of % of % of % of
Net Premiums Earned (1) 1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Farmowners $14,547 19.3% $12,309 19.7% $ 9,907 18.5% $13,413 20.1% $13,315 21.0%
Homeowners 20,478 27.2 16,114 25.8 14,898 27.6 18,391 27.6 16,755 26.4
Businessowners and commercial
multi-peril 9,965 13.2 8,576 13.8 7,078 13.2 8,828 13.2 8,387 13.2
Personal automobile 18,393 24.4 14,800 23.7 12,766 23.8 14,459 21.7 12,521 19.8
Commercial automobile 1,742 2.3 1,239 2.0 565 1.1 769 1.2 717 1.1
Workers' compensation 4,657 6.2 4,388 7.0 3,564 6.6 4,233 6.4 4,266 6.7
Fire, allied, inland marine 4,831 6.4 4,378 7.0 4,538 8.5 6,294 9.4 6,930 10.9
Surety 187 0.3 172 0.3 - - - - - - - - - - - -
Other liability 546 0.7 453 0.7 276 0.5 276 0.4 574 0.9
Total $75,346 100.0% $62,429 100.0% $53,592 100.0% $66,663 100.0% $63,465 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
Year Ended December 31
Net Loss Ratios 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Farmowners 58.8% 68.5% 94.2% 78.7% 8.8%
Homeowners 69.8 62.1 95.5 80.8 98.0
Business owners and commercial
multi-peril 58.2 66.5 76.5 62.2 47.8
Personal automobile 83.3 75.3 82.5 90.4 70.9
Commercial automobile 65.3 82.5 63.6 70.9 53.8
Workers' Compensation 24.0 (7.8) 45.7 43.0 58.3
Fire, allied, inland marine 35.1 52.4 58.5 53.4 49.7
Surety (6.8) (9.3) - - - - - -
Other liability 58.0 58.2 87.8 326.3 49.9
Total 64.2% 61.7% 82.8% 75.8% 73.2%
==== ==== ==== ==== ====
<CAPTION>
Year Ended December 31
Expense Ratios (2) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Farmowners 48.9% 47.8% 46.4% 36.6% 34.1%
Homeowners 46.6 37.8 31.8 39.0 39.7
Businessowners and commercial
multiple peril 63.6 58.3 57.1 41.2 36.4
Personal automobile 29.3 23.8 20.4 22.6 24.0
Commercial automobile 44.9 33.0 27.9 24.9 27.3
Workers' Compensation 57.1 39.1 21.4 23.6 25.7
Fire, allied, inland marine 39.0 33.8 34.8 47.2 49.6 <PAGE 7>
Surety 38.1 59.7 - - - - - -
Other liability 57.1 52.1 50.7 46.9 25.2
Total 44.7% 39.1% 34.7% 34.9% 34.8%
==== ==== ==== ==== ====
<CAPTION>
Combined Ratios (2)(3)
<S> <C> <C> <C> <C> <C>
Farmowners 107.7% 116.2% 138.7% 115.2% 112.8%
Homeowners 116.4 99.9 127.3 119.7 137.7
Businessowners and commercial
multiple peril 121.8 124.8 133.6 103.4 84.1
Personal automobile 112.6 99.1 102.9 113.1 94.8
Commercial automobile 110.2 115.5 91.5 95.8 81.2
Workers' Compensation 81.1 31.3 67.1 66.7 84.1
Fire, allied, inland marine 74.1 86.1 93.3 100.6 99.2
Surety 31.3 50.4 - - - - - -
Other liability 115.1 110.3 138.5 373.2 75.1
Total 108.9% 100.8% 120.3% 107.9% 106.3%
===== ===== ===== ===== ====
Industry combined ratio (4) 105.0% 101.6% 105.8% 106.4% 108.4%
</TABLE>
(1) Effective January 1, 1996, Old Guard, Old Guard Fire and
First Patriot entered into a quota share reinsurance
agreement pursuant to which they ceded 20% (reduced to 15%
effective January 1, 1997 and cancelled on a run-off basis
effective January 1, 1998) of their liability remaining
after cessions of excess and catastrophic risks through
other reinsurance contracts. Pro rata cessions of unearned
premiums as of January 1, 1996 and the transfer of premiums
written during the year ended December 31, 1996 accounts, in
part, for the decline in net premiums earned when the year
ended December 31, 1996 is compared to the year ended
December 31, 1995.
(2) Excludes effect of other revenue on ratio.
(3) A combined ratio over 100% means that an insurer's
underwriting operations are not profitable.
(4) Per A.M. Best
Farmowners Policy
The farmowners policy is a flexible, multi-line package of
insurance coverages. As a result of its flexible features, this
product can be adapted to meet the needs of a variety of
agricultural and related businesses. The farmowners policy
combines property and liability insurance for the farm owner, as
well as owners of other agricultural related businesses, such as
nurseries and greenhouses. The largest numbers of farmowners
policies written by OGGI are for dairy, beef, poultry and crop
farming risks. In general, standing crops are not insured except
under limited circumstances but harvested and stored crops
<PAGE 8> generally are insured. Policyholders may select
property damage coverages for specific peril groups, such as
basic perils that include fire and allied lines, extended
coverage and vandalism or broad form and special perils.
Personal liability coverage insures policyholders against third
party liability from accidents occurring on their premises or
arising out of their operations or from their products. The
farmowners policy contains a limited liability extension of
pollution-type coverage for damages caused to third persons or
their crops resulting from above-ground, off-premises
contamination, such as overspray of fertilizers and pesticides.
Homeowners Policy
Homeowners insurance is a multi-peril policy providing
property and liability coverages and optional inland marine
coverage. The homeowners policy is sold to provide coverage for
the insured's principal residence.
Businessowners and Commercial Multi-Peril
Businessowners. Businessowners insurance provides property
and liability coverages to small businesses within rural and
suburban markets. This product is marketed to six distinct
groups: (i) apartment owners with relatively small property-
based risks; (ii) condominium owners; (iii) landlords with
dwelling properties of up to four family units; (iv) mercantile
businessowners, such as florists, gift shops and antique dealers,
with property-based risks; (v) offices with owner and/or tenant
occupancies; and (vi) religious institutions consisting of
smaller, rural properties.
Commercial Multi-Peril. Commercial multi-peril policies
provide property and liability coverage to accounts that, because
of their larger size, do not meet the eligibility requirements
for the businessowners product. OGGI is working to increase
market penetration for this product because it includes
commercial liability risks that help to diversify exposures and
lessen the impact of property losses on overall results. One
such marketing initiative is the promotion of commercial multi-
peril packages targeted to the following businesses: (i) food
processing, (ii) retailing, (iii) manufacturing, (iv) metal
working, (v) offices, (vi) contractors, and (vii) service
operations. These packages are being written using existing
policy forms and were chosen based on the experience of the
underwriting staff and market opportunities available to existing
agents. The packages are of a type generally written by larger
companies and should permit OGGI to sell commercial packages as
well as accompanying workers' compensation and commercial
automobile coverages to larger accounts.
<PAGE 9>
Personal Automobile
Personal automobile policies insure individuals against
claims resulting from injury and property damage and can be
marketed in conjunction with OGGI's other products, such as the
farmowners policy, the businessowners policy or the homeowners
policy.
Commercial Automobile
Commercial automobile policies are generally marketed in
conjunction with farmowners, businessowners or commercial multi-
peril policies. Commercial automobile is one of OGGI's lower
volume products.
Workers' Compensation
Workers' compensation policies are generally issued in
conjunction with farmowners policies, businessowners policies or
other commercial packages. However, the stand-alone workers'
compensation policies may be written. A recent initiative is
tiered pricing for workers' compensation coverage with the
introduction of a policy with more attractive pricing and the
opportunity for dividends.
Fire, Allied, Inland Marine
Fire and allied lines insurance generally covers fire,
lightning and extended coverage. Inland marine coverage insures
merchandise or cargo in transit and business and personal
property. Fire, allied and inland marine insurance coverages are
offered only as endorsements available under the other insurance
products.
Other Liability
Umbrella Liability. Commercial and personal line excess
liability policies are offered to cover business, farm and
personal liabilities in excess of amounts covered under
farmowners, homeowners, businessowners, commercial multi-peril
and automobile policies. Such policies are available generally
with limits of $1 million to $5 million. Excess liability
policies are generally not marketed to individuals and farmowners
unless they also purchase an underlying liability policy.
However, excess liability coverage may be written for commercial
accounts without all underlying liability coverages.
Commercial General Liability. Stand-alone commercial general
liability policies are written for certain business situations
that do not meet the criteria for liability coverage under a
farmowners, businessowners or commercial multi-peril policy. The
policy insures businesses against third party liability from
accidents occurring on their premises or arising out of their
<PAGE 10> operations or products. Most of OGGI's products
liability line is written as part of the commercial general
liability product.
Marketing
OGGI markets its property and casualty insurance products in
Pennsylvania, Maryland and Delaware through independent agencies.
These agencies collectively employ a force of approximately 3,500
agents. Most of the agents represent multiple carriers and are
established residents of the rural and suburban communities in
which they operate. OGGI's agents generally market and write the
full range of OGGI's products. OGGI considers their
relationships with agents to be excellent. As of December 31,
1998, no agency accounted for more than 5% of direct premiums
written.
OGGI emphasizes personal contact between their agents and
policyholders. OGGI believes that their name recognition,
policyholder loyalty and policyholder satisfaction with agent and
claims relationships are the principal sources of new customer
referrals, cross-selling of additional insurance products and
policyholder retention.
OGGI depends upon their agency force to produce new business
and to provide customer service. The network of independent
agents also serves as an important source of information about
the needs of the communities served by OGGI. This information is
utilized to develop new products and new product features.
Agency compensation is based on one of three compensation
plans. Each agency may elect: fixed base commission only, fixed
base commission with some opportunity for bonus commission based
on the agency's loss experience, or floating base commission
based on the agency's three year loss ratio with some opportunity
to earn bonus commission depending on the agency's one-year loss
experience.
OGGI has introduced a new agency compensation system
effective January 1, 1999, which will better compensate those
agents whose historical profitability, size and ability to grow
has been superior. Each agent has been assigned a tier (1-4)
which is indicative of their historical results. Each agent's
compensation, regardless of tier, will then have a fixed base
component plus an ability to earn a bonus commission depending on
profitability. Those agents which are ranked higher will receive
a higher base and the opportunity to earn a higher bonus
commission.
OGGI believes that the new compensation system is a tool
that will enable better planning, organization and control of
agency resources and compensate those agents that are able to
contribute to our corporate-wide goals.
<PAGE 11>
Independent agencies are supported by agent representatives,
who are employees of OGGI and who have principal responsibility
for recruiting agencies and training new agents. To support its
marketing efforts, OGGI develops and produces advertising in
partnership with their agencies. The ability to customize this
advertising to reflect the agent's and their communities' needs
is a unique feature of the marketing effort. OGGI and agent
representatives conduct training programs that provide both
technical training about products and sales training on how to
market insurance products.
Computer software is provided to agencies that allow them to
quote rates on homeowners, farmowners, businessowners and
personal auto. In addition, a home page has been established on
the Internet for the public that is periodically updated with
pertinent information about OGGI and their products. OGGI now
provides most agencies with the ability to share records and
information electronically which increases the efficiency of both
OGGI and their agents.
Underwriting
OGGI seeks to write their commercial and personal lines by
evaluating each risk with consistently applied standards. OGGI
maintains information on all aspects of their business that is
regularly reviewed to determine product line profitability.
OGGI's underwriters generally specialize in personal or
commercial/farm lines. Specific information is monitored with
regard to individual insureds that is used to assist in making
decisions about policy renewals or modifications. OGGI's
underwriters have an average of over 15 years of experience as
underwriters. OGGI believes their extensive knowledge of local
markets is a key underwriting advantage.
OGGI relies on information provided by their independent
agents, who, subject to certain guidelines, also act as field
underwriters and pre-screen policy applicants. The independent
agents have the authority to sell and bind insurance coverages in
accordance with pre-established guidelines. Agents' underwriting
results are monitored and on occasion agents with historically
poor loss ratios are placed on rehabilitation until more
profitable underwriting results are achieved, or if
rehabilitation is unsuccessful, the relationship is terminated..
Claims
Claims on insurance policies written by OGGI are usually
investigated and settled by one of OGGI's staff claims
representatives who work in teams led by a supervisor.
Supervisors report to the claims manager. OGGI claims philosophy
emphasizes timely investigation, evaluation and fair settlement
of claims, while maintaining adequate case reserves and
controlling claim adjustment expenses. The claims philosophy is
designed to support marketing efforts by providing prompt service
<PAGE 12> and making the claims process a positive experience for
agents and policyholders.
Claims settlement authority levels are established for each
representative and claims manager based upon their level of
experience. Claims are typically reported by the agents. Multi-
line teams exist to handle all claims. Subrogation recovery is
centralized in the Lancaster, Pennsylvania office. The claims
department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and
resolving the claims. OGGI engages independent appraisers and
adjusters to evaluate and settle claims as claims volume or
specialized needs require.
OGGI attempts to minimize claims costs by encouraging the
use of alternative dispute resolution procedures. Litigated
claims are assigned to outside counsel, who then work closely as
a team with a staff claims representative. OGGI has a panel of
law firms carefully selected for their insurance defense
expertise. Billing is on a negotiated flat fee basis as
negotiated with the individual firm. These fees are tracked
quarterly to assure fairness to both parties.
Reinsurance
In accordance with insurance industry practice, OGGI
reinsures a portion of their exposure and pay to the reinsurers a
portion of the premiums received on all policies reinsured.
Insurance is ceded principally to reduce net liability on
individual risks, to mitigate the effect of individual loss
occurrences (including catastrophic losses), to stabilize
underwriting results and to increase underwriting capacity.
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each risk or portion
of a risk is reinsured individually. Under treaty reinsurance,
an agreed-upon portion of business written is automatically
reinsured. Treaty reinsurance can be further defined as quota
share or excess of loss reinsurance. Under quota share
reinsurance, the ceding company cedes a percentage of its
insurance liability to the reinsurer in exchange for a like
percentage of premiums less a ceding commission, and in turn will
recover from the reinsurer the reinsurer's share of all losses
and loss adjustment expenses incurred on those risks. Under
excess reinsurance, an insurer limits its liability to all or a
particular portion of the amount in excess of a predetermined
deductible or retention. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies. However,
the assuming reinsurer is obligated to reimburse the ceding
company to the extent of the coverage ceded. OGGI places its
reinsurance directly or through the use of brokers.
<PAGE 13>
OGGI determines the amount and scope of reinsurance coverage
to purchase each year based upon their evaluation of the risks
accepted, consultations with reinsurance representatives and a
review of market conditions, including the availability and
pricing of reinsurance. In 1998, 1997 and 1996, OGGI ceded earned
premiums of $18.4 million, $24.8 million and $27.5 million,
respectively.
OGGI's reinsurance arrangements are placed with non-
affiliated reinsurers, principally American Re-Insurance Company
(American Re), and are generally renegotiated annually.
Coverages described herein are generally for 1998.
Except for certain excluded classes of property and losses
due to flood, the largest exposure retained by OGGI on any one
individual property risk is $150,000. Individual property risks
in excess of $150,000 are covered on an excess of loss basis up
to $2.0 million per risk pursuant to reinsurance agreements with
American Re.
For 1998, individual casualty risks for most lines of
business, excluding umbrella liability, that were in excess of
$150,000 were covered on an excess of loss basis up to $2.0
million per occurrence pursuant to reinsurance agreements with
American Re. In addition, casualty losses arising from workers'
compensation claims were reinsured on a per occurrence and per
person basis by various reinsurers up to $10.0 million. Umbrella
liability losses were reinsured by American Re on a 95% quota
share basis up to $1.0 million and a 100% quota share basis in
excess of $2.0 million up to $5.0 million.
The first layers ($350,000 excess of $150,000) of both the
property and casualty reinsurance programs are subject to annual
aggregate loss deductibles equal to 6.0% and 6.5% of subject
premiums, respectively. These layers are also subject to
retrospectively rated premium provisions whereby the ultimate
premium is adjusted based upon actual loss experience, limited to
minimums and maximums, plus a load or risk charge.
Catastrophic reinsurance protects the ceding insurer from
significant aggregate loss exposure arising from a single event
such as windstorm, hail, tornado, hurricane, earthquake, riot,
blizzard, freezing temperatures or other extraordinary events.
For 1998, OGGI purchased layers of catastrophic property
reinsurance, which reinsured 95.0% of losses over $3.5 million up
to a maximum of $10.0 million and 100% of losses between
$13.5 million and $31.5 million per occurrence. OGGI also had an
underlying catastrophe and aggregate excess of loss reinsurance
agreement with American Re designed to protect against multiple
events each of which was below the $3.5 million retention under
the primary catastrophe reinsurance. Under this agreement,
losses were reinsured to the extent of (A) aggregate net losses
exceeding a 75% loss ratio in any accident year up to the lesser
of a 78.33% loss ratio or $5.0 million, and (B) 100% of losses in
<PAGE 14> excess of $5.0 million for winter storm losses during
specified periods, up to a maximum of $5.0 million. OGGI
recovered under this latter coverage provision for losses
attributable to the January 1996 blizzard.
OGGI also maintained a quota share reinsurance agreement
with American Re for the benefit of all of its members except
First Delaware and New Castle. Effective January 1, 1998, this
agreement is in a "run-off" basis whereby new or renewal policies
in 1998 are no longer covered by the agreement. Under the terms
of this agreement, a percentage of the liability (15% in 1997 and
20% in 1996) remaining after cessions of excess and catastrophic
risks through other reinsurance contracts was ceded to American
Re. The result of the quota share agreement was a pro rata
sharing of risk with American Re. This agreement protected
surplus from high frequency and low severity type losses.
Reinsurance premiums due American Re on the quota share agreement
were reduced by a ceding allowance equal to a percentage (30% in
1997 and 35% in 1996) of the reinsurance premium.
Quota share reinsurance may be used to moderate the adverse
impact of underwriting losses to the ceding company but also
decreases underwriting profits which would otherwise be retained
by the ceding company. The quota share reinsurance agreement
with American Re had a material effect on the financial condition
and results of operations of OGGI during the term of the
reinsurance agreement.
The insolvency or inability of any reinsurer to meet its
obligations could have a material adverse effect on the results
of operations or financial condition of the Group. American Re
is OGGI's major reinsurer. American Re is rated A++ (superior)
by A.M. Best. The A++ rating is the highest of A.M. Best's
fifteen ratings. In 1998, 1997 and 1996, OGGI paid reinsurance
premiums in an aggregate amount of approximately $10.4 million,
$18.2 million and $31.2 million to American Re, respectively.
OGGI monitors the solvency of reinsurers through regular review
of their financial statements and A.M. Best ratings. OGGI has
not experienced significant difficulties collecting amounts due
from reinsurers.
Losses and LAE Liabilities
Property and Casualty Reserves. Insurance companies are
required by applicable insurance laws and regulations to maintain
liabilities for payment of losses and loss adjustment expenses
("LAE") for both reported claims and for claims incurred but not
reported ("IBNR"), arising from the policies they have issued.
These laws and regulations require that provision be made for the
ultimate cost of those claims without regard to how long it takes
to settle them or the time value of money. The determination of
the liabilities involves actuarial and statistical projections of
what is expected to be the cost of the ultimate settlement and
administration of such claims based on facts and circumstances
<PAGE 15> then known, estimates of future trends in claims
severity, and other variable factors such as inflation and
changing legal theories of liability.
The estimation of ultimate liability for losses and LAE is
an inherently uncertain process and does not represent an exact
calculation of that liability. OGGI's estimation policy
recognizes this uncertainty by maintaining liabilities at a level
providing for the possibility of adverse development relative to
the estimation process. OGGI does not discount their liabilities
to recognize the time value of money.
When a claim is reported to OGGI, claims personnel establish
a "case reserve" for the estimated amount of the ultimate
payment. This estimate reflects an informed judgment based upon
general insurance reserving practices and on the experience and
knowledge of the estimator regarding the nature and value of the
specific claim, the severity of injury or damage, and the policy
provisions relating to the type of loss. Case reserves are
adjusted by OGGI's claims staff as more information becomes
available. It is OGGI's policy to settle each claim as
expeditiously as possible.
OGGI maintains IBNR reserves to provide for future reporting
of already incurred claims and developments on reported claims.
The IBNR reserve is determined by estimating OGGI's ultimate net
liability for both reported and IBNR claims and then subtracting
the case reserves for reported claims.
Quarterly, OGGI computes its estimated ultimate liability
using principles and procedures applicable to the lines of
business written. Such liabilities are also considered annually
by OGGI's independent auditors in connection with their audit of
OGGI's consolidated financial statements. However, because the
establishment of these liabilities are an inherently uncertain
process, there can be no assurance that ultimate losses will not
exceed the estimated losses. Adjustments in aggregate
liabilities, if any, are reflected in the operating results of
the period during which such adjustments are made. As required
by insurance regulatory authorities, OGGI submits to the various
jurisdictions in which they are licensed a statement of opinion
by its appointed actuary concerning the adequacy of statutory
liabilities. The results of these actuarial studies have
consistently indicated that the liabilities are adequate.
Management does not believe that OGGI is subject to any material
potential asbestos or environmental liability claims.
A table providing a reconciliation of beginning and ending
liability for losses and LAE of OGGI for 1998, 1997 and 1996 is
included in footnote 4 to the consolidated financial statements
included herein.
The following table shows the development of the liabilities
for loss and LAE from 1988 through 1998 for OGGI. The top line
<PAGE 16> of the table shows the liabilities at the balance sheet
date, including losses incurred but not yet reported. The upper
portion of the table shows the cumulative amounts subsequently
paid as of successive years with respect to the liability. The
lower portion of the table shows the reestimated amount of the
previously recorded liability based on experience as of the end
of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of
claims for individual years. The redundancy (deficiency) exists
when the reestimated liability at each December 31 is less
(greater) than the prior liability estimate. The "cumulative
redundancy (deficiency)" depicted in the table, for any
particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
Year Ended December 31,
(000s)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid Losses
and LAE net of reinsurance
recoverable $14,097 $22,404 $25,477 $29,291 $34,895 $36,882 $32,810 $36,091 $34,515 $31,717 $31,681
Acquisition - - - - - - - - 668 747 -
Adjusted liability 14,097 22,404 25,477 29,291 34,895 36,882 32,810 36,091 35,183 32,464 31,681
Cumulative amount of liability
paid through:
One year later 6,554 10,425 10,713 10,867 14,126 15,386 17,468 16,289 14,704 14,915
Two years later 9,589 13,770 14,904 16,318 20,871 22,331 22,959 22,314 21,182
Three years later 11,380 16,098 18,438 20,368 24,346 25,109 26,788 25,718
Four years later 12,256 17,793 20,987 22,588 24,422 27,562 28,625
Five years later 13,264 19,293 21,947 23,274 25,675 28,563
Six years later 14,281 19,786 22,270 24,035 25,984
Seven years later 14,646 20,112 22,753 24,251
Eight years later 14,887 20,353 22,921
Nine years later 15,057 20,454
Ten years later 15,067
Liability re-estimated as of:
One year later 15,787 22,120 25,094 28,404 32,099 31,363 35,252 36,648 30,840 30,207
Two years later 15,747 22,060 25,117 28,052 28,821 32,503 34,000 31,705 29,992
Three years later 15,570 21,416 25,008 26,143 28,165 31,375 32,134 30,868
Four years later 15,237 21,696 23,809 25,467 27,740 30,637 31,552
Five years later 15,367 20,969 23,781 25,153 27,036 30,200
Six years later 15,338 20,911 23,488 24,757 26,906
Seven years later 15,357 20,895 23,255 24,665
Eight years later 15,298 20,639 23,201
Nine years later 15,157 20,593
Ten years later 15,137
Cumulative total redundancy
(deficiency) $(1,040) $ 1,811 $ 2,276 $ 4,626 $ 7,989 $ 6,682 $ 1,258 $ 5,223 $ 5,191 $ 2,257
Gross Liability end of year $59,057 $51,309 $52,091 $57,565 $51,172 $52,708
Reinsurance recoverables 22,175 18,499 16,000 22,382 18,708 21,027
Net Liability, end of year 36,882 32,810 36,091 35,183 32,464 31,681
Gross reestimated Liability 47,026 49,550 46,024 51,096 48,706 -
Reestimated reinsurance
recoverables $16,389 $17,416 $14,319 $20,240 $18,499 -
Net reestimated Liability 30,637 32,134 31,705 30,856 30,207 -
</TABLE>
<PAGE 17>
The following table is derived from the preceding table and
summarizes the effect of reserve re-estimates, net of
reinsurance, on calendar year operations for the same ten-year
period ended December 31, 1998. The total of each column details
the amount of reserve re-estimates made in the indicated calendar
year and shows the accident years to which the re-estimates are
applicable. The amounts in the total accident year column on the
far right represent the cumulative reserve re-estimates for the
indicated accident year(s).
<TABLE>
<CAPTION>
Cumulative
Deficiency
Effect of Reserve Reestimates on Calendar Year Operations from
Increase (Decrease) in Reserves for Calendar Year Reestimates
for each
Accident Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Accident Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1,690 (40) (177) (333) 130 (29) 19 (59) (141) (20) 1,040
1990 (244) 117 (311) 150 (698) (77) 43 (115) (26) (1,161)
1991 (323) 667 (389) (472) 30 (277) 23 (8) (749)
1992 (910) (243) (710) (648) (21) (163) (38) (2,733)
1993 (2,444) (1,369) 20 (111) (308) (38) (4,250)
1994 (2,241) 1,796 (703) (34) (307) (1,489)
1995 1,302 (124) (1,128) (145) (95)
1996 1,809 (3,077) (255) (1,523)
1997 600 (679) (79)
1998 (741) (741)
Total 1,690 (284) (383) (887) (2,796) (5,519) 2,442 557 (4,343) (2,257) (11,780)
</TABLE>
Investments
OGGI's investments are classified as either available for
sale or held to maturity. An important component of the operating
results of OGGI has been the return on invested assets. OGGI's
investment objective is to maximize current yield while
maintaining safety of capital together with adequate liquidity
for its insurance operations. OGGI's investments are managed by
outside investment advisors.
Certain consolidated information concerning OGGI's
investments and their maturities is set forth in footnote 3 to
the consolidated financial statements contained elsewhere herein.
The average duration of OGGI's fixed maturity investments,
as of December 31, 1998 was approximately 4.1 years. The market
value of OGGI's investments may fluctuate significantly in
response to changes in interest rates. In addition, OGGI may
experience investment losses to the extent its liquidity needs
require the disposition of fixed maturity securities in
unfavorable interest rate environments.
A.M. Best Rating <PAGE 18>
A.M. Best, which rates insurance companies based on factors
of concern to policyholders, currently assigns an "A-"
(Excellent) rating (its fourth highest rating category out of
15 categories) to Old Guard, Old Guard Fire, First Patriot and
New Castle as a group. In addition, First Delaware has received
a "A-" rating from A.M. Best. A.M. Best assigns "A" or "A-"
ratings to companies which, in its opinion, have demonstrated
excellent overall performance when compared to the standards
established by A.M. Best. Companies rated "A" and "A-" have a
strong ability to meet their obligations to policyholders over a
long period of time. In evaluating a company's financial and
operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity, as well as the company's
book of business, the adequacy and soundness of its reinsurance,
the quality and estimated market value of its assets, the
adequacy of its loss reserves, the adequacy of its surplus, its
capital structure, the experience and competency of its
management and its market presence. No assurance can be given
that A.M. Best will not reduce the current rating in the future.
Competition
The property and casualty insurance market is highly
competitive. OGGI's insurance subsidiaries compete with other
stock insurance companies, mutual companies, local cooperatives
and other underwriting organizations. Certain of these
competitors have substantially greater financial, technical and
operating resources. OGGI's ability to compete successfully in
its principal markets is dependent upon a number of factors, many
of which (including market and competitive conditions) are
outside OGGI's control. Many of the lines of insurance written
by OGGI are subject to significant price competition. Some
companies may offer insurance at lower premium rates through the
use of salaried personnel or other methods, rather than through
independent agents paid on a commission basis, as OGGI does. In
addition to price, competition in the lines of business written
by OGGI is based on quality of the products, quality and speed of
service (including claims service), financial strength, ratings,
distribution systems and technical expertise.
<PAGE 19>
Regulation
Insurance companies are subject to supervision and
regulation in the states in which they transact business. Such
supervision and regulation relates to numerous aspects of an
insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the
protection of policyholders. The extent of such regulation
varies, but generally derives from state statutes which delegate
regulatory, supervisory and administrative authority to state
insurance departments. Accordingly, the authority of the state
insurance departments includes the establishment of standards of
solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of
and limitations on investments, premium rates for property and
casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms,
notice requirements for the cancellation of policies and the
approval of certain changes in control. State insurance
departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance
companies.
Examinations are conducted by the insurance department of
the state of domicile every three to five years. The last
examinations of Old Guard, Old Guard Fire, First Patriot and
First Delaware were as of December 31, 1996. These examinations
did not result in any material adjustments to the financial
position of any of the companies. In addition, there were no
substantive qualitative matters indicated in the examination
reports that had a material adverse impact on the operations of
the companies. In addition, the Delaware Insurance Department is
currently finalizing its examination of New Castle as of December
31, 1996. To date, no material findings have been brought to
the attention of management.
In addition to state-imposed insurance laws and regulations,
the NAIC has adopted risk-based capital ("RBC") requirements that
require insurance companies to calculate and report information
under a risk-based formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix
of products and investment portfolio. Under the formula, a
company first determines its Authorized Control Level risk-based
capital ("ACL") by taking into account (i) the risk with respect
to the insurer's assets; (ii) the risk of adverse insurance
experience with respect to the insurer's liabilities and
obligations, (iii) the interest rate risk with respect to the
insurer's business; and (iv) all other business risks and such
other relevant risks as are set forth in the RBC instructions. A
company's "Total Adjusted Capital" is the sum of statutory
capital and surplus and such other items as the RBC instructions
<PAGE 20> may provide. The formula is designed to allow state
insurance regulators to identify potential weakly capitalized
companies.
The requirements provide for four different levels of
regulatory attention. The "Company Action Level" is triggered if
a company's Total Adjusted Capital is less than 2.0 times its ACL
but greater than or equal to 1.5 times its ACL. At the Company
Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve the capital position. The "Regulatory Action Level"
is triggered if a company's Total Adjusted Capital is less than
1.5 times but greater than or equal to 1.0 times its ACL. At the
Regulatory Action Level, the regulatory authority will perform a
special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized
Control Level" is triggered if a company's Total Adjusted Capital
is less than 1.0 times but greater than or equal to 0.7 times its
ACL, and the regulatory authority may take action it deems
necessary, including placing the company under regulatory
control. The "Mandatory Control Level" is triggered if a
company's Total Adjusted Capital is less than 0.7 times its ACL,
and the regulatory authority is mandated to place the company
under its control. OGGI's insurance subsidiaries have never
failed to exceed the required levels of capital. However, there
can be no assurance that the capital requirements applicable to
the businesses will not increase in the future.
The NAIC has also developed a set of eleven financial
ratios, referred to as the Insurance Regulatory Information
System (IRIS), for use by state insurance regulators in
monitoring the financial condition of insurance companies. The
NAIC has established an acceptable range of values for each of
the eleven IRIS financial ratios. Generally, an insurance
company will become the subject of increased scrutiny when four
or more of its IRIS ratio results fall outside the range deemed
acceptable by the NAIC. The nature of increased regulatory
scrutiny resulting from IRIS ratio results outside the acceptable
range is subject to the judgment of the applicable state
insurance department, but generally will result in accelerated
review of annual and quarterly filings. Depending on the nature
and severity of the underlying cause of the IRIS ratio results
being outside the acceptable range, increased regulatory scrutiny
could range from increased but informal regulatory oversight to
placing a company under regulatory control. During the last
three years, each of OGGI's insurance subsidiaries have reported
results outside the acceptable range for certain IRIS tests but
none reported four or more IRIS ratios outside the acceptable
range.
The states in which OGGI does business (Pennsylvania,
Maryland and Delaware), have guaranty fund laws under which
insurers doing business in such states can be assessed on the
basis of premiums written by the insurer in that state in order
<PAGE 21> to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of
business, to assist in the payment of policyholder claims against
insolvent insurers. Each of OGGI's insurance subsidiaries makes
accruals for their portion of assessments related to such
insolvencies when notified of assessments by the guaranty
associations. During 1998 OGGI was notified of two large medical
malpractice insurance company insolvencies. Based upon current
estimates of the costs of these insolvencies, OGGI expects to be
assessed the maximum allowable by law (2% of subject premiums in
Pennsylvania) for up to five years. OGGI has incurred charges of
$2.0 million in 1998 related to these insolvencies based upon its
1997 and 1998 premiums and expects to incur additional charges of
$1.0 million per year based upon current premium volume until
these insolvencies are paid.
Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
holding company system is required to register with the insurance
supervisory agency of its state of domicile and furnish
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurers within the
system. Pursuant to these laws, the respective insurance
departments may examine OGGI and their respective insurance
subsidiaries at any time, require disclosure of material
transactions by OGGI and/or its subsidiaries and require prior
approval of certain transactions, such as "extraordinary
dividends" to OGGI from its insurance subsidiaries.
All transactions within the holding company system affecting
OGGI and its subsidiaries must be fair and equitable. Approval
of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer.
In some states, including Pennsylvania, the acquisition of 10% or
more of the outstanding capital stock of an insurer or its
holding company is presumed to be a change in control. In
addition, the Pennsylvania Insurance Department's (Department)
approval of the acquisition by OGGI of all of the common stock of
Old Guard, Old Guard Fire and First Patriot prohibits OGGI from
paying any dividends or making other distributions to
shareholders (i) other than from earnings of Old Guard, Old Guard
Fire and First Patriot or (ii) in excess of $500,000 per year for
a period of three years following the Conversion without the
approval of the Department. These laws also require notice to
the applicable insurance commissioner of certain material
transactions between an insurer and any person in its holding
company system and, in some states, certain of such transactions
cannot be consummated without the prior approval of the
applicable insurance commissioner.
<PAGE 22>
Other Subsidiaries
As of December 31, 1998, OGGI owns all the capital stock of
OGIM, a Pennsylvania corporation. OGIM is a management company
that employs and pays senior management of OGGI. OGIM derives
all its revenues from management agreements with OGGI. OGGI also
owns 2929 Service Corporation, a licensed insurance agency that
distributes products of OGGI to customers whose agents are no
longer in business or no longer an agent for OGGI. During 1998,
Old Guard Investment Holding Co., Inc. (Old Guard Investment) was
merged into OGGI. Old Guard Investment was a Delaware
corporation which had previously been the parent of First
Delaware, OGIM and 2929 Service Corporation.
Employees
As of December 31, 1998, the total number of full-time
equivalent employees of OGGI and its subsidiaries was 224. None
of these employees are covered by a collective bargaining
agreement and OGGI believes that employee relations are good.
Item 2. PROPERTIES
OGGI's main offices are located at 2929 Lititz Pike,
Lancaster, Pennsylvania in a 33,000 square foot facility owned by
Old Guard. Old Guard Fire owns a 25,000 square foot office
facility near the main office at 147 West Airport Road in
Lancaster. First Patriot leases 7,500 square feet of office
space in Quakertown, Pennsylvania and First Delaware and New
Castle occupy 6,750 square feet of leased office space in Smyrna,
Delaware.
On February 21, 1997, OGGI purchased a 21,500 square foot
facility situated on 8 acres of land adjacent to OGGI's
headquarters. The purchase price was $1.1 million. The parcel
of land allowed for the expansion of an additional 50,000 square
foot facility. This expansion was begun in late 1997 and was
completed in the fall of 1998. In addition, Old Guard Fire has
listed the Airport Road facility for sale.
In March 1999, OGGI announced its intention to close the
operation in Quakertown and integrate those functions within its
Lancaster office. The lease on the space in Quakertown will be
allowed to expire in late 1999.
Item 3. LEGAL PROCEEDINGS
On February 10, 1997, OGGI, Old Guard, Old Guard Fire, First
Patriot (the Insurance Companies) and each of their respective
directors were served with an eleven count combination class
action and derivative lawsuit, filed in the United States
District Court for the Eastern District of Pennsylvania by four
policyholders. By filing the class action portion of the
lawsuit, these four policyholders purport to represent all
<PAGE 23> 141,000 policyholders of the Insurance Companies.
Seven of the eleven counts challenge the constitutionality of the
Pennsylvania Insurance Company Mutual to Stock Conversion Act
(the "Act"), which permitted the Insurance Companies plan of
demutualization in 1997. The plaintiffs are contending that the
Plan violated the rights of the plaintiffs and members of the
class under the United States and Pennsylvania constitutions, and
that the Act is unconstitutional as applied by the Plan. The
remainder of the class action claims assert theories regarding
purported violations of the Act, principally relating to the
description of the Plan in the proxy statement approved by the
Department and mailed to policyholders. The derivative claim was
brought against the directors of the Insurance Companies,
purportedly on behalf of the Insurance Companies, alleging breach
of the fiduciary duty of care in approving and implementing the
Plan and the fiduciary duty of loyalty, presumably in approving
the stock-based compensation plans which were contemplated by the
Plan. The stock-based compensation plans are expressly permitted
by the Act, were approved by the Department and have subsequently
been approved by shareholders. The suit seeks such compensatory
damages as may be allowed by law, a declaration that the Plan
violates the Act and the United States and Pennsylvania
Constitutions and the rights of the plaintiffs thereunder, and
such other relief as the court deems appropriate.
OGGI, the Insurance Companies and the individual defendants
filed a motion to dismiss the complaint in May 1997. In December
1997, the Court granted the motion with respect to two of the
constitutional counts and denied the motion with respect to the
remaining nine counts, including five of the constitutional
claims.
On January 15, 1998, the plaintiffs filed a motion for class
certification. On September 30, 1998, the Court granted the
motion, appointing plaintiffs as class representatives and
certifying the class as all policyholders of the Insurance
Companies as of February 7, 1997.
OGGI, the Insurance Companies and the individual defendants
filed a motion for summary judgment with respect to the remaining
federal constitutional claims on July 13, 1998. On March 5,
1999, the Court granted the motion with respect to the two
remaining counts under the U.S. Constitution and retained
supplemental jurisdiction over the remaining state law claims.
If the plaintiffs prevail in the above litigation, the
remedy a court would grant or the amount of damages it might
award is uncertain. A court has broad discretion to fashion a
fair and equitable remedy in light of the nature of the
constitutional or other violation, the relative harm to the
parties, and the public interest. In some cases, relief is
applied on a prospective basis only; in other cases, relief is
applied on a retroactive basis. No prediction can be made
concerning the remedy a court would fashion or the amount of
<PAGE 24> damages it might award. However, two of the more far-
reaching possibilities include:
- A requirement that OGGI pay all purchasers of common
stock, either on a mandatory basis or at the election
of the purchaser, as damages or otherwise, (i) the
purchase price paid per share of common stock acquired
in the subscription offering, plus interest, (ii) the
market value per share of common stock acquired, or
(iii) the greater of (i) or (ii), less, in each case,
any proceeds received by such purchaser from the sale
of the common stock. No assurance can be given that
OGGI would have sufficient funds at that time to honor
any such obligation; or
- OGGI could be required to pay or distribute to all or
some policyholders of the Insurance Companies, either
on a mandatory basis or at the election of the
policyholders, an amount equal to the statutory surplus
of the Insurance Companies as of the date of the
subscription offering (approximately $38 million), as
damages or otherwise. Such distribution could be
required to be made in cash, common stock or other debt
or equity securities. No assurance can be given that
OGGI would have sufficient funds, or the capacity to
borrow sufficient funds, at that time to honor any such
obligation. Any required distribution of common stock
or other equity securities would materially dilute the
interests of existing shareholders.
In the event that OGGI could not honor its obligations under
any remedy imposed by the Court, Old Guard Group, Inc. could be
forced to seek the protection of the bankruptcy laws and the
Insurance Companies could be deemed insolvent and seized by the
Department.
OGGI and its subsidiaries are also parties to other
litigation in the normal course of business. Based upon
information presently available to them, OGGI does not consider
any threatened or pending litigation to be material, except as
described above. However, given the uncertainties attendant to
litigation, there can be no assurance that OGGI's results of
operations and financial condition will not be materially
adversely affected by any threatened or pending litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
PAGE 25
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
OGGI's common stock commenced trading on the Nasdaq Stock
Market under the symbol OGGI on February 18, 1997, after
completion of the Offering. Prior to the Offering, no shares of
common stock were issued or outstanding. As of March 22, 1999,
OGGI had approximately 3,200 shareholders of record. The table
below sets forth for the periods indicated the amount of
dividends declared per share and the quarterly ranges of high and
low bid prices for the common stock as reported by Nasdaq and
does not necessarily reflect mark-ups, mark-downs or commissions.
Cash
Dividends
1998 High Low Declared
First Quarter $19.75 $17.75 $.05
Second Quarter 21.61 17.00 -
Third Quarter 19.75 14.75 .05
Fourth Quarter 16.38 13.38 -
Cash
Dividends
1997 High Low Declared
First Quarter $15.00 $13.00 $ -
Second Quarter 14.75 13.38 -
Third Quarter 19.44 14.75 .05
Fourth Quarter 19.13 16.88 -
Subsequent to December 31, 1998, the Board declared a $.05
per share dividend payable on March 15, 1999.
The payment of dividends is subject to determination and
declaration by OGGI's Board of Directors. Any dividend policy of
OGGI will depend upon the financial condition, results of
operations and future prospects of OGGI. In addition, the
Department's approval of the Conversion prohibits OGGI from
paying any dividends or making other distributions to
shareholders (i) other than from earnings of Old Guard, Old Guard
Fire and First Patriot, or (ii) in excess of $500,000 per year
for a period of three years following the Conversion without the
prior approval of the Department. At present, OGGI intends to
pay an annual dividend of $.10 per share. However, there can be
no assurance that dividends will be permitted to be paid under
the terms of the Department's approval order or, if paid
initially, that they will continue to be paid in the future. In
addition, because OGGI initially will have no significant source
of income other than dividends from its subsidiaries and earnings
from investment on the net proceeds of the Conversion retained by
<PAGE 26> OGGI, the payment of dividends by OGGI will depend
significantly upon receipt of dividends from its subsidiaries.
Old Guard, Old Guard Fire and First Patriot intend to seek
Department approval to pay dividends that, in the aggregate, will
permit OGGI to pay an annual dividend of $.10 per share. No
assurance can be given, however, that the Department will grant
such approval. See "Business -- Regulation."
Except as described above, OGGI is not subject to regulatory
restrictions on the payment of dividends to shareholders. OGGI
is subject to the requirements of the Pennsylvania Business
Corporation Law of 1988, as amended, which generally permits
dividends or distributions to be paid as long as, after making
the dividend or distribution, OGGI will be able to pay its debts
in the ordinary course of business and OGGI's total assets will
exceed its total liabilities plus the amount that would be needed
to satisfy the preferential rights upon dissolution of holders of
stock with senior liquidation rights if OGGI were to be dissolved
at the time the dividend or distribution is paid.
PAGE 27
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Direct and assumed premiums written $ 97,448 $ 87,936 $ 82,109 $ 78,946 $ 78,110
Net premiums written 83,926 66,064 47,692 67,115 65,649
Net premiums earned 75,346 62,429 53,592 66,663 63,465
Net investment income 6,179 5,877 4,495 4,686 4,241
Net realized investment gains 1,290 2,326 1,385 1,011 476
Other revenue 2,150 413 322 274 266
Total revenue: 84,965 71,045 59,794 72,634 68,448
Losses and Expenses:
Losses and LAE incurred 48,395 38,514 44,359 50,509 46,440
Other underwriting expenses 35,824 24,436 18,397 23,227 22,087
Stock option compensation - - 2,017 - - - - - -
Interest 503 591 385 266 309
Total losses and expenses 84,722 65,558 63,141 74,002 68,836
Income (loss) before income tax (benefit)
and minority interest 243 5,487 (3,347) (1,368) (388)
Income tax expense (benefit) (90) 2,009 (1,427) (684) (532)
Minority interest in income (loss) of
consolidated subsidiary 54 (7) - - - - - -
Net income (loss) $ 279 $ 3,485 $ (1,920) $ (684) $ 144
Selected Balance Sheet Data (at period end):
Total investments $121,878 $118,123 $ 84,131 $ 92,335 $ 82,879
Total assets 188,632 175,399 137,462 134,853 127,831
Line of credit outstanding - - - - 1,550 - - - -
Subordinated debt - - - - 1,500 2,250 3,000
Total liabilities and minority interest 110,856 96,744 98,451 93,956 91,300
Total equity $ 77,776 $ 78,654 $ 39,011 $ 40,897 $ 36,531
GAAP Ratios:
Loss and LAE ratio 64.2% 61.7% 82.8% 75.8% 73.2%
Underwriting expense ratio 44.7% 38.5% 33.7% 34.4% 34.4%
Combined ratio 108.9% 100.2% 116.5% 110.2% 107.6%
Statutory Data:
Statutory combined ratio 105.6 101.7 120.3 107.9 106.3
Industry combined ratio 105.0 101.6 105.8 106.4 108.4
Statutory surplus $ 54,323 $ 51,691 $ 30,759 $ 32,249 $ 31,097
Ratio of annual statutory net premiums
written to statutory surplus 1.5:1 1.3:1 1.6:1 2.2:1 2.2:1
</TABLE>
PAGE 28
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997
Premiums. Gross (direct plus assumed) premiums written
increased $9.5 million, or 10.8%, in 1998 compared to 1997. The
increase in gross premiums written can be attributed primarily to
the affiliation with New Castle Insurance which contributed $8.0
million of homeowners and personal auto premiums. Specifically,
$1.4 million of the increase from New Castle is attributable to
direct premiums written in the fourth quarter (subsequent to
OGGI's acquisition of New Castle) with the remaining increase of
$6.6 million attributable to the assumption, through reinsurance,
of 100% of New Castle's business during the first nine months of
1998. The remaining increase can be attributed to increases in
direct premiums written for personal and commercial automobile,
farmowners business and workers' compensation offset by a
decrease in fire, allied line, and inland marine business.
Farmowners, homeowners, and personal automobile direct writings
as a percentage of the total book of business were 21.0%, 25.2%,
and 24.1%, respectively, in 1998 and 21.0%, 25.0% and 23.6%,
respectively, for 1997.
Ceded premiums written decreased $8.3 million to $13.5
million in 1998 compared to 1997. The decrease in premiums ceded
was directly attributable to the elimination of the 15% quota
share reinsurance agreement with our primary reinsurer, American
Re-Insurance Company (American Re). This agreement was cancelled
on a run-off basis whereby new or renewal policies in 1998 are no
longer covered. Ceded premiums written under this agreement
amounted to nil and $9.4 million for 1998 and 1997, respectively.
Net premiums written increased $17.9 million, or 27.0%, in
1998 to $83.9 million from $66.1 million in 1997. For the same
comparative periods, net premiums earned increased $12.9 million,
or 20.7%, to $75.3 million from $62.4 million. The increases in
net premiums written and net premiums earned were directly
attributable to the effects of eliminating the quota share
reinsurance agreement with American Re and the contribution of
New Castle premiums to OGGI.
Net Investment Income. Net investment income increased
$303,000, or 5.2%, to $6.2 million in 1998 from $5.9 million in
1997 while average cash and invested assets increased $3.0, or
2.6%. In addition to the increase in average invested assets,
investment income increased in 1998 because of $169,000 of
distributions from limited partnerships which did not make
distributions in 1997. For 1998, the yield on average cash and
invested assets was 5.2% compared to 5.3% for 1997.
<PAGE 29>
Net Realized Investment Gains. Net realized investment
gains were $1.3 million for 1998 compared to $2.3 million in
1997, a decrease of $1.0 million or 44.6%. The decrease in
realized gains were a result of the market volatility in the
fourth quarter of 1998 which increased the spread between bid and
ask prices making the sale of bonds and convertible securities
unattractive and a loss of $817,000 related to the acquisition of
New Castle. The loss resulted from writing down the carrying
value of OGGI's surplus note investment in New Castle,
forgiveness of interest on the note and costs related to the
transaction.
Other Revenue. Other revenue increased $1.7 million, or
419.8%, in 1998 to $2.1 million from $414,000 in 1997. This
increase is attributable to increased management fees from
Neffsville Mutual Fire Insurance Company and New Castle.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred increased by $9.9 million, or 25.7%,
to $48.4 million in 1998 from $38.5 million in 1997. Losses and
loss adjustment expenses increased in 1998 as compared to 1997
because of the $3.4 million of claims from tornadoes and severe
thunderstorms during the first week of June 1998 compared to the
absence of severe storms in 1997, more losses being retained by
OGGI as a result of the termination of the quota share
reinsurance agreement, and the $2.3 million favorable loss
development in 1998 compared to 1997's favorable development of
$4.3 million.
Underwriting Expenses. Underwriting expenses, which include
amortization of deferred policy acquisition costs and operating
expenses, increased $11.4 million, or 46.6%, in 1998 to $35.8
million from $24.4 million in 1997. The increase is primarily
the result of the loss of commission income from the termination
of the quota share reinsurance agreement in 1998 and additional
commission expense on assumed business from New Castle, as well
as pretax charges of $2.0 million for guaranty fund assessments
related to the insolvencies of PIC Insurance Group, Inc. and
P.I.E. Mutual Insurance Company. Assessment from these
insolvencies are expected to continue for the next two to three
years. Based upon OGGI's current premium volume this amounts to
approximately $1.0 million each year. Other increases in
underwriting expenses relate to Old Guard Insurance Management
Co.'s management agreement with New Castle. Expenses related to
this agreement are offset by increases in other revenue.
Federal Income Tax Expense (Benefit). Federal income tax
expense (benefit) as a percentage of pre-tax income or loss was
(37.3%) in 1998 compared to 36.6% in 1997. The unusual
relationship of income tax benefit versus pretax income in 1998
is attributable to the low level of pretax income versus the
magnitude of tax preference items (primarily tax exempt income
and dividends received deduction) which do not vary with pretax
income. In 1998, tax preference items were large enough to
<PAGE 30> offset pretax income. Assessment from these
insolvencies are expected to continue for the next two to three
years. Based upon OGGI's current premium volume this amounts to
approximately $1.0 million each year.
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
Premiums. Gross premiums written increased $5.8 million, or
7.1%, in 1997 compared to 1996. The increase can be attributed,
in part, to the acquisition of First Delaware which contributed
$3.6 million to the increase. The remaining increase can be
attributed to increases in direct premiums written for personal
and commercial automobile and farmowners business offset by a
decrease in homeowners business. The increases in automobile
writings reflect OGGI's focus on increasing liability business in
an effort to balance the overall book of business between
property and liability exposures. The farmowners line increased
due to premium rate increases as competition eased somewhat in
OGGI's primary market, Pennsylvania. Homeowners premiums
decreased $435,000, or 2.0%, in 1997 as a result of a
reunderwriting initiative which commenced in 1997 and is designed
to improve the portfolio mix to include higher value dwellings
and to ensure that the appropriate premium is received for the
risk underwritten. This initiative was successful as the number
of homeowners policies in force has declined at a faster and
faster rate than written premiums indicating that OGGI received
more premium dollars for less risk. Workers' compensation
premium rates decreased in 1997 because of a 25% rate reduction
mandated by the Pennsylvania Workers' Compensation Rating Bureau.
The decrease was driven by lower claim costs arising out of
reforms adopted in 1994-1995. This rate reduction was offset by
increases in policy count as OGGI implemented several safety
group programs to attract new and maintain existing business. The
safety group programs offer dividends based upon the group's loss
experience and to policyholders who are otherwise unable to
obtain a dividend participating policy. By creating safety
groups, OGGI is able to offer this benefit and attract new
business. Farmowners, homeowners, and personal automobile direct
writings as a percentage of the total book of business were
21.0%, 25.0%, and 23.6%, respectively, in 1997 as compared to
20.6%, 27.2%, and 23.5%, respectively, for 1996.
Ceded premiums written decreased $12.5 million to $21.9
million in 1997 compared to 1996. The decrease in premiums ceded
was directly attributable to the effects of reducing from 20% to
15% the quota share reinsurance agreement with our primary
reinsurer, American Re. Ceded premiums written under this
agreement amounted to $9.4 million and $20.1 million for 1997 and
1996, respectively. The remaining decrease in ceded premiums
written related to a restructuring of our property reinsurance
program effective January 1, 1997, from a combination of pro-rata
and excess of loss to 100% excess of loss. This change in the
property reinsurance program resulted in a $2.9 million decrease
<PAGE 31> in ceded premiums written. Decreases in ceded premiums
as a result of the aforementioned changes in our property
reinsurance were offset by a $1.6 million increase associated
with the acquisition of First Delaware.
Net premiums written increased $18.4 million, or 38.5%, in
1997 to $66.1 million from $47.7 million in 1996. For the same
comparative periods, net premiums earned increased $8.8 million,
or 16.5%, to $62.4 million from $53.6 million. The increases in
net premiums written and net premiums earned were directly
attributable to the effects of reducing the quota share
reinsurance agreement with American Re as well as the other
factors discussed above.
Net Investment Income. Net investment income increased $1.4
million, or 30.7%, to $5.9 million in 1997 from $4.5 million in
1996 while average cash and invested assets increased $28.2
million, or 31.8%. For 1997, the yield on average cash and
invested assets was 5.3% compared to 5.1% for 1996. The increase
in average cash and invested assets can be attributed primarily
to the $33.7 million in net proceeds from OGGI's subscription
offering in February 1997 and the increase in gross unrealized
gains on investments of $2.8 million.
During the third quarter of 1997, OGGI transferred $38.1
million of fixed income securities from available to sale to held
to maturity reflecting management's intention and ability to hold
these securities until maturity. This will enable OGGI to extend
the duration of this portion of the portfolio which will allow
for the purchase of higher yielding securities. The change in
classification from available to sale to held to maturity did not
have a material effect on OGGI's financial position or results of
operations.
Net Realized Investment Gains. Net realized investment
gains were $2.3 million for 1997 compared to $1.4 million in
1996, an increase of $900,000 or 68.0%. The additional gains
were realized as interest rate and general economic conditions in
1997 created capital gains opportunities particularly in the
equity portfolio.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred decreased by $5.8 million, or 13.2%,
to $38.5 million in 1997 from $44.4 million in 1996. Losses and
loss adjustment expenses decreased in 1997 as compared to 1996
because of the absence of catastrophic claims in 1997 which
amounted to $3.7 million in 1996 and favorable loss development
in 1997 on prior losses of $4.3 million as compared to adverse
development in 1996 of $557,000. These decreases were offset by
losses incurred associated with First Delaware that amounted to
$1.1 million and the decrease in the quota share reinsurance
agreement which increased incurred losses and loss adjustment
expenses by $836,000.
<PAGE 32>
Underwriting Expenses. Underwriting expenses, which include
amortization of deferred policy acquisition costs and operating
expenses, increased $6.0 million, or 32.8%, in 1997 to $24.4
million from $18.4 million in 1996. The increase is primarily
due to a $4.5 million reduction in ceded commissions arising out
of the decrease in the quota share reinsurance agreement and a
$1.4 million increase in other underwriting expenses. The other
underwriting expense increase can be attributed to the
acquisition of First Delaware that contributed $650,000 to the
increase and initiatives undertaken by OGGI's subsidiaries to
upgrade their computer systems and to reunderwrite the homeowners
book of business.
Stock Option Compensation. The $2.0 million charge for
stock compensation expense is a non-recurring, non-cash expense
resulting from the grant of 237,286 stock options on February 11,
1997, at an exercise price equal to the $10 per share offering
price in OGGI's subscription offering, and approved by
shareholders at OGGI's first Annual Meeting on August 19, 1997.
At the time of shareholder approval OGGI's stock price was $18.50
per share. In accordance with OGGI's accounting policy for
stock-based compensation (the optional accounting treatment
afforded under Statement of Financial Accounting Standards (SFAS)
No. 123 which allows companies to follow the expense recognition
criteria of Accounting Principles Board Opinion No. 25), the
difference between the stock price at the approval date and the
exercise price is charged to earnings. Further changes in OGGI's
stock price or future grants of options, shareholder approval of
which will not be required and which are expected to be made at
the then current price of OGGI's stock, will not result in
additional charges to earnings.
Federal Income Tax Expense (Benefit). Federal income tax
expense (benefit) as a percentage of pre-tax income or loss was
36.6% in 1997 compared to 42.6% in 1996. The increase in the
rate can be attributed to the return to profitable operations in
1997, which generated taxable income versus operating losses in
1996, and the realization of $128,000 in research and
experimentation tax credits in 1996.
Liquidity and Capital Resources
The principal sources of OGGI'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 OGGI
relate primarily to the payment of losses and loss adjustment
expenses. The short and long-term liquidity requirements of OGGI
vary because of the uncertainties regarding the settlement dates
for liabilities for unpaid losses and because of the potential
for large losses, either individually or in the aggregate.
OGGI and its subsidiaries have in place unsecured lines of
credit with a local financial institution under which they may
<PAGE 33> borrow up to an aggregate of $1.5 million. As of
December 31, 1998 and 1997, no amounts were borrowed against
these lines of credit.
Net cash provided (used) by operating activities was
$5.1 million, $4.1 million and $(10.7) million during 1998, 1997,
and 1996, respectively. Negative cash flow from operating
activities during 1996 was primarily attributable to the net loss
for the period and an increase in reinsurance receivables and
prepaid reinsurance premiums as a result of implementing the
quota share agreement with American Re.
In 1998, investing activities used cash of $6.8 million
primarily because of the expansion of our home office which was
completed in the fall of 1998 and continued investments in
technology. In 1997, investing activities used cash of $33.5
million primarily because of the investment of the net proceeds
from the subscription offering and the continuing costs of
improvements to our computer systems. In 1996, investing
activities provided cash of $7.4 million primarily as a result of
decreases in the fixed income portfolio needed to fund
unprofitable operations in that year.
In February 1996, OGGI and American Technologies, Inc., a
California based software lessor, entered into a lease financing
agreement in connection with the acquisition by OGGI 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. During 1998, this lease
was repaid.
As a holding company, the principal source of liquidity for
Old Guard Group, Inc. will be dividend payments and other fees
received from its subsidiaries. The Company'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 Company 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 Insurance Department cannot exceed the greater
of 10% of the insurance company's statutory surplus as reported
on the most recent annual statement filed, or the net income of
the insurance company for the period covered by such annual
statement. However, Old Guard, Old Guard Fire and First Patriot
are further restricted as to the amount of dividends that they
may pay. These restrictions do not allow the insurance companies
to pay any dividend without prior approval of the Pennsylvania
Insurance Department for a 36 month period following the
conversion.
<PAGE 34>
The ESOP borrowed $4.1 million from an unaffiliated lender
and $100,000 from OGGI to purchase 10% of the common stock issued
in OGGI's subscription offering (see Note 1). The loans bear an
8.45% interest rate, and will require the ESOP to make monthly
payments of $50,417 for a term of 10 years. The loan is 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 OGGI's Board of
Directors may determine at its discretion.
Effects of Inflation
The effects of inflation on OGGI 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 OGGI'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.
New Accounting Pronouncements
In January 1997, the Accounting Standards Executive
Committee of the American Institute of Certified Public
Accountants issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3, which is effective for fiscal
years beginning after December 31, 1998, provides guidance for
determining when an insurance company should recognize a
liability for guaranty fund and other insurance related
assessments and how to measure that liability. The adoption of
SOP 97-3 is not expected to have a material impact on the
financial statements of OGGI.
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. <PAGE 35>
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.
OGGI has determined that it manages one operating segment which
is comprised of its property and casualty business.
Year 2000 Issue
General:
As the year 2000 approaches, concerns arise involving
business interruptions or failures of specific operations
performed by computer chips as a result of date sensitive
information. The problem results because some current
information technology ("IT") systems and non-IT systems with
embedded computer chips are not prepared to recognize the year
change from 1999 to 2000. Absent remediation of non-compliant
systems, there is a substantial risk to OGGI of business
interruption or failure. Therefore, it is important to prepare a
contingency plan to insure that all affected areas within OGGI
have been reviewed.
Project:
OGGI developed an enterprise-wide year 2000 Readiness
Initiative Program to identify the enterprise-wide business
impact(s) of the arrival of the year 2000. A plan was developed
to ensure all applicable systems, equipment, vendors and external
agents are compliant. OGGI has utilized the recommendations from
an outside consultant as a tool for project management.
In the process of identifying assets affected by the year
2000 problem, a year 2000 representative was selected from each
department within OGGI. Each representative completed an
inventory of year 2000 affected assets utilized by their
department. The inventory included: infrastructure, including
non-IT assets such as elevators and security systems,
applications software, third-party suppliers and customers
(external agents).
The representatives prioritized assets by assigning a
criticality factor. These factors consisted of "fatal,"
"critical," "marginal" and "desirable." "Fatal" is defined as an
asset that is necessary for uninterrupted operations of OGGI and
will fail or terminate if there were year 2000 date processing
errors. "Critical" is defined as an asset that is necessary for
the operation of the business, and year 2000-related failures
<PAGE 36> will produce an inaccurate or incorrect result.
"Marginal" is defined as an asset that is necessary for the
operation of the business, but year 2000-related failures will
cause minor inconveniences, annoyances, or irritations.
"Desirable" is defined as an asset that is not mandatory for
operating the business. All assets will continue to be evaluated
to determine whether they need to be replaced, repaired or are
compliant. As of December 1998, OGGI has evaluated the majority
of assets and confirms all assessment work is substantially
completed.
OGGI's most "fatal" asset is older personal computers. OGGI
has developed a plan to ensure these systems will be compliant by
the first quarter of 1999. Information regarding BIOS upgrades
and recommendations have been received from the manufacturers of
each of the different computer systems that are not year 2000
compliant. The software programs identified as not yet compliant
continue to be reviewed and remediation will be implemented
according to manufacturer recommendations. Some of the computer
software programs currently being utilized will be replaced by
compliant systems.
Vendors and external agents also have been contacted by
phone and/or letter to request information regarding their year
2000 status. OGGI has received some responses to date but all
vendors have not yet responded. Alternative vendors have been
identified for those vendors that do not respond.
In addition, a process also was established for reviewing
new and existing contracts and maintenance agreements for
appropriate year 2000 compliance language.
Costs:
OGGI presently expects that substantially all future costs
associated with the year 2000 compliance will be internal and are
estimated to be less than $50,000. Costs incurred to date have
been approximately $150,000.
Contingency Plans:
Although OGGI expects to finish testing its year 2000
compliance by June 30, 1999, it has considered contingencies in
case any of its fatal or critical assets, not already confirmed
as compliant, fail year 2000 compliance testing. For such
assets, OGGI has identified alternatives that will not cause
significant interruptions to service or operation.
Policy Coverage:
Many experts now believe that the year 2000 problem may have
a material adverse impact on the national and global economies.
In addition, it seems likely that if businesses are materially
damaged as a result of the year 2000 problems, at least some such
<PAGE 37> 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 and has
included exclusionary language on certain policies beginning in
1998, 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 OGGI to accurately estimate the
impact of the year 2000 problem on the insurance issued by, or
other business operations of OGGI.
Forward-Looking Statements
Certain statements contained in the Management's Discussion
and Analysis 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-forwarding 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 conditions; OGGI's dependence on investment
income; the geographic concentration of OGGI's business in the
Northeast United States; the adequacy of OGGI'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 OGGI with the
Securities and Exchange Commission. OGGI expressly disclaims any
obligation to update any forward-looking statements as a result
of developments occurring after the release of this report.
PAGE 38
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk of Financial Instruments
A significant portion of the OGGI's assets and liabilities
are financial instruments, which are subject to the market risk
of potential losses from adverse changes in market rates and
prices. OGGI's primary market risk exposures relate to interest
rate risk on fixed rate domestic medium-term instruments and, to
a lesser extent, domestic short- and long-term instruments. OGGI
has established strategies, asset quality standards, asset
allocations and other relevant criteria for its portfolio to
manage its exposure to market risk. In addition, maturities are
structured after projecting liability cash flows with actuarial
models. OGGI currently has only one derivative instrument
outstanding, an interest rate swap on its long-term debt, which
is used as a hedge. All of OGGI's financial instruments are held
for purposes other than trading. OGGI's portfolio does not
contain any significant concentrations in single issuers (other
than U.S. treasury and agency obligations), industry segments or
geographic regions (see Notes 3 and 7 to OGGI's Consolidated
Financial Statements for additional discussion).
Caution should be used in evaluating the OGGI's overall
market risk from the information below, since actual results
could differ materially because the information was developed
using estimates and assumptions as described below, and because
insurance liabilities and reinsurance receivables are excluded in
the hypothetical effects (insurance liabilities represent 47.9%
of total liabilities and reinsurance receivables on unpaid losses
represent 11.1% of total assets).
The hypothetical effects of changes in market rates or
prices on the fair values of financial instruments as of
December 31, 1998, excluding insurance liabilities, reinsurance
receivables on unpaid losses, and fixed income securities that
are classified as "held-to-maturity" because such assets and
liabilities are not carried at fair value, would have been as
follows:
- If interest rates had decreased by 100 basis points,
there would have been no significant change in the fair
value of OGGI's long-term debt or the related swap
agreement. The change in fair values was determined by
estimating the present value of future cash flows using
models that measure the change in net present values
arising from selected hypothetical changes in market
interest rates.
- If interest rates had increased by 100 basis points,
there would have been an approximate $2.9 million net
decrease in the fair value of OGGI's investment
<PAGE 39> portfolio. The change in fair value was
determined by estimating the present value of future
cash flows using various models, primarily duration
modeling.
- If the market prices of all equity securities decreased
10%, there would have been an approximate $2.2 million
decrease in the fair value of OGGI's investment
portfolio. Common equity securities at December 31,
1998 include $8.7 million which are managed under the
value-style investment management approach and $6.9
million which are managed under a growth-style
investment approach. Preferred equity securities at
December 31, 1998 consist primarily of convertibles.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Accountants
To the Board of Directors and Shareholders
of Old Guard Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income and comprehensive
income, shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Old Guard Group,
Inc. and Subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1999, except for Notes 15 and 16, for which the date
is March 5, 1999
PAGE 40
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 1998 and 1997
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed income securities
Held to maturity, at amortized cost $ 36,615,905 $ 38,382,722
Available for sale, at fair value 59,249,118 57,237,836
Preferred stocks, available for sale, at fair value 5,979,443 4,626,565
Common stocks, available for sale, at fair value 15,620,659 12,208,318
Other invested assets 4,412,378 5,668,025
Total investments 121,877,503 118,123,466
Cash and cash equivalents 6,121,983 10,214,908
Receivables:
Premiums 9,354,449 7,945,218
Reinsurance 15,138,801 10,767,770
Investment income 1,194,031 1,236,186
Affiliates 479,989 1,093,062
Prepaid reinsurance premiums 3,631,428 6,285,844
Deferred policy acquisition costs 9,423,124 7,318,767
Deferred income taxes - - 262,750
Property and equipment 16,941,129 10,112,212
Goodwill 716,879 772,023
Other assets 3,752,624 1,266,509
Total assets $188,631,940 $175,398,715
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $ 52,707,951 $ 48,718,666
Unearned premiums 42,460,383 36,535,108
Accrued expenses 4,250,938 2,541,896
Deferred income taxes 420,654 - -
Capital lease obligations - - 796,558
Long-term debt 3,402,778 - -
ESOP liability 3,547,448 3,840,566
Other liabilities 3,362,831 3,662,423
Total liabilities 110,152,983 96,095,217
Minority Interest 703,220 649,125
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized;
none issued and outstanding) - - - -
Common stock (15,000,000 shares authorized; 4,248,417 and 4,204,910 shares
issued; 3,933,401 and 4,084,370 shares outstanding, no par) 38,776,603 38,317,908
Additional paid-in capital 4,370,606 4,787,703
Deferred compensation (5,330,718) (6,277,553)
Retained earnings 40,175,219 40,259,736
Net unrealized investment gains, net deferred income taxes 4,997,299 3,856,612
Treasury stock, at cost (315,016 and 120,540 shares) (5,213,272) (2,290,033)
Total shareholders' equity 77,775,737 78,654,373
Total liabilities and shareholders' equity $188,631,940 $175,398,715
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 41
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Revenue:
Net premiums written $83,925,644 $66,063,881 $47,692,036
Change in net unearned premiums (8,579,680) (3,635,287) 5,899,678
Net premiums earned 75,345,964 62,428,594 53,591,714
Investment income, net of expenses 6,179,394 5,876,708 4,494,818
Net realized investment gains 1,289,541 2,326,221 1,384,957
Other revenue 2,149,885 413,636 321,770
Total revenue 84,964,784 71,045,159 59,793,259
Expenses:
Losses and loss adjustment
expenses incurred 48,395,431 38,514,060 44,358,790
Amortization of deferred policy
acquisition costs 20,857,284 16,398,006 12,076,183
Operating expenses 14,966,532 8,038,028 6,320,550
Stock option compensation - 2,016,931 -
Interest expense 502,734 591,452 384,529
Total expenses 84,721,981 65,558,477 63,140,052
Income (loss) before income tax (benefit)
and minority interest 242,803 5,486,682 (3,346,793)
Income tax expense (benefit) (90,570) 2,009,403 (1,427,080)
Income (loss) before minority interest 333,373 3,477,279 (1,919,713)
Minority interest in income (loss) of consolidated
subsidiary 54,095 (7,287) - -
Net income (loss) $279,278 $3,484,566 $(1,919,713)
Other comprehensive income, before tax:
Unrealized holding gains 3,310,993 5,089,184 1,430,975
Less: Reclassification adjustment for gains
included in net income 1,600,259 2,326,221 1,384,957
Other comprehensive income, before tax 1,710,734 2,762,963 46,018
Income tax expense related to items of other
comprehensive income 570,047 931,855 12,700
Other comprehensive income, net of tax 1,140,687 1,831,108 33,318
Comprehensive income (loss) $1,419,965 $5,315,674 $(1,886,395)
Earnings (loss) per share:
Basic 0.08 0.92 (0.49)
Diluted 0.07 0.91 (0.49)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 42
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1998, 1997 and 1996
Net
Unrealized
Investment
Additional Gains, Net
Common Stock Paid-In Deferred Retained of Deferred Treasury
Shares Amount Capital Compensation Earnings Income Taxes Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 - $ - $ - $ - $38,905,128 $1,992,186 $ - $40,897,314
Comprehensive income:
Net loss - - - - (1,919,713) - - (1,919,713)
Unrealized gains on
investments, net of
reclassification
adjustment - - - - - 33,318 - 33,318
Comprehensive income - - - - - - - (1,886,395)
Balance, December 31, 1996 - - - - 36,985,415 2,025,504 - 39,010,919
Comprehensive income:
Net income - - - - 3,484,566 - - 3,484,566
Unrealized gains on
investments, net of
reclassification
adjustment - - - - - 1,831,108 - 1,831,108
Comprehensive income 5,315,674
Issuance of common stock,
net of issuance costs 4,204,910 38,317,908 - - - - 38,317,908
Dividends ($.05 per share) (210,245) (210,245)
Purchase of treasury stock (120,540) - - - - - (2,290,033) (2,290,033)
Deferral of stock-based
compensation - - 2,633,864 (6,688,774) - - (4,054,910)
Stock-based compensation - - 2,153,839 411,221 - - 2,565,060
Balance December 31, 1997 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 - - - - 279,278 - - 279,278
Unrealized gains on
investments, net of
reclassification
adjustment - - - - - 1,140,687 - 1,140,687
Comprehensive income 1,419,965
Dividends ($.05 per share) - - - - (363,795) - - (363,795)
Purchase of treasury stock (200,000) - - - - - (3,025,325) (3,025,325)
Reissuance of treasury stock 3,104 - 828 - - - 46,948 47,776
Exercise of common stock
options 41,257 412,570 0 - - - - 412,570
Stock-based compensation 4,670 46,125 (417,925) 946,835 55,138 630,173
Balance, December 31, 1998 $3,933,401 $38,776,603 $4,370,606 $(5,330,718) $40,175,219 $4,997,299 $(5,213,272) $77,775,737
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement. <PAGE 43>
PAGE 44
<PAGE>
<TABLE>
<CAPTION> OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $279,278 $3,484,566 $(1,919,713)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,329,678 1,388,677 960,515
Net realized investment gains (1,289,541) (2,326,221) (1,384,957)
Deferred income tax expense (benefit) 150,904 958,542 (910,615)
Non-cash compensation expense 1,046,297 2,565,061 -
Other (25,394) (16,694) (5,195)
(Increase) decrease in assets:
Receivables (3,563,949) 3,063,473 (5,463,532)
Prepaid reinsurance premiums 5,505,730 2,945,331 (6,948,184)
Deferred policy acquisition costs (2,104,357) (1,519,308) 1,577,436
Other assets (2,519,408) 1,116,626 (757,012)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses 1,205,943 (8,847,039) 3,279,580
Unearned premiums 3,073,961 689,956 1,048,506
Accrued expenses 1,497,577 (298,154) (408,945)
Other liabilities 514,653 849,542 214,401
Net cash provided (used) by operating activities 5,101,372 4,054,358 (10,717,715)
Cash flows from investing activities:
Cost of purchases of fixed income securities:
Held to maturity (11,858,011) (2,777,906) -
Available for sale (28,122,059) (51,038,191) (23,847,070)
Proceeds from sales of fixed income securities:
Available for sale 24,538,026 18,322,894 24,135,158
Proceeds from maturities of fixed income securities:
Held to maturity 13,570,526 2,463,699 -
Available for sale 5,825,742 10,100,750 7,827,777
Cost of equity securities purchased (8,396,523) (8,981,660) (4,015,036)
Proceeds from sales of equity securities 6,134,648 7,662,191 7,122,598
Change in receivable/payable for securities 317,722 (87,932) (423,768)
Cost of purchases of other invested assets (1,325,000) (4,420,001) (1,885,000)
Proceeds from sales of other invested assets 56,846 588,582 -
Acquisition of subsidiary, net of cash acquired 427,269 (626,175) -
Cost of purchases of property and equipment (8,015,341) (4,740,860) (1,535,465)
Proceeds from sales of property and equipment 3,000 20,700 -
Net cash provided (used) by investing activities (6,843,155) (33,513,909) 7,379,194
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs - 33,721,482 (958,484)
Exercise of common stock options 412,570 - -
Purchase of treasury stock (4,760,795) (970,688) -
Proceeds from reissuance of treasury stock 47,776
Payment of dividends (363,795) (210,245) -
Repayment of subordinated debt - - (750,000)
Proceeds from bank loans 3,500,000 5,054,770 1,550,000
Proceeds from capital lease funding - - 1,499,028
Payment on principal of capital lease or bank loan (1,186,898) (3,589,229) (486,779)
Net cash provided (used) by financing activities (2,351,142) 34,006,090 853,765
Net increase (decrease) in cash and cash equivalents (4,092,925) 4,546,539 (2,484,756)
-
Cash and cash equivalents at beginning of period 10,214,908 5,668,369 8,153,125
Cash and cash equivalents at end of period $6,121,983 $10,214,908 $5,668,369
Cash paid (received) during the year for:
Interest $ 503,364 $ 591,452 $ 381,896
Income taxes $1,485,004 $ 85,241 $ (160,453)
</TABLE> <PAGE 45>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 46
<PAGE>
Old Guard Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts
of Old Guard Group, Inc. and its wholly-owned subsidiaries
(OGGI), Old Guard Insurance Company (Old Guard), Old Guard Fire
Insurance Company (Old Guard Fire), First Patriot Insurance
Company (First Patriot), New Castle Insurance Company of
Delaware, Old Guard Insurance Management Co. (OGIM), 2929 Service
Corporation and OGGI's 80% owned subsidiary, First Delaware
Insurance Company (First Delaware).
OGGI 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 subscription offering and in accordance with
a plan of demutualization, Old Guard, Old Guard Fire and First
Patriot were converted from mutual to stock insurance companies
and issued shares of common stock to OGGI in exchange for $16.0
million.
Effective October 1, 1998, New Castle Mutual Insurance
Company converted from mutual to stock form and changed its name
to New Castle Insurance Company of Delaware (New Castle). New
Castle's conversion was pursuant to a plan of conversion approved
by the Delaware Insurance Department and New Castle's
policyholders. Along with the conversion, OGGI's $2.5 million
surplus note investment in New Castle was converted to 1,500
shares of common stock and OGGI became the sole shareholder of
New Castle. Accordingly, New Castle's results of operations for
the three months ended December 31, 1998 are consolidated with
those of OGGI in the financial statements presented herein. Pro
forma results for 1998 and 1997, including New Castle as if it
had been fully owned for each of those years are as follows:
(Unaudited) 1998 1997
Total revenue $85,244,243 $73,639,526
Income before income tax 839,290 4,163,329
Net income 672,960 2,611,153
Earnings per share $0.17 $0.68
Effective January 1, 1997, OGGI acquired 80% of the
outstanding common stock of First Delaware for $3.3 million,
which included a capital infusion of $1.5 million. Pro forma
results for 1996, including First Delaware as if it had been 80%
<PAGE 47> owned during that period and as if OGGI had converted
to stock form, are as follows:
Total revenue $61,476,000
Loss before provision for income tax (3,200,000)
Net loss (1,814,000)
Loss per share $(0.46)
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles. All significant intercompany transactions have been
eliminated in consolidation. Certain amounts in the 1997 and
1996 financial statements have been reclassified to conform to
the current year presentation.
Description of Business
OGGI is a property and casualty insurer of farms, small and
medium size businesses and residences in rural and suburban
communities in Pennsylvania, Delaware and Maryland, with
Pennsylvania comprising in excess of 83% of total direct premiums
written. The principal lines of business are homeowners,
farmowners, personal automobile and commercial multi-peril which
represent approximately 25%, 21%, 24% and 15%, respectively, of
direct premiums written.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost, which
approximates fair value. OGGI considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
Investments
OGGI classifies fixed income and marketable equity
securities as trading or available for sale. In addition, fixed
income securities may be classified as held to maturity. Each
security are evaluated at the time of purchase and periodically
reevaluated. Held to maturity securities are carried at amortized
cost. Available for sale securities are carried at fair value,
with the unrealized gains and losses, net of deferred income tax,
reported as a separate component of shareholders' equity.
Currently, no securities are classified as trading.
The fair value of all investments is subject to various
market fluctuations which include changes in equity markets,
interest rate environment and general economic conditions.
Interest on fixed maturities and short-term investments is
credited to income as it accrues on the principal amounts
outstanding, adjusted for amortization of premiums and accretion
of discounts computed utilizing the effective interest rate
method. Realized gains and losses on investments sold are
calculated on the specific identification basis. <PAGE 48>
During the third quarter of 1997, OGGI transferred $38.1
million of fixed income securities from available for sale to
held to maturity reflecting management's intention and ability to
hold these securities until maturity. The change in
classification from available to sale to held to maturity did not
have a material effect on OGGI's financial position or results of
operations.
Deferred Policy Acquisition Costs
Acquisition costs such as commissions, premium taxes and
certain other expenses which vary with and are directly related
to the production of business, are deferred and amortized over
the effective period of the related insurance policies. The
method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated
realizable value, which gives effect to premiums to be earned,
related investment income, loss and loss adjustment expenses and
certain other maintenance costs expected to be incurred as the
premiums are earned. To the extent that deferred policy
acquisition costs are not realizable, the deficiency is charged
to income currently.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Property is depreciated on a straight-line basis
over the useful lives ranging from five to fifty years. Equipment
is depreciated on a straight-line basis with useful lives of five
to ten years. Computer software is amortized on a straight-line
basis over a useful life of five years.
Premiums
Premiums written are earned on a pro rata basis over the
terms of the respective policies. Unearned premiums represent
the unexpired portion of the policies in-force.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses
include amounts determined on the basis of claims adjusters'
evaluations, estimates of losses incurred but not reported
calculated using historical experience and other estimates. Any
adjustments resulting from changes in estimates are reflected in
current operating results. Estimated amounts of salvage and
subrogation recoverable on paid and unpaid losses are reflected
as a reduction of the liability for losses and loss adjustment
expenses.
Stock-Based Compensation <PAGE 49>
Stock-based compensation plans are accounted for under the
provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded
on the date of a stock option grant only if the current market
price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," permits entities to
recognize as expense, over the vesting period, the fair value of
all stock-based awards on the date of grant. Alternately, SFAS
No. 123 allows entities to apply the provision of APB Opinion No.
25 and provide pro forma net income and earnings per share
disclosures for employee stock option grants as if the fair value
method defined in SFAS No. 123 had been applied. OGGI has
elected to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures under SFAS No. 123.
Income Taxes
Deferred income taxes are accounted for using the liability
method wherein deferred tax assets or liabilities are calculated
on the differences between the bases of assets and liabilities
for financial statement purposes versus tax purposes (temporary
differences) using enacted tax rates in effect for the year in
which the differences are expected to reverse. Tax expense in
the consolidated statements of income is equal to the sum of
taxes currently payable, including the effect of the alternative
minimum tax, if any, plus an amount necessary to adjust deferred
tax assets and liabilities to an amount equal to period-end
temporary differences at prevailing tax rates.
Effective for the 1997 tax year, OGGI and its subsidiaries
file a consolidated federal income tax return.
Reinsurance
In the normal course of business, OGGI's insurance
subsidiaries reinsure a portion of their exposure and pay to
reinsurers a portion of premiums received on all policies
reinsured. Insurance is ceded primarily to reduce net liability
on individual risks, to mitigate the effect of individual loss
occurrences (including catastrophe losses), to stabilize
underwriting results and to increase underwriting capacity.
Assets and liabilities related to insurance contracts are
reported before the effects of reinsurance. Reinsurance
receivables and prepaid reinsurance premiums are reported as
separate assets.
Certain reinsurance contracts provide for retrospective rate
adjustments based on experience. Management estimates the
ultimate ceded premium based upon historical experience. Any
adjustments resulting from changes in estimates are reflected in
current operating results. <PAGE 50>
Assessments
OGGI's insurance subsidiaries are subject to assessments in
the states in which each company is licensed. Assessments
consist primarily of charges from the residual markets and
guaranty fund associations. Expense for guaranty fund
assessments is recognized when an insolvency has taken place, the
amount of the related assessment is reasonably estimable and the
event obligating OGGI to pay (the writing of premiums) has taken
place.
Concentration of Credit Risk
Financial instruments which potentially expose OGGI to
concentrations of credit risk consist primarily of cash and
short-term investments, premiums in course of collection,
investments and balances recoverable from reinsurers. Insureds
primarily consist of individuals and commercial and agricultural
businesses.
No one insured accounted for a significant amount of
premiums earned or premiums in course of collection in 1998, 1997
or 1996.
Use of Estimates
The preparation of the accompanying consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the results of their
operations during the period. The consolidated financial
statements include estimates the most significant of which are
the net deferred tax asset, liability for losses and loss
adjustment expenses, deferred policy acquisition costs and
reinsurance recoverables. Actual results may differ from those
estimates.
2. Statutory Information:
OGGI's insurance subsidiaries prepare their statutory
financial statements in accordance with accounting principles and
practices prescribed or permitted by the Insurance Department of
the respective company's state of domicile. Prescribed statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners (NAIC).
Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ from
state to state, may differ from company to company within a
state, and may change in the future.
In 1998, the NAIC adopted the Codification of Statutory
Accounting Principles guidance, which will replace the current
<PAGE 51> Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would
also be effective upon implementation. The Codification provides
guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas, e.g. deferred
income taxes are recorded. The Pennsylvania Insurance Department
has adopted the Codification guidance, effective January 1, 2001.
OGGI has not yet estimated the potential effect of the
Codification guidance, however, it will not likely affect
financial statements prepared in accordance with generally
accepted accounting principles.
Risk based capital is designed to measure the acceptable
amount of capital an insurer should have based on the inherent
risks of the insurer's business. Insurers failing to meet
adequate capital levels may be subject to insurance department
scrutiny and ultimately rehabilitation or liquidation. Based on
established standards, OGGI's insurance subsidiaries maintain
surplus in excess of prescribed risk based capital requirements.
Statutory surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted by
insurance regulatory authorities are as follows:
<TABLE>
<CAPTION>
Statutory Surplus Statutory Net Income (Loss)
1998 1997 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Old Guard $30,460,772 $29,176,267 $(183,599) $2,789,155 $(658,740)
Old Guard Fire 13,573,448 14,274,141 (179,784) 675,225 (534,143)
First Patriot 4,868,651 5,254,516 (110,523) 504,258 (207,441)
First Delaware 3,055,027 2,986,233 217,325 26,457 -
New Castle 2,365,024 - 467,926 - -
$54,322,922 $51,691,157 $211,345 $3,995,095 $(1,400,324)
=========== =========== ======== ========== ===========
</TABLE>
A reconciliation of OGGI's statutory net income and surplus
to OGGI's net income and shareholders' equity, under generally
accepted accounting principles (GAAP), is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Income:
Statutory net income $211,345 $3,995,095 $(1,400,324)
GAAP adjustments:
Increase (decrease) in deferred policy
acquisition costs 2,104,357 1,519,308 (1,577,436)
Deferred income tax (expense) benefit 233,028 (1,716,425) 910,615
Accrual of guaranty fund assessment (1,015,100) - -
New Castle pre-acquisition earnings (634,035) - -
Other (620,317) (313,412) 147,432
GAAP net income (loss) $279,278 $3,484,566 $(1,919,713)
========== ========== =========== <PAGE 52>
<CAPTION>
As of December 31,
Shareholders' Equity: 1998 1997
<S> <C> <C>
Statutory surplus $54,322,922 $51,691,157
GAAP adjustments:
Deferred policy acquisition costs 9,423,124 7,318,767
Deferred income taxes (803,736) (436,396)
Restoration of non-admitted assets 686,811 686,604
Unrealized gains on investments,
available for sale 2,054,306 1,401,835
Elimination of excess of statutory
over statement reserves 3,157,510 3,395,713
Equity of holding company, net of
eliminations 8,380,414 12,775,263
Goodwill 716,879 772,023
Accrual of guaranty fund assessment (1,015,100) -
Other 852,607 1,049,407
Shareholders' equity $77,775,737 $78,654,373
=========== ===========
</TABLE>
3. Investments:
Net investment income, net realized investment gains and
change in unrealized investment gains on investments are as
follows for each of the three years ended December 31:
Net investment income and net realized investment gains
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Investment Income:
Fixed income securities $5,660,870 $5,391,156 $4,337,217
Preferred stocks 299,920 285,712 437,633
Common stocks 274,104 252,638 99,763
Cash and cash equivalents 649,579 1,039,826 418,695
Other 514,375 395,576 244,514
Gross investment income 7,398,848 7,364,908 5,537,822
Less investment expenses 1,219,453 1,488,200 1,043,004
Net investment income $6,179,395 $5,876,708 $4,494,818
Realized gains (losses):
Fixed income securities 1,279,666 1,054,387 1,079,958
Preferred stocks 425,875 391,640 413,326
Common stocks 408,169 868,704 141,673
Other (824,169) 11,490 (250,000)
Net realized investment gains $1,289,541 $2,326,221 $1,384,957
</TABLE>
<PAGE 53>
Change in net unrealized gains on investments:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed income securities $230,342 $1,189,419 $(1,309,607)
Preferred stocks (177,861) 19,257 (62,807)
Common stocks 1,691,769 1,578,982 1,434,746
Other invested assets (33,516) (24,695) (16,314)
1,710,734 2,762,963 46,018
Tax effect (570,047) (931,855) (12,700)
$1,140,687 $1,831,108 $33,318
</TABLE>
The cost and estimated fair value of investments at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
1998 Unrealized Unrealized Estimated
Held to Maturity Cost (1) Gains Losses Fair Value
<S> <C> <C> <C> <C>
Fixed income securities
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $9,345,372 $246,328 $5,915 $9,585,785
Obligations of states and political subdivisions 7,244,349 230,745 7,038 7,468,056
Corporate obligations 5,923,405 170,103 18,576 6,074,932
Collateralized mortgage obligations 14,102,779 316,883 35,901 14,383,761
Total held to maturity $36,615,905 $964,059 $67,430 $37,512,534
1998
Available for Sale
Fixed income securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $9,609,215 $162,062 $ 970 $9,770,307
Obligations of states and political subdivisions 9,589,498 270,455 26 9,859,927
Corporate obligations 25,307,133 1,717,579 615,577 26,409,135
Collaterized mortgage obligations 13,134,849 117,714 42,814 13,209,749
Total fixed income securities
available for sale 57,640,695 2,267,810 659,387 59,249,118
Equity securities:
Preferred stock 5,962,437 328,375 311,369 5,979,443
Common stock 9,605,659 6,404,413 389,413 15,620,659
Total available for sale $73,208,791 $9,000,598 $1,360,169 $80,849,220
=========== ========== ========== ===========
<CAPTION>
Gross Gross
1997 Unrealized Unrealized Estimated
Held to Maturity Cost (1) Gains Losses Fair Value
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $18,542,131 $141,455 $100,752 $18,582,834
Obligations of states and political subdivisions 8,344,543 65,375 11,027 8,398,891
Corporate obligations 5,051,926 99,797 20,300 5,131,423
Collateralized mortgage obligations 6,444,122 172,351 10,274 6,606,199
Total held to maturity 38,382,722 478,978 142,353 38,719,347 <PAGE 54>
1997
Available for Sale
Fixed income securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $14,722,507 $146,230 $16,308 $14,852,429
Obligations of states and political subdivisions 8,188,884 167,823 - 8,356,707
Corporate obligations 23,424,907 1,311,703 273,040 24,463,570
Collateralized mortgage obligations 9,523,457 49,128 7,455 9,565,130
Total fixed income securities 55,859,755 1,674,884 296,803 57,237,836
Equity securities:
Preferred stock 4,431,698 371,736 176,869 4,626,565
Common stock 7,885,087 4,587,650 264,419 12,208,318
Total available for sale $68,176,540 $6,634,270 $738,091 $74,072,719
=========== ========== ======== ===========
</TABLE>
PAGE 55
<PAGE>
(1) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
The amortized cost and estimated fair value of fixed income
securities at December 31, 1998 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Held to Maturity
Due in one year or less $3,068,185 $3,106,033
Due after one year through five years 4,915,524 4,981,973
Due after five years through ten years 4,304,608 4,464,599
Due after ten years 10,224,809 10,576,168
Collateralized mortgage obligations 14,102,779 14,383,761
$36,615,905 $37,512,534
=========== ===========
Available for Sale
Due in one year or less $1,278,282 $1,418,811
Due after one year through five years 8,825,279 9,064,240
Due after five years through ten years 16,133,008 16,348,128
Due after ten years 18,269,277 19,208,190
Collateralized mortgage obligations 13,134,849 13,209,749
$57,640,695 $59,249,118
=========== ===========
</TABLE>
Actual maturities may differ from contractual and
anticipated maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Collateralized mortgage obligations consist of mortgage
pass-through holdings and securities backed by credit card
receivables, auto loans and home equity loans. These securities
follow a structured principal repayment schedule and are of high
credit quality rated "AA" or better by Standard & Poor's. These
securities are presented separately in the maturity schedule due
to the inherent risk associated with prepayment on early
authorization. The average duration of this portfolio is
2.4 years.
The gross realized gains and losses on investment securities
in 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Gross realized gains $2,783,095 $2,720,560 $1,804,668
Gross realized losses (1,493,554) (394,339) (419,711)
Net realized gains $1,289,541 $3,326,221 $1,384,957
</TABLE>
<PAGE 56>
Insurance laws require that certain amounts be deposited
with various state insurance departments for the benefit and
protection of policyholders. The amortized cost of fixed income
securities on deposit with governmental authorities was $924,399
and $820,402 at December 31, 1998 and 1997, respectively.
4. Losses and Loss Adjustment Expenses:
Activity in the liability for losses and loss adjustment
expenses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance as of January 1 $48,718,666 $55,371,077 $52,091,497
Less reinsurance recoverables 17,001,279 20,855,702 16,000,653
Net balance at January 1 31,717,387 34,515,375 36,090,844
Acquisitions 746,938 667,929 -
Incurred related to:
Current year 50,652,000 42,857,000 43,801,765
Prior years (2,256,569) (4,342,940) 557,025
Total incurred 48,395,431 38,514,060 44,358,790
Paid related to:
Current year 34,264,000 27,276,000 29,648,916
Prior years 14,914,454 14,703,977 16,285,343
Total paid 49,178,454 41,979,977 45,934,259
Net balance as of December 31 31,681,302 31,717,387 34,515,375
Plus reinsurance recoverables 21,026,649 17,001,279 20,855,702
Balance at December 31 $52,707,951 $48,718,666 $55,371,077
=========== =========== ===========
</TABLE>
Changes in estimates for prior years are attributable to
favorable loss development across all lines in 1998 and primarily
in workers' compensation reserves in 1997. The changes in
estimates for 1996 are primarily attributable to incurred loss
development experience across all lines of business.
The liability for losses and loss adjustment expenses
reflects management's best estimate of future amounts needed to
pay claims and related settlement costs with respect to insured
events which have occurred, including events that have not been
reported. In many cases, significant periods of time, ranging up
to several years, may elapse between the occurrence of an insured
loss, the reporting of the loss, and the payment of that loss.
As part of the process in determining these amounts, historical
data is reviewed and consideration is given to the impact of
various factors, such as legal developments, changes in social
attitudes, and economic conditions.
<PAGE 57>
OGGI's insurance subsidiaries have geographic exposure to
catastrophic losses in certain Mid Atlantic states. Catastrophes
can be caused by various events including hurricanes, windstorms,
earthquakes, hail, explosions, severe weather and fires, and the
incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the area
affected by the event and the severity of the event. Most
catastrophes are restricted to small geographic areas; however,
hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. OGGI's insurance subsidiaries
generally seek to reduce their exposure to catastrophe through
individual risk selection and the purchase of catastrophe
reinsurance.
Management believes that its liability for losses and loss
adjustment expenses are fairly stated, in accordance with
generally accepted actuarial principles and practices. However,
estimating the ultimate claims liability is a complex and
judgmental process inasmuch as the amounts are based on
management's informed estimates and judgments using data
currently available. As additional experience and data become
available regarding claim payments and reporting patterns,
legislative developments, and economic conditions, the estimates
are revised accordingly and the impact is reflected currently in
the consolidated financial statements.
5. Property and Equipment
Property and equipment consisted of the following at
December 31, 1998 and 1997:
1998 1997
Land $ 767,407 $ 767,407
Buildings and improvements 10,230,801 4,992,202
Furniture, fixtures,
equipment and software 11,730,183 7,599,114
Property and equipment, cost 22,728,391 13,358,723
Less accumulated depreciation (6,563,363) (5,458,521)
16,165,028 7,900,202
Software in development 776,101 1,771,969
Construction in progress - 440,041
Property and equipment $16,941,129 $10,112,212
6. Reinsurance:
OGGI's insurance subsidiaries maintain reinsurance
agreements which provide coverage for individual property and
liability claims, as well as, catastrophic events. These
<PAGE 58> reinsurance programs mitigate loss exposure from
individually large losses and an aggregation of losses arising
from a single loss event. OGGI is contingently liable for
reinsured claims if the assuming reinsurers cannot meet their
obligations under the reinsurance agreements.
The following amounts represent OGGI's reinsurance activity
with unrelated insurers in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Ceded:
Premiums earned $18,360,030 $24,817,610 $27,468,375
Unearned premiums $ 983,630 $ 6,285,844 $ 8,417,500
Losses and loss adjustment
expenses incurred $11,361,729 $ 8,816,887 $30,508,137
Assumed:
Premiums earned $ 359,173 $ 300,536 $ 142,423
Unearned premiums $ 35,524 $ 76,602 $ 27,545
Losses and loss adjustment
expenses incurred $ (761,028) $ 314,913 $ 180,604
</TABLE>
During 1997 and 1996, Old Guard, Old Guard Fire and First
Patriot maintained a 15% (20% in 1996) quota share reinsurance
agreement with their primary reinsurer, American Re-Insurance
Company. The agreement provided for a 30% (35% in 1996) ceding
commission on net business written. Effective January 1, 1998,
the agreement was cancelled on a run-off basis. This agreement
was intended to provide protection from high frequency and low
severity type losses. The following summarizes activity under
this treaty in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Earned premiums $5,198,631 $10,732,903 $13,647,111
Unearned premiums $ - $ 5,198,631 $ 4,867,616
Losses and loss adjustment
expenses incurred $2,926,217 $ 6,943,898 $ 7,779,576
</TABLE>
Reinsurance recoverable, under this agreement, on paid and
unpaid losses was $2,641,973 and $5,565,726 at December 31, 1998
and 1997, respectively.
OGGI performs credit reviews of its reinsurers, focusing on
financial stability and commitment to the reinsurance business.
At December 31, 1998, OGGI's insurance subsidiaries had
reinsurance balances of approximately $11,723,000, net of
applicable ceded reinsurance payable, due from American Re.
American Re's A.M. Best rating is A++.
<PAGE 59>
7. Long-Term Debt:
Long-term debt is as follows at December 31, 1998:
Mortgage, due 2013
7.70% fixed $1,944,444
LIBOR plus 1.50% 1,458,334
$3,402,778
The mortgage is secured by property located in Lancaster,
PA. and requires annual principal payments of $233,328. The
fixed rate portion of the mortgage was converted from a variable
rate through an interest rate swap. The fair value of the swap
at December 31, 1998 was $101,682.
8. Lines of Credit:
Subsidiaries of OGGI jointly maintain cash management
programs with a local financial institution. The programs
provide for draws by any member of OGGI against a line of credit
in the event of overdrafts. The line of credit is subject to a
maximum of $1,500,000 and bears interest at prime. OGGI must
maintain zero balances on the lines for one thirty-day period
each year and must meet certain demand deposit requirements. No
borrowings were outstanding under these arrangements at
December 31, 1998 and 1997. OGGI also maintains a $15,000,000
acquisition line of credit which is subject to certain approvals
by the granting institution before funds can be drawn.
9. Income Taxes:
The tax effect of significant temporary differences that
give rise to OGGI's net deferred tax asset as of December 31, is
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unearned premiums $2,640,369 $2,056,951
Losses and loss adjustment expenses 1,289,391 1,435,173
Stock compensation costs 666,843 752,695
Tax credits 321,064 336,315
Net operating loss carryforward 480,930 504,533
Other 557,157 154,551
Deferred tax asset $5,955,754 $5,240,218
Deferred policy acquisition costs $3,203,833 $2,488,352
Unrealized gain on investments 2,557,508 1,987,461
Depreciation and other 615,067 501,655
Deferred tax liability $6,376,408 $4,977,468
Net deferred tax asset (liability) $(420,654) $262,750
</TABLE>
<PAGE 60>
The net deferred tax asset has not been reduced by a
valuation allowance because management believes that, while it is
not assured, it is more likely than not that it will generate
sufficient future taxable income to utilize these net excess tax
deductions. The amount of the deferred tax asset considered
realizable, however, could be materially reduced in the near term
if estimates of future taxable income in the years in which the
differences are expected to reverse are decreased.
Actual income tax expense (benefit) differed from expected
income tax expense (benefit), computed by applying the federal
corporate tax rate of 34% to income (loss) before income tax and
minority interest, for each of the three years ended December 31
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected income tax expense (benefit) $82,553 $1,865,472 $(1,137,910)
Tax-exempt interest (100,837) (8,041) (9,380)
Dividends received reduction (81,414) (95,595) (144,871)
ESOP compensation 73,430 46,549 -
Goodwill 18,749 18,749 -
Research and experimentation
credit - - (127,823)
Other (83,051) 182,269 (7,096)
Income tax expense (benefit) $(90,570) $2,009,403 $(1,427,080)
======== ========== ===========
</TABLE>
The components of income tax expense (benefit) for each of the
three years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current income tax expense
(benefit) $(241,474) $1,050,862 $ (516,465)
Deferred tax expense
(benefit) 150,904 958,541 (910,615)
Income tax expense (benefit) $(90,570) $2,009,403 $(1,427,080)
========= ========== ===========
</TABLE>
First Patriot has a net operating loss carryforward at
December 31, 1998 of approximately $1,415,000. First Patriots'
net operating loss carryforward expires $58,000 in 2007, $261,000
in 2009, $780,000 in 2010 and $316,000 in 2011. The NOL's can be
utilized to offset future taxable income of First Patriot.
As of December 31, 1998, Old Guard and Old Guard Fire had
alternative minimum tax credit carryforwards of approximately
$71,000 and $139,000, respectively, available to offset future
regular income tax.
<PAGE 61>
10. Employee Benefit Plans
OGGI and it subsidiaries maintain certain stock compensation
and retirement plans as follows:
Stock Compensation Plan
The Stock Compensation Plan was adopted by the Board of
Directors of OGGI on December 20, 1996 and approved by
shareholders at the first Annual Meeting on August 19, 1997. The
purpose of the plan is to provide additional incentive to
directors and employees by facilitating their purchase of stock
of OGGI. Awards under the plan may be made in the form of
options, stock appreciation rights or grants of restricted stock.
Awards up to 420,491 shares may be made under the Stock
Compensation Plan. The Compensation Committee of the Board of
Directors of OGGI may, at their discretion, select employees to
whom awards will be granted, the number of shares to be subject
to such awards, the terms and conditions of such awards and other
restrictions they deem appropriate. No awards of stock
appreciation rights or restricted stock have been made as of
December 31, 1998.
OGGI applies the APB Opinion No. 25 expense recognition
criteria of SFAS No. 123 and related interpretations in
accounting for its stock compensation plan. Accordingly, no
compensation cost has been recognized, except for the one-time
charge of $2,016,931 described later herein, in the accompanying
financial statements for the difference between the fair value of
stock-based compensation plans and the intrinsic value. Had
compensation cost for stock-based compensation plans been
determined using fair value, OGGI's net income and earnings per
share would have been as follows:
1998 1997
Net income:
As reported $279,278 $3,484,566
Pro forma $253,951 $3,074,985
Basic earnings per share:
As reported $.08 $ .92
Pro forma $.07 $ .79
The per share weighted-average fair value of options granted
during 1998 and 1997 was $5.05 and $ 10.75, respectively. The
fair value of each option grant is estimated on the date of grant
using an option-pricing model and the following weighted-average
assumptions:
1998 1997
Dividend Yield .50% .50%
Expected Volatility 21.90% 20.00%
Risk Free Interest Rate 4.95% 6.33% <PAGE 62>
Expected Life 5.4 years 5.4 years
Information regarding activity in OGGI's stock options plan
is presented below:
<TABLE>
<CAPTION>
Weighted -Average
Exercise Prices
Number of Shares Per Share
<S> <C> <C>
Outstanding at January 1, 1997 - N/A
Granted in 1997 245,286 $10.34
Exercised in 1997 - N/A
Forfeited in 1997 - N/A
Outstanding at December 31, 1997 245,286 $10.34
Granted in 1998 10,905 $17.01
Exercised in 1998 41,257 10.00
Forfeited in 1998 320 13.81
Outstanding at December 31, 1998 214,614 $10.74
</TABLE>
The following table summarizes information about OGGI's
stock option plan at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Exercise Prices $10.00 $19.00 $22.00 $19.63 $13.81
Outstanding at December 31, 1998 196,029 4,000 4,000 6,000 4,585
Weighted-average remaining
contractual life (in years) 8.1 8.6 8.6 9.5 9.8
Options exercisable
at December 31, 1998 196,029 4,000 4,000 6,000 -
</TABLE>
On February 11, 1997, in connection with OGGI's subscription
offering, 237,286 stock options were granted to directors and
officers. These options have an exercise price of $10 per share
and are exercisable by the grantee for a period of ten years.
The granting of these options was approved by shareholders at
OGGI's first Annual Meeting on August 19, 1997. At that time, the
price of OGGI's stock was $18.50 per share. The difference
between the price of the stock at the measurement date and the
exercise price of the options was charged to earnings in 1997.
Since these options were granted as non-qualified incentive stock
options, OGGI has recognized a deferred tax asset on the
difference between the exercise price and the value of the
options at the measurement date.
Management Recognition Plan
On December 20, 1996, the Board of Directors of OGGI also
adopted a Management Recognition Plan (MRP) which is designed to
reward and retain key employees of OGGI. A total of 168,196
shares were authorized for possible award.
The following summarizes MRP activity in 1998 and 1997:
<PAGE 63>
Shares
Total granted at January 1, 1997 -
Granted in 1997 142,373
Forfeited in 1997 -
Total granted at December 31, 1997 142,373
Granted in 1998 5,000
Forfeited in 1998 (14,095)
Total granted at December 31, 1998 133,278
Awards under the MRP vest over a period of five years
following the award date. OGGI is recognizing compensation cost
over the vesting period equal to the value of the shares granted
at the award date. In 1998 and 1997, $491,083 and $196,878 of
compensation cost was recognized under the MRP, respectively.
Employee Stock Ownership Plan
The Board of Directors has also adopted an Employee Stock
Ownership Plan (ESOP) for the exclusive benefit of participating
and eligible employees. Employees are eligible after having
attained the age of 21 and completing one year of service with
OGGI or its subsidiaries. In connection with the subscription
offering, the ESOP borrowed $4,054,910 in order to purchase 10%
of the total shares issued by OGGI. The loan bears interest at
8.45% and requires monthly payments of principal and interest of
$50,417 for a term of 10 years. Because OGGI has guaranteed
repayment of the ESOP debt, the debt and related unearned
compensation are recorded in the accompanying consolidated
balance sheets as of December 31, 1998 and 1997.
Dividends on shares held by the ESOP are paid to the ESOP
trust. Dividends on the unallocated ESOP shares together with
OGGI's contributions, are used by the ESOP to repay principal and
interest on the outstanding debt. Shares are released for
allocation to participants as the debt is retired. Interest
incurred on the ESOP notes amounted to $309,671 and $282,079 in
1998 and 1997, respectively. OGGI paid dividends on the stock
held by the ESOP of $40,518 and $20,275 in 1998 and 1997,
respectively.
Retirement Plans
OGGI has a discretionary noncontributory profit sharing plan
covering eligible employees. OGGI's contribution to the plan
amounted to $73,050, $58,224 and $268,043 in 1998, 1997 and 1996,
respectively.
OGGI also maintains a voluntary defined contribution savings
plan covering substantially all full-time employees. OGGI
<PAGE 64> matches employee contributions up to 3% of
compensation. OGGI's contribution to this plan amounted to
$216,237, $168,064 and $158,784 in 1998, 1997 and 1996,
respectively.
11. Earnings Per Share
The following table reconciles the numerator and denominator
used in basic earnings per share to diluted earnings per share.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) for basic
and diluted earnings per share $279,278 $3,484,566 $(1,919,713)
========== ========== ===========
Common shares outstanding 3,694,538 3,803,141 3,957,610
Dilutive shares
Treasury shares in MRP trust 121,365 5,231 -
Outstanding stock options 83,401 40,483 -
Total common and dilutive shares 3,899,304 3,848,855 3,957,610
========== ========= =========
</TABLE>
Options totaling 18,585 and 8,000 at December 31, 1998 and
1997, respectively, were not included in the computation of
diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
Earnings per share for 1996 are computed on a pro forma basis
assuming the subscription offering took place on January 1, 1996.
12. Commitments and Contingencies:
In the event a property and casualty insurer becomes or is
declared insolvent, state insurance regulations provide for the
assessment of other insurers operating in that jurisdiction to
fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary
written premiums to total written premiums for all insurers in
that particular state. OGGI charges these assessments to expense
when the following criteria have been met:
(a) the insolvency has taken place
(b) the amount of the assessment is reasonably estimable
and
(c) the event obligating the Group to pay has taken place
(usually the writing of premiums).
Because of the insolvencies of two large medical malpractice
insurance companies, OGGI expects to be assessed the maximum
allowable under Pennsylvania law (2% of subject premium writings)
for the next two to three years. Based upon OGGI's current
<PAGE 65> premium volume this amounts to approximately $1,000,000
each year.
13. Fair Values of Financial Instruments:
The carrying amounts of cash and cash equivalents, short-
term investments and long-term debt approximate their fair value.
Fixed income securities, preferred stocks and common stocks
are reported at fair value as established by quoted market prices
on secondary markets as of the balance sheet dates.
14. Related Party Transactions:
Neffsville Mutual Fire Insurance Company (Neffsville) is
affiliated with OGGI through common management and reinsurance
programs.
Neffsville is provided management services by OGIM for a fee
as determined under a management agreement. Management fees
recognized by OGIM under the aforementioned management agreements
are as follows:
1998 1997 1996
Neffsville $462,061 $110,220 $55,600
Neffsville maintains a quota share reinsurance agreement
with Old Guard Fire whereby 90% of Neffsville's business is
assumed by Old Guard Fire. The following summarizes the business
ceded under the reinsurance agreement as of and for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Premiums written $2,328,492 $2,371,963 $2,577,252
Premiums earned 2,319,231 2,371,561 2,577,252
Losses and loss adjustment expenses (744,444) (1,192,792) (1,424,207)
Commissions (502,714) (728,032) (902,038)
$1,072,073 $450,737 $251,007
========== ========== ==========
Liability for losses and loss
adjustment expenses $138,373 $351,750 $305,440
Receivable from Neffsville $355,773 $755,497 $258,430
</TABLE>
Effective January 1, 1998 Old Guard reinsured 100% of New
Castle's premiums losses and loss adjustment expenses in return
for a commission of 35% of ceded premiums written. During 1997,
Old Guard participated in a portion of New Castle's reinsurance
program. The following summarizes the business assumed from New
Castle for the year ended December 31, 1997 and for the nine
<PAGE 66> months ended September 30, 1998, the date New Castle
became a subsidiary of OGGI (See note 1).
1998 1997
Premiums written $7,462,598 $582,580
Premiums earned 4,640,003 582,580
Losses and loss adjustment expenses (2,831,782) (373,214)
Commissions (2,611,910) (170,631
$ (803,689) $ 38,735
15. Subsequent Event
On March 5, 1999, OGGI completed the acquisition of
Investors Southern Corporation and its principal operating
subsidiary, Southern Title Insurance Corporation (collectively
referred to as Southern). Southern provides title insurance and
related services through a network of agencies in Virginia, North
Carolina, the District of Columbia, Ohio and Pennsylvania.
Pursuant to the stock purchase agreement, OGGI paid $6,750,000 in
cash for 100% of Southern's capital stock. In addition, OGGI
will make additional payments equal to 25% of Southern's pretax
profits in 1999, 2000 and 2001.
The acquisition will be accounted for under the purchase
method of accounting. The purchase price will be allocated to
the assets acquired and liabilities assumed based upon their
estimated fair values. The purchase price allocation will be
determined in 1999 when additional information becomes available.
Summary financial information for Southern as of and for the
year ended December 31, 1998 is as follows:
(Unaudited)
Total assets $11,700,000
Total revenues 14,400,000
Pre-tax income 444,000
16. Litigation
On February 10, 1997, OGGI, Old Guard, Old Guard Fire, First
Patriot (the Insurance Companies) and each of their respective
directors were served with an eleven count combination class
action and derivative lawsuit, filed in the United States
District Court for the Eastern District of Pennsylvania by four
policyholders. By filing the class action portion of the
lawsuit, these four policyholders purport to represent all
141,000 policyholders of the Insurance Companies. Seven of the
eleven counts challenge the constitutionality of the Pennsylvania
Insurance Company Mutual to Stock Conversion Act (Act), which
permitted the Insurance Companies plan of demutualization (Plan)
<PAGE 67> in 1997. The plaintiffs are contending that the Plan
violated the rights of the plaintiffs and members of the class
under the United States and Pennsylvania Constitutions and that
the Act is unconstitutional as applied by the Plan. The
remainder of the class action claims assert theories regarding
purported violations of the Act, principally relating to the
description of the Plan in the proxy statement approved by the
Insurance Department of the Commonwealth of Pennsylvania
(Department) and mailed to policyholders. The derivative claim
was brought against the directors of the Insurance Companies,
purportedly on behalf of the Insurance Companies, alleging breach
of the fiduciary duty of care in approving and implementing the
Plan and the fiduciary duty of loyalty, presumably in approving
the stock-based compensation plans which were contemplated by the
Plan. The stock-based compensation plans are expressly permitted
by the Act, were approved by the Department and have subsequently
been approved by shareholders. The suit seeks such compensatory
damages as may be allowed by law, a declaration that the Plan
violates the Act and the United States and Pennsylvania
Constitutions and the rights of the plaintiffs thereunder, and
such other relief as the court deems appropriate.
OGGI, the Insurance Companies and the individual defendants
filed a motion to dismiss the complaint in May 1997. In December
1997, the Court granted the motion with respect to two of the
constitutional counts and denied the motion with respect to the
remaining nine counts, including five of the constitutional
claims.
On January 15, 1998, the plaintiffs filed a motion for class
certification. On September 30, 1998, the Court granted the
motion, appointing plaintiffs as class representatives and
certifying the class as all policyholders of the Insurance
Companies as of February 7, 1997.
OGGI, the Insurance Companies and the individual defendants
filed a motion for summary judgment with respect to the remaining
constitutional claims on July 13, 1998. On March 5, 1999, the
Court granted the motion with respect to the two remaining counts
under the U.S. Constitution and retained supplemental
jurisdiction over the remaining state law claims.
If the plaintiffs prevail in the above litigation, the
remedy a court would grant or the amount of damages it might
award is uncertain. A court has broad discretion to fashion a
fair and equitable remedy in light of the nature of the
constitutional or other violation, the relative harm to the
parties, and the public interest. In some cases, relief is
applied on a prospective basis only; in other cases, relief is
applied on a retroactive basis. No prediction can be made
concerning the remedy a court would fashion or the amount of
damages it might award. However, two of the more far-reaching
possibilities include:
<PAGE 68>
- A requirement that OGGI pay all purchasers of common
stock, either on a mandatory basis or at the election
of the purchaser, as damages or otherwise, (i) the
purchase price paid per share of common stock acquired
in the subscription offering, plus interest, (ii) the
market value per share of common stock acquired, or
(iii) the greater of (i) or (ii), less, in each case,
any proceeds received by such purchaser from the sale
of the common stock. No assurance can be given that
OGGI would have sufficient funds at that time to honor
any such obligation; or
- OGGI could be required to pay or distribute to all or
some policyholders of the Insurance Companies, either
on a mandatory basis or at the election of the
policyholders, an amount equal to the surplus of the
Insurance Companies as of the date of the subscription
offering (approximately $38 million), as damages or
otherwise. Such distribution could be required to be
made in cash common stock or other debt or equity
securities. No assurance can be given that OGGI would
have sufficient funds, or the capacity to borrow
sufficient funds, at that time to honor any such
obligation. Any required distribution of common stock
or other equity securities would materially dilute the
interests of existing shareholders.
In the event that OGGI could not honor its obligations under
any remedy imposed by the Court, OGGI could be forced to seek the
protection of the bankruptcy laws and the Insurance Companies
could be deemed insolvent and seized by the Department.
17. Unaudited Quarterly Information (in thousands except per
share data):
<TABLE>
<CAPTION>
1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net premiums earned $19,330 $19,839 $18,448 $17,729
Total revenues $21,486 $21,297 $21,543 $20,639
After-tax operating income (loss), net of
realized investment gains $ (18) $ (331) $(1,268) $ 1,045
Net income loss $ (13) $ (636) $ (650) $ 1,578
Earnings (loss) per share
Basic (0.00) (0.17) (0.17) 0.43
Diluted (0.00) (0.17) (0.17) 0.41
<CAPTION> <PAGE 69>
1997
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net premiums earned $16,544 $15,377 $15,801 $14,707
Total revenues $18,392 $18,097 $17,920 $16,636
After-tax operating income (loss), net
of realized investment gains $ 915 $ (436) $ 650 $ 820
Net income (loss) $ 1,174 $ 258 $ 924 $ 1,129
Earnings per share
Basic 0.31 0.07 0.24 0 .30
Diluted 0.30 0.07 0.24 0.30
</TABLE>
PAGE 70
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Of Old Guard Group, Inc.
Our report on the consolidated financial statements of Old
Guard Group, Inc. and Subsidiaries is included in Item 8 of this
Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement
schedules included in Item 8 of this Form 10-K.
In our opinion, the financial statement schedules referred
to above, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all
material respects, the information required to included therein.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1999, except for Notes 15
and 16, for which the date is March 5, 1999
PAGE 71
<PAGE>
OLD GUARD INSURANCE GROUP
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN
RELATED PARTIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
Fair Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities $ 18,954,587 $ 19,356,092 $ 19,115,679
States, Municipalities and Political
Subdivisions 16,833,847 17,327,983 17,104,276
Convertibles and Bonds with Warrants Attached 10,604,409 10,962,447 10,962,447
All Other Corporate Bonds 47,863,755 49,115,510 48,682,621
Redeemable Preferred Stock 3,732,189 3,661,576 3,661,576
Total Fixed Maturities $ 97,988,787 $100,423,228 $ 99,526,599
Equity Securities:
Common Stocks:
Public Utilities 170,087 206,288 206,288
Banks, Trust and Insurance Companies 1,221,091 2,205,852 2,205,852
Industrial, Miscellaneous and All Other 8,214,481 13,208,519 13,208,519
Non-redeemable Pref(CONV) 2,230,248 2,317,867 2,317,867
Total Equity Securities 11,835,907 17,938,526 17,938,526
Other Long-Term Investments 4,498,000 4,412,378 4,412,378
Total Investments $114,322,694 $122,774,132 $121,877,503
</TABLE>
PAGE 72
<PAGE>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant -
Balance Sheet (Parent Company)
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Investments:
Fixed income securities, available for sale $ 2,059,455 $ 8,513,120
Other invested assets 2,184,509 1,068,376
Investment in subsidiaries, at equity 69,616,981 70,560,377
Total investments 73,860,945 80,141,873
Cash and cash equivalents 387,471 2,729,671
Deferred income taxes 534,456 702,051
Property and equipment 9,973,709 -
Other assets 928,549 196,524
TOTAL ASSETS $85,685,130 $83,770,119
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 3,402,778 $ -
ESOP liability 3,547,448 3,740,426
Other liabilities 959,167 1,375,320
Total liabilities 7,909,393 5,115,746
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized;
None issued and outstanding)
Common stock (15,000,000 shares
authorized; 4,248,417 and 4,204,910
shares issued; 3,933,401 and 4,084,370
shares outstanding, no par) 38,776,603 38,317,908
Additional paid-in capital 4,370,606 4,787,703
Deferred compensation (5,330,718) (6,277,553)
Retained earnings 40,175,219 40,259,736
Net unrealized investment gains, net deferred
income taxes 4,997,299 3,856,612
Treasury stock, at cost (315,016
and 120,540 shares) (5,213,272) (2,290,033)
Total shareholders' equity 77,775,737 78,654,373
Total liabilities and shareholders' equity $85,685,130 $83,770,119
</TABLE>
PAGE 73
<PAGE>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant -
Statement of Income (Parent Company)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenue:
Dividends from subsidiaries $ 900,000 $1,675,000
Investment income 368,929 828,502
Total revenue 1,268,929 2,503,502
Expense:
Stock option compensation - 2,016,931
Other expense 982,136 1,050,453
Interest expense 111,817 282,079
Total expense 1,093,953 3,349,463
Income (loss) before income tax and
equity in earnings of subsidiaries 174,976 (845,961)
Income tax benefit (303,556) (810,595)
Income (loss) before equity in earnings
of subsidiaries 478,532 (35,366)
Equity in undistributed earnings (loss)
of subsidiaries (199,254) 3,519,932
Net income $ 279,278 $3,484,566
</TABLE>
PAGE 74
<PAGE>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant -
Statement of Cash Flow (Parent Company)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 279,278 $ 3,484,566
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries 199,254 (3,519,932)
Deferred income tax benefit 192,159 (752,695)
Non-cash compensation expense 1,046,297 2,565,061
Other (1,432) (143,646)
Net cash provided by operating activities 1,715,556 1,633,354
Cash flows from investing activities:
Cost of purchases of fixed income securities (2,581,418) (8,895,373)
Proceeds from sales and maturities of fixed
income securities 8,550,750 465,926
Cost of equity securities acquired - (26,296,727)
Cost of purchases of other invested assets (1,000,000) (1,000,000)
Proceeds from sales of other invested assets - 1,500,000
Capital contribution to subsidiary (625,584) -
Cost of purchases of property and equipment (6,114,806) -
Net cash used by investing activities (1,771,038) (34,226,174)
Cash flows from financing activities
Proceeds from sale of stock, net of issuance
costs 412,570 32,762,998
Cost of treasury stock (4,760,795) (970,688)
Proceeds from reissuance of treasury stock 47,776 -
Payment of dividends (363,795) (210,245)
Proceeds from bank loans 3,500,000 3,954,770
Payments on principal of capital lease or
bank loan (1,122,474) (214,344)
Net cash (used) provided by financing
activities (2,286,718) 35,322,491
Net increase in cash and cash equivalents (2,342,000) 2,729,671
Cash and cash equivalents at beginning of period 2,729,671 -
Cash and cash equivalents at end of period. $ 387,471 $ 2,729,671
</TABLE>
PAGE 75
<PAGE>
OLD GUARD INSURANCE GROUP
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Ceded to Assumed from of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998 $91,027,590 $18,360,030 $2,678,404 $75,345,964 3.55%
FOR THE YEAR ENDED DECEMBER 31, 1997 $83,991,527 $24,817,610 $3,254,677 $62,428,594 5.20%
FOR THE YEAR ENDED DECEMBER 31, 1996 $78,340,414 $27,468,375 $2,719,675 $53,591,714 5.10%
</TABLE>
PAGE 76
<PAGE>
OLD GUARD INSURANCE GROUP
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY &
CASUALTY INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
DEFERRED RESERVE FOR DISCOUNT IF
POLICY LOSSES AND ANY NET NET
ACQUISITION LOSS ADJ DEDUCTED IN UNEARNED EARNED INVESTMENT
AFFILIATION WITH REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED PROPERTY & CASUALTY ENTITIES
12/31/98 $9,423,124 $52,707,951 $0 $42,460,383 $75,345,964 $6,179,394
12/31/97 $7,318,767 $48,718,666 $0 $36,535,108 $62,428,594 $5,876,708
12/31/96 $5,603,343 $55,371,077 $0 $34,377,756 $53,591,714 $4,494,818
<CAPTION>
COLUMN H COLUMN I COLUMN J COLUMN K
LOSSES AND LAE PAID LOSSES
INCURRED AND LOSS NET
CURRENT PRIOR AMOUNT ADJUSTMENT WRITTEN
YEAR YEAR OF DPAC EXPENSES PREMIUMS
<S> <C> <C> <C> <C> <C>
12/31/98 $50,652,000 ($2,256,569) $20,857,284 $49,178,454 $83,925,644
12/31/97 $42,857,000 ($4,342,940) $16,398,006 $41,979,977 $66,063,881
12/31/96 $43,801,765 $557,025 $12,076,183 $45,934,259 $47,692,036
</TABLE>
PAGE 77
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1999 annual meeting of shareholders.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1999 annual meeting of shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1999 annual meeting of shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1999 annual meeting of shareholders. PAGE 78
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements are included
by reference in Part II, Item 8 hereof:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31,
1998 and 1997.
Consolidated Statements of Income and
Comprehensive Income for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1998, 1997 and
1996.
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
The following financial statement schedules are included in
Part II, Item 8 hereof:
Schedule I - Summary of Investments - Other than
Investments in Related Parties
Schedule II - Condensed Financial Information of
Registrant
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property and Casualty Insurance Operations
3. Exhibits.
Number Title
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance Company
(Incorporated by reference to Exhibit 2.1 to the
<PAGE 79> Company's Registration Statement
No. 333-12779 on Form S-1)
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement No. 333-12779 on Form S-1)
4.1 Form of certificate evidencing shares of Old Guard
Group, Inc. (Incorporated herein by reference to
Exhibit 1 to the Registration Statement on Form 8-A
(File No. 000-21611) of Old Guard Group, Inc.)
10.1 Old Guard Group, Inc. - Management Recognition Plan*
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan*
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan*
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler* (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer* (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff* (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley* (Incorporated by reference
<PAGE 80> to Exhibit 10.8 to the Company's Registration
Statement No. 333-12779 on Form S-1)
10.8 Employment Agreement, dated as of January 1, 1999,
between Old Guard Group, Inc. and Henry J. Straub*
(filed herewith)
10.9 Shareholder Rights Agreement dated February 9, 1999,
between Old Guard Group, Inc. and American Stock
Transfer and Trust Company, as trustee. (filed
herewith)
21 List of Subsidiaries of Old Guard Group, Inc.
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule
________
*Denotes a compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
None.
PAGE 81
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
March 30, 1998 By_________________________________
David E. Hosler,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title
/s/ James W. Appel Director March 30, 1999
James W. Appel
/s/ John E. Barry Director March 30, 1999
John E. Barry
/s/ Luther R. Campbell, Jr. Director March 30, 1999
Luther R. Campbell, Jr.
/s/ M. Scott Clemens Director March 30, 1999
M. Scott Clemens
/s/ David E. Hosler Chairman of Board, March 30, 1999
David E. Hosler Chief Executive
Officer, and
Director (Principal
Executive Officer)
/s/ Richard B. Neiley, Jr. Director March 30, 1999
Richard B. Neiley, Jr.
/s/ G. Arthur Weaver Director March 30, 1999
G. Arthur Weaver
/s/ Robert L. Wechter Director March 30, 1999
Robert L. Wechter
/s/ Noah W. Kreider, Jr. Director March 30, 1999
Noah W. Kreider, Jr.
/s/ Karen M. Balaban Director March 30, 1999
<PAGE 82>
Karen M. Balaban
/s/ Henry J. Straub Chief Financial March 30, 1999
Henry J. Straub Officer and
Treasurer
(Principal
Financial and Accounting
Officer)
PAGE 83
<PAGE>
EXHIBIT INDEX
Number Title
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance Company
(Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement No. 333-12779 on Form S-1)
4.1 Form of certificate evidencing shares of Old Guard
Group, Inc. (Incorporated herein by reference to
Exhibit 1 to the Registration Statement on Form 8-A
(File No. 000-21611) of Old Guard Group, Inc.)
10.1 Old Guard Group, Inc. - Management Recognition Plan*
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan*
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan*
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler* (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer* (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff* (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley* (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.8 Employment Agreement, dated as of January 1, 1999,
between Old Guard Group, Inc. and Henry W. Straub*
(filed herewith)
10.9 Shareholder Rights Agreement dated February 9, 1999,
between Old Guard Group, Inc. and American Stock
Transfer and Trust Company, as trustee. (filed
herewith)
21 List of Subsidiaries of Old Guard Group, Inc.
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule
________
*Denotes a compensatory plan, contract or arrangement.
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 1999 by and between OLD
GUARD INSURANCE MANAGEMENT CO., a Pennsylvania corporation, OLD
GUARD GROUP, INC., a Pennsylvania corporation, and HENRY T.
STRAUB.
Old Guard Insurance Management Co. and Old Guard Group, Inc.
both desire to employ Mr. Straub and Mr. Straub is willing to
serve Old Guard Insurance Management Co. and Old Guard Group,
Inc. on the terms and conditions herein provided.
In order to effect the foregoing, the parties hereto desire
to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises
and the respective covenants and agreements of the parties
contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions and Special Provisions. Each capitalized
word and term used herein shall have the meaning ascribed to it
in the glossary appended hereto, unless the context in which such
word or term is used otherwise clearly requires. Such glossary
is incorporated herein by reference and made a part hereof.
2. Employment. Old Guard hereby agrees to employ the
Executive, and the Executive hereby agrees to serve Old Guard, on
the terms and conditions set forth herein.
3. Term of Agreement. The Executive's employment under
this Agreement shall commence on the date hereof and, except as
otherwise provided herein, shall continue until December 31,
2001; provided, however, that commencing on January 1, 1999 and
each January 1 thereafter, the term of this Agreement shall
automatically be extended for one additional year beyond the term
otherwise established unless, at least 90 days prior to such
January 1st date, Old Guard or the Executive shall have given a
Notice of Nonextension.
4. Position and Duties. The Executive shall serve as
Treasurer and Chief Financial Officer of OGIMC and the Company,
and he shall have such responsibilities, duties and authority as
may, from time to time, be generally associated with such
positions. In addition, the Executive shall serve in such
capacity, with respect to each Subsidiary or affiliated company,
as the Board of Directors of each such Subsidiary or affiliated
company shall designate from time to time. During the term of
this Agreement, he shall devote substantially all of his working
time and efforts to the business and affairs of Old Guard, the
Subsidiaries and affiliated companies; provided, however, that
nothing herein shall be construed as precluding him from devoting
a reasonable amount of time to civic, charitable, trade <PAGE 1>
association, and similar activities, at least to the extent he is
presently devoting time.
5. Compensation and Related Matters.
(a) Base Compensation. During the period of the
Executive's employment hereunder, Old Guard shall pay to him
annual base compensation at a rate not less than
$118,175. The Board(s) of Directors of Old Guard shall
periodically review the Executive's employment performance,
in accordance with policies generally in effect from time to
time, for possible merit or Cost-of-living increases in such
base compensation. Except for a reduction which is
proportionate to a company-wide reduction in executive pay,
the annual base compensation paid to the Executive in any
calendar year shall not be less than the annual base
compensation paid to him in any prior calendar year. The
frequency and manner of payment of such base compensation
shall be in accordance with Old Guard's executive payroll
practices from time to time in effect. Nothing herein shall
be construed as precluding the Executive from entering into
any salary reduction or deferral plan or arrangement during
the term of this Agreement; provided, however, that his base
compensation shall be determined without regard to any such
salary reduction or deferral for purposes of calculating the
amount of any compensation and benefits to which he or his
surviving spouse may be entitled under Paragraph 6, 7, 10,
or 11 following his termination of employment. During the
initial calendar year of this Agreement, the amount set
forth in the first sentence of this subparagraph shall be
pro rated to reflect the portion of such calendar year which
follows the execution date hereof.
(b) Incentive Compensation. During the period of the
Executive's employment hereunder, he shall be entitled to
participate in all incentive plans, stock option plans,
stock appreciation rights plans, and similar arrangements
maintained by Old Guard for executive officers on a basis
and at award levels consistent and commensurate with his
position and duties hereunder,
(c) Employee Benefit Plans and Other Plans or
Arrangements. The Executive shall be entitled to
participate in all Employee Benefit Plans of Old Guard on
the same basis as other executive officers of Old Guard. In
addition, he shall be entitled to participate in and enjoy
any other plans and arrangements which provide for sick
leave, vacation, sabbatical, or personal days, company-
provided automobile, club memberships and dues, education
payment or reimbursement, business-related seminars, and
similar fringe benefits provided to or for the executive
officers of Old Guard from time to time, but at least to the
extent he is presently entitled to participate in and enjoy
such plans and arrangements. <PAGE 2>
(d) Expenses. During the period of the Executive's
employment hereunder, he shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses,
including transportation expenses, incurred by him in
performing services hereunder in accordance with the general
policies and procedures established by Old Guard.
6. Termination By Reason of Disability.
(a) In General. In the event the Executive becomes
unable to perform his duties on a full-time basis by reason
of the occurrence of his Disability and, within 30 days
after a Notice of Termination is given, he shall not have
returned to the full-time performance of such duties, his
employment may be terminated by Old Guard.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Old Guard
shall pay or provide the compensation and benefits set
forth below:
(1) The Executive shall be paid an amount per
annum equal to the greater of (i) his highest base
compensation received during one of the two calendar
years immediately preceding the calendar year in which
the Date of Termination occurs, or (ii) his base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason) for
the remainder of the term of this Agreement, beginning
with such Date of Termination. The frequency and
manner of payment of such amounts shall be in
accordance with Old Guard's executive payroll practices
from time to time in effect.
(2) The Executive shall be paid an amount equal
to the higher of the aggregate bonus(es) paid to him
with respect to one of the two years immediately
preceding the year in which the Date of Termination
occurs. Such amount shall be paid to him in cash on
each of the first and second anniversary dates of the
Date of Termination, and a pro rated amount shall be
paid to him in cash on the last day of the remaining
term of this Agreement. such pro rated amount shall be
determined by reference to a fraction, the numerator of
which is the number of whole months elapsed during the
year in which termination occurs, and the denominator
of which is 12.
(3) The Executive shall be paid an amount equal
to the highest annual contribution made on his behalf
(other than his own salary reduction contributions) to
each tax-qualified and non-qualified Defined <PAGE 3>
Contribution Plan of Old Guard with respect to the year
in which the Date of Termination occurs or one of the
two years immediately preceding such year. The amount
separately determined for each such plan shall be
aggregated and shall be paid to him in cash on each of
the first and second anniversary dates of the Date of
Termination, and a pro rated amount shall be paid to
him on the last day of the remaining term of this
Agreement. Such pro rated amount shall be determined
by reference to a fraction, the numerator of which is
the number of whole months elapsed during the year in
which termination occurs, and the denominator of which
is 12.
(4) The Executive shall accrue benefits equal to
the excess of (i) the aggregate retirement benefits he
would have received under the terms of each tax-
qualified and non-qualified Defined Benefit Plan of Old
Guard as in effect immediately prior to the Date of
Termination had he (A) continued to be employed for the
remaining term of this Agreement, and (B) received (on
a pro rated basis, as appropriate) the greater of (1)
the highest compensation taken into account under each
such plan with respect to one of the two years
immediately preceding the year in which the Date of
Termination occurs, or (11) his annualized base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason), over
(ii) the retirement benefits he actually receives under
such plans. The frequency, manner and extent of
payment of such benefits shall be consistent with the
terms of the plans to which they relate and any
elections made thereunder. (As of the date of the
execution of this Agreement, there is no such plan.)
(5) The Executive and his eligible dependent
shall be entitled to continue to participate at the
same aggregate benefit levels, for the remaining term
of this Agreement and at no out-of-pocket or tax cost
to him, in the Welfare Benefit Plans in which he was a
participant immediately prior to the Date of
Termination, to the extent permitted under the terms of
such plans and applicable law. To the extent Old Guard
is unable to provide for continued participation in a
Welfare Benefit Plan, it shall provide an equivalent
benefit directly at no out-of-pocket or tax cost to
him. For purposes of the preceding two sentences, Old
Guard shall be deemed to have provided a benefit at no
tax cost to him if it pays an additional amount to him
or on his behalf, with respect to those benefits which
would otherwise be nontaxable to him, calculated in a
manner consistent with the provisions of Paragraph 12.
<PAGE 4>
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. Notwithstanding the provisions
of Subparagraph (b)(5), Old Guard's obligation to pay or
fund any disability insurance premiums on "behalf of the
Executive shall be suspended while his Disability continues,
provided the cessation of payment or funding does not result
in the termination of disability benefits. Any amounts
otherwise due under Subparagraph (b) shall be reduced (but
not below zero) by the dollar amount of disability benefits
received by him pursuant to plans or policies funded,
directly at its cost, by Old Guard.
(d) Earlier Cessation of Certain welfare Benefits.
Notwithstanding the provisions of Subparagraph (b)(5), Old
Guard shall not be required to provide, at its cost, the
welfare benefits covered therein after the later of (i) the
attainment by the Executive and his spouse (if any) of age
65, or (ii) the date specified in the relevant plan document
for benefit termination (assuming that he was employed until
age 65 or the normal retirement date, if any, specified in
such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is survived by a
spouse, the compensation and benefits remaining to be
paid and provided under Subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described
in Subparagraph (b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that Old Guard
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall Old Guard be requited
to provide, at its cost, the other welfare benefits
described in Subparagraph (b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is not survived by a
spouse, (i) Old Guard shall thereafter make the
remaining payments described in Subparagraphs (b)(1)
through (b)(3) directly to his estate, (ii) the extent
of the rights of any person to the accrued benefits
<PAGE 5> described in Subparagraph (b)(4) shall be
determined by reference to the relevant plan provisions
and any elections made under such plans, and (iii) Old
Guard's obligation to provide continued benefits under
Subparagraph (b) (5) shall terminate.
(f) Compensation and Benefits Upon Expiration of
Remaining Term of Agreement. Upon the expiration of the
remaining term of this Agreement following the Executive's
termination for Disability, and provided his Disability then
continues, he shall be entitled to receive the compensation
and benefits provided under the terms of Old Guard's long-
term disability plan in effect on the Date of Termination
or, if greater, at the expiration of such remaining term.
Such compensation and benefits shall continue until the
earlier of (i) his death, or (ii) the later of (A) his
attainment of age 65, or (B) the date specified in the plan
document for benefit termination. To the extent Old Guard
is unable to provide such compensation and benefits under
its long-term disability plan, it shall provide equivalent
compensation and benefits directly at no out-of-pocket or
tax cost to him. For purposes of the preceding sentence,
Old Guard shall be deemed to have provided compensation and
benefits at no tax cost to him if it pays an additional
amount to him or on his behalf, with respect to the
compensation and benefits which would otherwise be
nontaxable to him, calculated in a manner consistent with
the provisions of Paragraph 12.
7. Termination By Reason of Death.
(a) Compensation and Benefits to Surviving Spouse. In
the event the Executive dies while he is employed under this
Agreement and is survived by a Spouse, Old Guard shall pay
or provide the compensation and benefits set forth below:
(1) The surviving spouse shall be paid an amount
equal to the greater of (i) the Executive's highest
base compensation received during one of the two
calendar years immediately preceding the calendar year
in which the Date of Termination occurs, or (ii) his
base compensation in effect immediately prior to the
Date of Termination (or prior to any reduction which
entitled him to terminate his employment for Good
Reason) for a period of one year, beginning with such
Date of Termination. The frequency and manner of
payment of such amounts shall be in accordance with
Old Guard's executive payroll practices from time to
time in effect.
(2) The surviving spouse shall be paid an amount
equal to the highest payment made to Executive under
each incentive bonus plan of Old Guard with respect to
one of the two years immediately preceding the year in
<PAGE 6> which the Date of Termination occurs. Such
amount shall be paid in cash to her within 30 days
after the Date of Termination.
(3) The surviving spouse shall be paid an amount
equal to the sum of the highest annual contribution
made on the Executive's behalf (other than his own
salary reduction contributions) to each tax-qualified
and non-qualified Defined Contribution Plan of Old
Guard with respect to the year in which the Date of
Termination occurs or one of the two years immediately
preceding such year. Such amount shall be paid in cash
to her within 30 days after the Date of Termination or
within 30 days after such amount can first be
determined, whichever is later.
(4) Subject to the following sentence, the
surviving spouse shall be paid benefits determined by
reference to the excess of (i) the aggregate retirement
benefits the Executive would have accrued under the
terms of each tax-qualified and non-qualified Defined
Benefit Plan as in effect immediately prior to the Date
of Termination, had he (A) continued to be employed for
a period of one year following the Date of Termination,
and (B) received (on a pro rated basis, as appropriate
the greater of (1) the highest compensation taken into
account under each such plan with respect to one of the
two years immediately preceding the year in which the
Date of Termination occurs, or (ii) his annualized base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason), over
(ii) the retirement benefits actually determined under
such plans. The frequency, manner, and extent of
payment of such benefits shall be consistent with the,
terms of the plans to which they relate and any
elections made thereunder. (As of the date of the
execution of this Agreement, there is no such plan.)
(5) The surviving spouse and her eligible
dependents shall be entitled to continue to participate
at the same aggregate benefit levels, for a period of
one year following the Date of Termination and at no
out-of-pocket or tax cost to her, in the Welfare
Benefit Plans in which the Executive was a participant
immediately prior to the Date of Termination, to the
extent permitted under the terms of such plans and
applicable law; provided, however, that old Guard shall
not be required to provide continued benefits with
respect to her deceased husband; and provided further,
that Old Guard shall not thereafter be required to
provide, at its cost, the other welfare benefits
covered by such plans to such spouse and her eligible
dependents after the earlier of (i) her death, or
<PAGE 7> (ii) the later of (A) her attainment of age
65, or (B) the date specified in the relevant plan
document for benefit termination (assuming the
Executive was employed until age 65 or the normal
retirement date, if any, specified in such document).
To the extent Old Guard is unable to provide for
continued participation in a Welfare Benefit Plan as
required, it shall provide an equivalent benefit
directly at no out-of-pocket or tax cost to her. For
purposes of the preceding two sentences, Old Guard
shall be deemed to have provided a benefit at no tax
cost to her if it pays an additional amount to her or
on her behalf, with respect to those benefits which
would otherwise be nontaxable to her, calculated in a
manner consistent with the provisions of Paragraph 12.
(b) Compensation and Benefits to Estate, Etc. In the
event the Executive dies while he is employed under this
Agreement and is not survived by a spouse, (i) Old Guard
shall make the payments described in Subparagraphs (a)(1)
through (a)(3) directly to his estate, (ii) the extent of
the rights of any person to the accrued benefits described
in Subparagraph (a)(4) shall be determined by reference to
the relevant plan provisions and any elections made under
such plans, and (iii) Old Guard's obligation to provide
benefits under Subparagraph (a)(5) shall terminate.
8. Termination By Old Guard for Cause.
(a) In General. In the event old Guard intends to
terminate the Executive's employment for Cause, it shall
deliver a Notice of Termination to him which specifies a
Date of Termination not less than 30 days following the date
of such notice, unless a shorter period of notice is
required by the principal regulator of the Company or any
affiliate of the Company.
(b) Compensation. Within 30 days after the
Executive's termination under Subparagraph (a), Old Guard
shall pay him, in one lump sum, his accrued but unpaid base
compensation and leave bank compensation earned through the
Date of Termination.
9. Termination By the Executive Without Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment without Good Reason, he shall
deliver a Notice of Termination to Old Guard which specifies
a Date of Termination not less than (i) 90 days following
the date of such notice, if a Change in Control shall not
have occurred, or (ii) 30 days following the date of such
notice, if a Change in Control shall have occurred.
<PAGE 8>
(b) Compensation. Within 30 days after the Executive's
termination under Subparagraph (a), old Guard shall pay him,
in one lump sum, his accrued but unpaid base compensation
and leave bank compensation earned through the Date of
Termination.
10. Termination By Old Guard Without Disability or Cause.
(a) In General. In the event Old Guard intends to
terminate the Executive's employment for any reason other
than Disability or Cause, it shall deliver a Notice of
Termination to him which specifies a Date of Termination not
less than 90 days following the date of such notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Old Guard
shall pay or provide the compensation and benefits described
in Paragraph 6(b).
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
,suffers a disability during the remaining term of this
Agreement following the Date of Termination, Old Guard's
obligation to pay or fund any disability insurance premiums
on his behalf shall be suspended while his Disability.
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost,
by old Guard.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b), Old
Guard shall not be required to provide, at its cost, the
welfare benefits covered by Paragraph 6(b )(5) after the
later of (i) the attainment by the Executive and his spouse
(if any) of age 65, or (ii) the date specified in the
relevant plan document for benefit termination (assuming
that he was employed until age 65 or the normal retirement
date, if any, specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause by Old Guard
and he is survived by a spouse, the compensation and
benefits required to be paid and provided under
Subparagraph (b) shall be unaffected by his death and
shall be paid and provided to her or on her behalf;
provided, however, that the extent of her rights to the
<PAGE 9> accrued benefits described in Paragraph
6(b)(4) shall be determined by reference to the
relevant plan provisions and any elections made under
such plans; and provided further, that Old Guard shall
not be required to provide continued benefits with
respect to her deceased husband; and provided further,
that in no event shall Old Guard be required to
provide, at its cost, the other welfare benefits
described in Paragraph 6(b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause and he is not
survived by a spouse, (i) Old Guard shall thereafter
make the remaining payments described in Paragraphs
6(b)(1) through 6(b)(3) directly to his estate, (ii)
the extent of the rights of any person to the accrued
benefits described in Paragraph 6(b)(4) shall be
determined by reference to the relevant plan provisions
and any elections made under such plans, and (iii) old
Guard's obligation to provide the continued benefits
described in Paragraph 6(b)(5) shall terminate.
11. Termination By the Executive for Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment for Good Reason, he shall deliver a
Notice of Termination to Old Guard which specifies a Date of
Termination not less than 30 days following the date of such
notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a) Old Guard
shall pay or provide the compensation and benefits described
in Paragraph 6 (b)
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
suffers a Disability during the remaining term of this
Agreement following the Date of Termination, Old Guard's
obligation to pay or fund any disability insurance premium*
on his behalf shall be suspended while his Disability
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
<PAGE 10> pursuant to plans or policies funded, directly at
its cost, by Old Guard.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provision of Subparagraph (b), Old Guard
shall not be required to provide, at its cost, the welfare
benefits covered by Paragraph 6(b)(5) after the later of (i)
the attainment by the Executive and his spouse (if any) of
age 65, or (ii) the date specified in the relevant plan
document for benefit termination (assuming that he was
employed until age 65 or the normal retirement date, if any,
specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is survived by a
spouse, the compensation and benefits required to be
paid and provided under subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described,
in Paragraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that old Guard
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall old Guard be required
to provide, at its cost, the other welfare benefits
described in Paragraph 6(b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is not survived by a
spouse, (i) Old Guard shall thereafter make the
remaining payments described in Paragraphs 6(b)(1)
through 6(b)(3) directly to his estate, (ii) the extent
of the rights of any person to the accrued benefits
described in Paragraph 6(b)(4) shall be determined by
reference to the relevant plan provisions and any
elections made under such plans, and (iii) Old Guard's
obligation to provide the continued benefits described
in Paragraph 6(b)(5) shall terminate.
<PAGE 11>
12. Provisions Relating to Excise Taxes.
(a) In General. In the event the Executive becomes
liable, for any taxable year, for the payment of an Excise
Tax (because of a change in control) with respect to the
compensation and benefits payable by Old Guard under this
Agreement or otherwise, Old Guard shall make one or more
Gross-Up Payments to the Executive or on his behalf. The
amount of any Gross-Up Payment shall be calculated by
certified public accountant or other tax professional
designated jointly by the Executive and Old Guard, The
provisions of this paragraph shall apply with respect to the
Executive's surviving spouse or estate, where relevant.
(b) Methodology for Calculation of Gross-Up Payment.
For purposes of determining the amount of any Gross-Up.
Payment, the Executive shall be deemed to pay income taxes
at the highest federal, state, and local marginal rates of
tax for the calendar yea r in which the Gross-Up Payment is
to be made, net of the maximum reduction in federal income
tax which could be obtained from the deduction of state and
local income taxes, In the event that the Excise Tax is
subsequently determined to be less than the amount taken
into account at the time the Gross-Up Payment was made, the
Executive shall repay to Old Guard, at the time that the
amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable
to the reduction (plus a portion of the Gross-Up Payment
attributable to the Excise Tax and the federal, state, and
local income taxes imposed on the portion of the Gross-Up
Payment being repaid by the Executive to the extent such
repayment results in a reduction in Excise Tax or federal,
state, or local income tax), plus interest on the amount of
such repayment. Such interest shall be calculated by using
the rate in effect under Section 1274(d)(1) of the IRC, on
the date the Gross-Up Payment was made, for debt instruments
with a term equal to the period of time which has elapsed
from the date the Gross-Up Payment was made to the date of
repayment. In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the
time the Gross-Up Payment was made (including by reason of
any payment the existence or amount of which could not be
determined at the time of the Gross-Up Payment), Old Guard
shall make an additional Gross-Up Payment with respect to
the excess at the time the amount thereof is finally
determined, plus interest calculated in a manner similar to
that described in the preceding sentence.
(c) Time of Payment. Any Gross-Up Payment provided
for herein shall be paid not later than the 30th day
following the payment of any compensation or the provision
of any benefit which causes such payment to be made;
provided, however, that if the amount of such payment cannot
be finally determined on or before such day, Old Guard shall
<PAGE 12> pay on such day an estimate of the minimum amount
of such payment and shall pay the remainder of such payment
(together with interest calculated in a manner similar to
that described in Subparagraph (b)) as soon as the amount
thereof can be determined. In the event that the amount Of
an estimated payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a
loan by old Guard to the Executive, payable on the 30th day
after demand by Old Guard (together with interest calculated
in a manner similar to that described in Subparagraph (b)).
(d) Notwithstanding the provisions of this paragraph
to the contrary, the actual amounts payable hereunder as
Gross-Up Payments shall be coordinated with any similar
amounts paid to the Executive under any other contract,
plan, or arrangement.
13. Fees and Expenses of the Executive. Except as provided
in the following sentence, Old Guard shall pay, within 30 days
following demand by the Executive, all legal, accounting,
actuarial, and related fees and expenses incurred by him in
connection with the enforcement of this Agreement. An
arbitration panel or a court of competent jurisdiction shall be
empowered to deny payment to the Executive of such fees and
expenses only if it determines that he instituted a proceeding
hereunder, or otherwise acted, in bad faith.
14. Reduction for Compensation and Benefits Received Under
Old Guard Severance Policy, Etc. Notwithstanding anything herein
to the contrary, in the event the Executive, his surviving
spouse, or any other person becomes entitled to continued
compensation and benefits hereunder by reason of the Executive's
termination of employment and, in addition, compensation or
similar benefits are payable under a severance policy, program or
arrangement maintained by Old Guard (other than retirement
plans), then the compensation or benefits otherwise payable
hereunder shall be reduced by the compensation or benefits
provided under such severance policy, program or arrangement.
15. Mitigation. The Executive shall not be required to
mitigate the amount of any compensation or benefits which may
become payable hereunder by reason of his termination by seeking
other employment or otherwise, nor, except as otherwise provided
in the following sentence or elsewhere herein, shall the amount
of any such compensation or benefits be reduced by any
compensation or benefits received by the Executive as the result
of his employment by another employer. Notwithstanding anything
in this Agreement to the contrary, Old Guard's obligation to
provide any medical and dental benefits hereunder may be
suspended, with the written concurrence of the Executive or if,
applicable, his surviving spouse during any period of time that
such benefits are being provided by reason of his or her
employment.
<PAGE 13>
16. Funding of Compensation and Benefits; Acceleration of
Certain Payments.
(a) Grantor Trust. In the event the Executive's
employment is terminated without Cause or he terminates his
employment for Good Reason and a Change in Control has
occurred as of the Date of Termination or occurs thereafter,
the Executive shall have the right to require Old Guard to
establish a grantor trust (taxable to Old Guard) and fund
such trust, on an actuarially sound basis, to provide the
compensation and benefits to which he is entitled hereunder,
other than those which may be paid pursuant to the
provisions of Subparagraph (c). The specific terms of such
trust shall be as agreed to by the parties in good faith;
provided, however, that the trustee shall be a financial
institution independent of old Guard; and provided further,
that in no event shall Old Guard be entitled to withdraw
funds from the trust for its benefit, or otherwise
voluntarily assign or alienate such funds, until such time
as all compensation and benefits required hereunder are paid
and provided. The determination of the extent of required
funding, including any supplemental funding in the event of
adverse investment performance of trust assets, shall be
made by an actuary or a certified public accountant retained
by each party. To the extent such professionals cannot
agree on the proper level of funding, they shall select a
third such professional whose determination shall be binding
upon the parties. Notwithstanding the foregoing, Old Guard
shall remain liable for all compensation and benefits
required to be paid or provided hereunder.
(b) Alternate Security. In lieu of the right given to
the Executive under Subparagraph (a), he shall have the
right under such circumstances to require that Old Guard
provide (i) an irrevocable standby letter of credit issued
by a financial institution other than the Company or any
Subsidiary of the Company with a senior debt credit rating
of "A" or better by Moody's investors Service or Standard
Poor's Corporation, or (ii) other security reasonably
acceptable to him, to secure the payment of such
compensation and benefits.
(c) Accelerated Payment of Present Value of Certain
Compensation. In the event the Executive's employment is
terminated without Cause or he-terminates his employment for
Good Reason and a Change in Control has occurred as of the
Date of Termination or occurs thereafter, the Executive
shall have the continuing right to demand that the present
value of the remaining payments described in Paragraphs
6(b)(1) through (3), and payable by reason of the provisions
of Paragraph 10 or 11 (as the case may be), be paid to him
in one lump sum within 30 days after the date written demand
is given. For purposes of calculating the present value of
such payments, a discount factor shall be applied to each
<PAGE 14> such payment which is equal to the relevant
applicable federal rate in effect on the date written demand
is given by him, determined by reference to the period of
time between the date of such notice and the scheduled time
such payment would otherwise be made. In the event any
payment described in Paragraphs 6(b)(1) through (3) is not
yet determinable on the date written demand is made, the
other payments shall nonetheless be made as provided above;
and the undetermined payment shall be made within 30 days
after it becomes determinable, calculated as provided in the
preceding sentence but by treating the date on which the
payment becomes determinable as the date of written notice.
Nothing in this subparagraph shall be construed as affecting
the Executive's right to one or more Gross-Up Payments in
accordance with the provisions of Paragraph 12; and a Gross-
Up Payment (it applicable) will be calculated and made with
any payment made under this subparagraph, as well as any
other Gross-Up Payments that may be required hereunder at a
subsequent date.
17. Withholding Taxes. All compensation and benefits
provided for herein shall, to the extent required by law, be
subject to federal, state, and local tax withholding.
18. Confidential Information. The Executive agrees that
subsequent to his employment with Old Guard, he will not, at any
time, communicate or disclose to any unauthorized person, without
the written consent of the Old Guard, any proprietary or other
confidential information concerning the Company or any Subsidiary
of the Company; provided, however, that the obligations under
this paragraph shall not apply to the extent that such matters
(i) are disclosed in circumstances where the Executive is legally
obligated to do so, or (ii) become generally known to and
available for use by the public otherwise than by his wrongful
act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles,
concepts and ideas which are not solely and exclusively derived
from the business plans and activities of old Guard.
19. Covenants Not to Compete or to Solicit.
(a) Noncompetition. If the Executive's employment
terminates under Paragraph 8 prior to a Change in Control or
he voluntarily terminates his employment prior to a Change
in Control, he agrees that for a period of 12 months after
the Date of Termination he will not, without the written
consent in writing of the Board of Directors of the Company,
become an officer, employee, agent, partner, director, or a
four and nine-tenths percent or greater shareholder or
equity owner of any entity engaged in the property and
casualty insurance business with its corporate headquarters
located within 50 miles of the City of Lancaster,
Pennsylvania. If at the time of the enforcement of this
paragraph a court holds that the duration, scope, or area
<PAGE 15> restrictions stated herein are unreasonable under
the circumstances then existing and, thus, unenforceable,
Old Guard and the Executive agree that the maximum duration,
scope, or area reasonable under such circumstances shall be
substituted for the stated duration, scope, or area.
(b) Nonsolicitation. During his employment and for a
period of 12 months following the Date of Termination, the
Executive shall not, whether on his own behalf or on behalf
of any other individual or business entity, solicit,
endeavor to entice away from the Company, a Subsidiary or
any affiliated company, or otherwise interfere with the
relationship of the Company, a Subsidiary,or any affiliated
company with any person who is, or was within the then most
recent 12 month period, an employee or associate thereof;
provided, however, that this subparagraph shall not apply
following the occurrence of a Change in Control.
20. Arbitration. To the extent permitted by applicable law,
any controversy or dispute arising out of or relating to this
Agreement, or any alleged breach hereof, shall be settled by
arbitration in the City of Lancaster, Pennsylvania, in accordance
with the commercial rules of the American Arbitration Association
then in existence (to the extent such rules are not inconsistent
with the provisions of this Agreement), it being understood and
agreed that the arbitration panel shall consist of three
individuals acceptable to the parties hereto. In the event that
the parties cannot agree on three arbitrators within 20 days
following receipt by one party of a demand for arbitration from
another party, then the Executive and Old Guard shall each
designate one arbitrator and the two arbitrators selected shall
select the third arbitrator. The arbitration panel so selected
shall convene a hearing no later than 90 days following the
selection of the panel. The arbitration award shall be final and
binding upon the parties, and judgment may be entered thereon in
the Pennsylvania Court of Common Pleas or in any other court of
competent jurisdiction.
21. Additional Equitable Remedy. The Executive acknowledges
and agrees that Old Guard's remedy at law for a breach or a
threatened breach of the provisions of Paragraphs IS and 19 would
be inadequate; and, in recognition of this fact and
notwithstanding the provisions of Paragraph 20, in the event of
such a breach or threatened breach by him, it is agreed that Old
Guard shall be entitled to request equitable relief in the form
of specific performance, temporary restraining order, temporary
or permanent injunction, or any other equitable remedy which may
then be available. Nothing in this paragraph shall be construed
as prohibiting Old Guard from pursuing any other remedy available
under this Agreement for such a breach or threatened breach.
22. Related Agreements. Except as may otherwise be
provided herein, to the extent that any provision of any other
agreement between Old Guard and the Executive shall limit,
<PAGE 16> qualify, duplicate, or be inconsistent with any
provision of this Agreement, the provision in this Agreement
shall control and such provision of such other agreement shall be
deemed to have been superseded, and to be of no force or effect,
as if :such other agreement had been formally amended to the
extent necessary to accomplish such purpose.
23. No Effect on Other Rights. Except as otherwise
specifically provided herein, nothing contained in this Agreement
shall be construed as adversely affecting any rights the
Executive may have under any agreement, plan, policy or
arrangement to the extent any such right is not inconsistent with
the provisions hereof.
24. Exclusive Rights and Remedy. Except for any explicit
rights and remedies the Executive may have under any other
contract, plan or arrangement with Old Guard, the compensation
and benefits payable hereunder and the remedy for enforcement
thereof shall constitute his exclusive rights and remedy in the
event of his termination of employment.
25. Director and Officer Liability insurance;
Indemnification. Old Guard shall provide the Executive
(including his heirs, executors, and administrators) with
coverage under a standard directors and officers' liability
insurance policy, at Old Guard's expense, in amounts consistent
with amounts provided by peer corporations to their directors and
officers, and shall indemnify him as both a director and as an
officer (and his heirs, executors, and administrators) to the
fullest extent permitted under Pennsylvania law against all
expenses and liabilities reasonably incurred by him in connection
with or arising out of any action, suit, or proceeding in which
he may be involved by reason of his having been an officer or
director of Old Guard or any Subsidiary or affiliated company
(whether or not he continues to be such an officer or director at
the time of incurring such expenses or liabilities). Such
expenses and liabilities shall include, but not be limited to,
judgments, court costs, and attorneys' fees, and the costs of
reasonable settlements.
26. Notices. Any notice required or permitted under
this Agreement shall be sufficient if it is in writing and shall
be deemed given (i) at the time of personal delivery to the
addressee, or (ii) at the time sent certified mail, with return
receipt requested, addressed as follows:
If to the Executive--
Mr. Henry J. Straub
15 Campbell Place
Camp Hill, PA 17011
<PAGE 17>
If to Old Guard, OGIMC, or the Company--
2929 Lititz Pike
P.O. Box,3010
Lancaster, PA 17604
Attention: President
The name or address of any addressee may be changed at any time
and from time to time by notice similarly given.
27. No Waiver. The failure by any party to this Agreement
at any time or times hereafter to require strict performance by
any other party of any of the provisions, terms, or conditions
contained in this Agreement shall not waive, affect, or diminish
any right of the first party at any time or times thereafter to
demand strict performance therewith and with any other provision,
term, or condition contained in this Agreement, Any actual waiver
of a provision, term, or condition contained in this Agreement
shall not constitute a waiver of any other provision, term, or
condition herein, whether prior or subsequent to such actual
waiver and whether of the same or a different type. The failure
of Old Guard to promptly terminate the Executive's employment for
Cause or the Executive to promptly terminate his employment for
Good Reason shall not be construed as a waiver of the right of
termination, and such right may be exercised at any time
following the occurrence of the event giving rise to such right.
28. Joint and Several Obligations of OGIMC and the Company.
OGIMC and the Company shall be jointly and severally liable for
all compensation and benefits that may become payable hereunder
to or on behalf of the Executive or, if applicable, his surviving
spouse, estate or beneficiaries.
29. Survival. Notwithstanding the nominal termination of
this Agreement and the Executives Employment hereunder the
provisions hereof which specify continuing obligations,
compensation and benefits, and rights (including the otherwise
applicable term hereof) shall remain in effect until such time as
all such obligations are discharged, all such compensation and
benefits are received, and no party or beneficiary has any
remaining actual or contingent rights hereunder.
30. Severability. In the event any provision in this
Agreement shall be held illegal or invalid for any reason, such
illegal or invalid provision shall not affect the remaining
provisions hereof, and this Agreement shall be construed,
administered and enforced as though such illegal or invalid
provision were not contained herein.
31. Binding Effect and Benefit. The provisions of this
Agreement shall be binding upon and shall inure to the benefit of
the successors and assigns of Old Guard and the executors,
<PAGE 18> personal representatives, surviving spouse, heirs,
devisees, and legatees of the Executive.
32. Entire Agreement. This Agreement embodies the entire
agreement among the parties with respect to the subject matter
hereof, and it supersedes all prior discussions and oral
understandings of the parties with respect thereto.
33. No Assignment. This Agreement, and the benefits and
obligations hereunder, shall not be assignable by any party
hereto except by operation of law.
34. No Attachment. Except as otherwise provided by law, no
right to receive compensation or benefits under this Agreement
shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to
set off, execution, attachment, levy, or similar process, and any
attempt, voluntary or involuntary, to effect any such action
shall be null and void.
35. Captions. The captions of the several paragraphs and
subparagraphs of this Agreement have been inserted for
convenience of reference only. They constitute no part of this
Agreement and are not to be considered in the construction
hereof.
36. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed one and the
same instrument which may be sufficiently evidenced by any one
counterpart.
37. Number. Wherever any words are used herein in the
singular form, they shall be construed as though they were used
in the plural form, as the context requires, and vice versa.
38. Applicable Law. Except to the extent preempted by
federal law, the provision$ of this Agreement shall be construed,
administered, and enforced in accordance with the domestic
internal law of the Commonwealth of Pennsylvania.
<PAGE 19>
replaces all prior Employment Agreements between Executive and
the Company or any Subsidiary of the Company.
IN WITNESS WHEREOF, the parties have executed this
Agreement, or caused it to be executed, as of the date first
above written.
/s/ Henry J. Straub (SEAL)
OLD GUARD INSURANCE MANAGEMENT CO.
By/s/ David E. Hosler
Attest:/s/Steven D. Dyer
OLD GUARD GROUP, INC.
By/s/ David E. Hosler
Attest:/s/Steven D. Dyer
PAGE 20
<PAGE>
GLOSSARY
"Board of Directors" means the board of directors of the
relevant corporation.
"Cause" means (i) a documented repeated and willful failure
by the Executive to perform his duties and achieve reasonably
established goals, but only after written demand and only if
termination is effected by action taken by a vote of (A) prior to
a Change in Control, at least a majority of the directors of the
Company then in office, or (E) after a Change in Control, at
least 80% of the nonofficer directors of the Company then in
office, (ii) his final conviction of a felony, (iii) conduct by
him which constitutes moral turpitude which is directly and
materially injurious to the Company or any Subsidiary or
affiliated company, (iv) willful material violation of corporate
policy, or (v) the issuance by the regulator of the Company or
any Subsidiary or affiliated company of an unappealable order to
the effect that he be permanently discharged,
For purposes of this definition, no act or failure to act on
the part of the Executive shall be considered "willful" unless
done or omitted not in good faith and without reasonable belief
that the action or omission was in the best interest of the
Company or any of its Subsidiaries or affiliated companies,
"Change in Control" means the occurrence of any of the
following events:
(a) any Person (except (i) the company or any
Subsidiary or prior affiliate of the Company, or (ii) any
Employee Benefit Plan (or any trust forming a part thereof)
maintained by the Company or any Subsidiary or prior
affiliate of the Company) is or becomes the beneficial
owner, directly or indirectly, of the Company's securities
representing 19% or more of the combined voting power of the
company's then outstanding securities, or 50.1% or more of
the combined voting power of a Material subsidiary's then
outstanding securities, other than pursuant to a transaction
described in Clause (c);
(b) there occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of the
Company or a Material Subsidiary to another entity, except
to an entity controlled directly or indirectly by the
Company; or
(c) there occurs a merger, consolidation, share
exchange, division or other reorganization of or relating to
(i) the shareholders of the Company immediately
before such merger, consolidation, share exchange,
division or reorganization own, directly or indirectly,
<PAGE 21> immediately thereafter at least two-thirds of
the combined voting power of the outstanding voting
securities of the Surviving Company in substantially
the same proportion as their ownership of the voting
securities immediately before such merger,
consolidation, share exchange, division or
reorganization; and
(ii) the individuals who, immediately before such
merger, consolidation, share exchange, division or
reorganization, are members of the Incumbent Board
continue to constitute at least two-thirds of the board
of directors of the Surviving Company; provided,
however, that if the election, or nomination for
election by the Company's shareholders, of any new
director was approved by a vote of at least two-thirds
of the Incumbent Board, such director shall, for the
purposes hereof, be considered a member of the
Incumbent Board; and provided further, however, that no
individual shall be considered a member of the
Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened
Election Contest or Proxy Contest, including by reason
of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; and
(iii) no Person (except (A) the Company or any
Subsidiary or prior affiliate of the Company, (B) any
Employee Benefit Plan (or any trust forming a part
thereof) maintained by the Company or any Subsidiary or
prior affiliate of the Company, or (C) the Surviving
Company or any Subsidiary or prior affiliate of the
Surviving Company) has beneficial ownership of 19.9% or
more of the combined voting power of the surviving
Company's outstanding voting securities immediately
following such merger, consolidation, share exchanger
division or reorganization;
(d) a plan of liquidation or dissolution of the
Company, other than pursuant to bankruptcy or insolvency
laws, is adopted; or
individuals who, at the beginning of such period,
constituted the Board of Directors of the Company cease for
any reason to constitute at least a majority of such Board
of Directors, unless the election, or the nomination for
election by the Company's shareholders, of each new director
was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the
beginning of the period; provided, however, that no
individual shall be considered a member of the Board of
Directors of the Company at the beginning of such period if
such individual initially assumed office as a result of
<PAGE 22> either an actual or threatened Election Contest or
Proxy Contest, including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest,
Notwithstanding the foregoing, a Change in Control shall not be
deemed to have occurred if a Person becomes the beneficial owner,
directly or indirectly, of securities representing 19.9% or more
of the combined voting power of the Company's then outstanding
securities solely as a result of an acquisition by the Company of
its voting securities which, by reducing the number of shares
outstanding, increases the proportionate number of shares
beneficially owned by such Person; provided, however, that if a
Person becomes a beneficial owner of 19.9% or more of the
combined voting power of the Company's then outstanding
securities by reason of share repurchases by the Company and
thereafter becomes the beneficial owner, directly or indirectly,
of any additional voting securities of the Company, then a Change
in Control shall be deemed to have occurred with respect to such
Person under Clause (a).
Notwithstanding anything contained herein to the contrary, if the
Executive's employment is terminated and he reasonably
demonstrates that such termination (i) was at the request of a
third party who has indicated an intention of taking steps
reasonably calculated to effect a Change in Control and who
effects a Change in Control, or (ii) otherwise occurred in
connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes hereof, a Change in
Control shall be deemed to have occurred on the day immediately
prior to the date of such termination of his employment.
Notwithstanding anything contained herein, the demutualization of
one or more of the Guarantors and the initial public offering of
the Company shall not constitute a Change in Control.
"Company" means Old Guard Group, Inc., a Pennsylvania
(stock) corporation, and any successor thereto.
"Date of Termination" means:
(a) if the Executive's employment is terminated for
disability, 30 days after the Notice of Termination is given
(provided that he shall not have returned to the performance
of his duties on a full-time basis during such 30-day
period);
(b) if the Executive's employment terminates by reason
of his death, the date of his death;
(c) if the Executive's employment is terminated by Old
Guard for Cause, the date specified in the Notice of
Termination;
<PAGE 23>
(d) if the Executive's employment is terminated by him
without Good Reason, the date specified in the Notice of
Termination;
(e) if the Executive's employment is terminated by Old
Guard for any reason other than for Disability or Cause, the
date specified in the Notice of Termination; or
(f) if the Executive's employment is terminated by
him for Good Reason, the date specified in the Notice of
Termination;
provided, however that the Date of Termination shall mean the
actual date of termination in the event the parties mutually
agree to a date other than that described above.
"Defined Benefit Plan" has the meaning ascribed to such term
in Section 3(35) of ERISA.
"Defined Contribution Plan" has the meaning ascribed to such
term in Section 3(34) of ERISA.
"Disability" has the meaning ascribed to the terra
"permanent and total disability" in Section 22(e)(3) of the IRC.
"Election Contest" means a solicitation with respect to the
election or removal of directors that is subject to the
provisions of Rule 14a-11 of the 1934 Act.
"Employee Benefit Plan" has the meaning ascribed to such
term in Section 3(3) of ERISA,
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended and as the same may be amended from time to
time.
"Excise Tax" means the tax imposed by Section 4999 of the
IRC (or any similar tax that may hereafter be imposed by federal,
state or local law).
"Executive" means Henry J. Straub, an individual residing in
Lancaster County, Pennsylvania.
"Good Reason" means, after a Change in Control:
(a) a change in the Executive's status or position,
or any material diminution in his duties or
responsibilities;
(b) any increase in the Executive's duties
inconsistent with his position;
(c) any reduction in the Executive's base
compensation; <PAGE 24>
(d) a failure to increase the Executive's base
compensation, consistent with his performance review, within
12 months of the last increase; or a failure to consider
Executive for an increase within 12 months of his last
performance review;
(e) a failure to continue in effect any Employee
Benefit Plan in which the Executive participates, including
(whether or not they constitute Employee Benefit Plans)
incentive bonus, stock option, or other qualified or
nonqualified plans of deferred compensation (A) other than -
as a result of the normal expiration of such a plan, or (B)
unless such plan is merged or consolidated into, or replaced
with, a plan with benefits which are of equal or greater
value;
(f) requiring the Executive to be based anywhere other
than the county where his principal office was located
immediately prior to the Change in Control;
(g) refusal to allow the Executive to attend to
matters or engage in activities in which he was permitted
to engage prior to the Change in Control;
(h) delivery to the Executive of a Notice of
Nonextension;
(i) failure to secure the affirmation by a Successor,
within three business days prior to a Change in Control, of
this Agreement and its or Old Guard's continuing obligations
hereunder (or where there is not at least three business
days advance notice that a Person may become a Successor,
within one business day after having notice that such Person
may become or has become a Successor); or
(j) any purported termination of the Executive's
employment which is not in accordance with the terms of this
Agreement.
Notwithstanding anything herein to the contrary, at the election
of the Executive, beginning with the 181st day following a Change
in Control and continuing through the first anniversary of such
Change in Control, he may terminate his employment for any reason
or no reason and such termination will be treated as having
occurred for Good Reason.
"Gross-Up Payment" means an additional payment to be made to
or on behalf of the Executive in an amount such that the net
amount retained by him, after deduction of any Excise Tax on the
Total Payments and any federal, state, and local income tax and
Excise Tax on such additional payment, equals the Total Payments.
"Incumbent Board" means the Board of Directors of the
Company as constituted at any relevant time. <PAGE 25>
"IRC" means the Internal Revenue Code of 1986, as amended
and as the same may be amended from time to time.
"Material subsidiary" means a Subsidiary whose net worth,
determined under generally accepted accounting principles, at the
fiscal year end immediately prior to any relevant time is at
least 25% of the aggregate net worth of the controlled group of
corporations of which the Company is the common parent.
"1934 Act" means the Securities Exchange Act of 1934, as
amended and as the same may be amended from time to time.
"Notice of Nonextension" means a written notice delivered to
or by the Executive which advises that the Agreement will not be
extended as otherwise provided in Paragraph 3.
"Notice of Termination" means a written notice that (i)
indicates the specific termination provision in this Agreement
relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive;s employment under the provision so indicated, and
(iii) gives the required advance notice of termination.
"OGIMC" means Old Guard Insurance Management Co., a
Pennsylvania corporation.
"Old Guard" means the Company and OGIMC, collectively, or, as
the context requires, either the Company or OGIMC, and any
successor to either or both of them,
"Person" has the same meaning as such term has for purposes
of Sections 13(d) and 14(d) of the 1934 Act.
"Proxy contest" means the solicitation of proxies or
consents by or on behalf of a Person other than the Board of
Directors of the Company.
"Subsidiary" means any business entity of which a majority
of its voting power or its equity securities or equity interests
is owned, directly or indirectly by the Company.
"Successor" means any Person that succeeds to, or has the
practical ability to control (either immediately or with the
passage of time), Old Guard's business directly, by merger or
consolidation, or indirectly, by purchase of Old Guard's voting
securities or all or substantially all of its assets.
"Surviving Company" means the business entity that is a
resulting company following a merger, consolidation, share
exchange, division or other reorganization of or relating to the
Company.
"Total Payments" means the compensation and benefits that
become payable under the Agreement or otherwise (and which may be
<PAGE 26> subject to an Excise Tax) by reason of the Executive's
termination of employment, determined without regard to any
Gross-Up Payments that may also be made.
"Welfare Benefit ]Plan" has the meaning ascribed to the term
"employee welfare benefit plan" in Section 3(l) of ERISA. For
purposes of determining the Executive's or his dependents' right
to continued welfare benefits hereunder following his termination
of employment, the meaning of such term shall include any retiree
health plan maintained by Old Guard at any time after the
relevant Date of Termination, notwithstanding the fact that the
Executive is not a participant therein prior to such date.
<PAGE 27>
EXHIBIT 10.9
________________________________________________________________
OLD GUARD GROUP, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
as rights agent
_______________
RIGHTS AGREEMENT
Dated as of February 9, 1999
________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Section Page
1. Certain Definitions . . . . . . . . . . . . . . . . . . . 1
2. Appointment of Rights Agent . . . . . . . . . . . . . . . 5
3. Issue of Rights Certificates. . . . . . . . . . . . . . . 6
4. Form of Rights Certificates . . . . . . . . . . . . . . . 7
5. Countersignature and Registration . . . . . . . . . . . . 8
6. Transfer, Split Up, Combination, or Exchange of Rights
Certificates; Mutilated, Destroyed, Lost, or Stolen
Rights Certificates . . . . . . . . . . . . . . . . . . . 9
7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Cancellation and Destruction of Rights Certificates . . . 12
9. Reservation and Availability of Capital Stock . . . . . . 13
10. Preferred Stock Record Date . . . . . . . . . . . . . . . 14
11. Adjustment of Purchase Price, Number and Kind of Shares
or Number of Rights . . . . . . . . . . . . . . . . . . . 15
12. Certificate of Adjusted Purchase Price or Number of
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 27
13. Consolidation, Merger, or Sale or Transfer of Assets or
Earning Power . . . . . . . . . . . . . . . . . . . . . . 27
14. Fractional Rights and Fractional Shares . . . . . . . . . 30
15. Rights of Action. . . . . . . . . . . . . . . . . . . . . 31
16. Agreement of Rights Holders . . . . . . . . . . . . . . . 31
17. Rights Certificate Holder Not Deemed a Shareholder. . . . 32
18. Concerning the Rights Agent . . . . . . . . . . . . . . . 33
19. Merger or Consolidation or Change of Name of Rights
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 33
20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . 34
21. Change of Rights Agent. . . . . . . . . . . . . . . . . . 36
22. Issuance of New Rights Certificates . . . . . . . . . . . 37
23. Redemption and Termination. . . . . . . . . . . . . . . . 37
24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . 39
25. Notice of Certain Events. . . . . . . . . . . . . . . . . 40
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 41
27. Supplements and Amendments. . . . . . . . . . . . . . . . 41
28. Successors. . . . . . . . . . . . . . . . . . . . . . . . 42
29. Determinations and Actions by the Board of Directors. . . 42
30. Benefits of this Agreement. . . . . . . . . . . . . . . . 43
31. Severability. . . . . . . . . . . . . . . . . . . . . . . 43
32. Governing Law . . . . . . . . . . . . . . . . . . . . . . 43
33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . 43
34. Descriptive Headings. . . . . . . . . . . . . . . . . . . 43
Exhibit A - Terms of Series A Junior Participating Preferred
Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of February 9, 1999 (the
"Agreement"), between OLD GUARD GROUP, INC., a Pennsylvania
business corporation (the "Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, a New York trust company, as rights
agent (the "Rights Agent").
BACKGROUND
On February 9, 1999 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and
declared a dividend distribution of one Right (as hereinafter
defined) for each share of common stock, no par value, of the
Company (the "Common Stock") outstanding at the close of business
on the Rights Dividend Declaration Date, payable to shareholders
of record as of the close of business on March 2, 1999 (the
"Record Date"), and has authorized the issuance of one Right (as
such number may hereinafter be adjusted pursuant to the
provisions of Section 11(p) hereof) for each share of Common
Stock issued between the Record Date (whether originally issued
or delivered from the Company's treasury) and the Distribution
Date, each Right initially representing the right to purchase one
one-hundredth of a share of Series A Junior Participating
Preferred Stock of the Company having the rights, powers, and
preferences herein set forth, upon the terms and subject to the
conditions hereinafter set forth (the "Rights").
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and
the mutual agreements herein set forth, the parties hereto,
intending to be legally bound, hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who
or which, together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of (i) 19.9% or more of the
shares of Common Stock or (ii) Voting Securities that in the
aggregate represent 19.9% or more of the Total Voting Power, but
shall not include the Company, any Subsidiary of the Company, any
employee stock option plan or other employee benefit plan of the
Company or of any Subsidiary of the Company, or any Person or
entity organized, appointed, or established by the Company for or
pursuant to the terms of any such plan.
(b) "Adverse Person" shall mean any Person
declared to be an Adverse Person by the Board of Directors upon a
determination that the criteria set forth in Section 11(a)(ii)(B)
apply to such Person.
<PAGE 1>
(c) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act, as in
effect on the date hereof.
(d) A Person shall be deemed the "Beneficial
Owner", of, and shall be deemed to "beneficially own," any
securities:
(i) which such Person or any of such
Person's Affiliates or Associates, directly or indirectly,
has the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to
any agreement, arrangement, or understanding (whether or not
in writing) or upon the exercise of conversion rights,
exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own,"
(A) securities tendered pursuant to a tender offer or
exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange, or (B) securities
issuable upon exercise of Rights at any time prior to the
occurrence of a Triggering Event, or (C) securities issuable
upon exercise of Rights from and after the occurrence of a
Triggering Event which Rights were acquired by such Person
or any of such Person's Affiliates or Associates prior to
the Distribution Date or pursuant to Section 3(a) or
Section 22 hereof (the "Original Rights") or pursuant to
Section 11(i) hereof in connection with an adjustment made
with respect to any Original Rights;
(ii) which such Person or any of such
Person's Affiliates or Associates, directly or indirectly,
has the right to vote or dispose of or has "beneficial
ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act),
including pursuant to any agreement, arrangement, or
understanding, whether or not in writing; provided, however,
that a Person shall not be deemed the "Beneficial Owner" of,
or to "beneficially own," any security under this
subparagraph (ii) as a result of an agreement, arrangement,
or understanding to vote such security if such agreement,
arrangement, or understanding (A) arises solely from a
revocable proxy given in response to a public proxy or
consent solicitation made pursuant to, and in accordance
with, the applicable provisions of the General Rules and
Regulations under the Exchange Act and (B) is not also then
reportable by such Person on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person (or any of such
<PAGE 2> Person's Affiliates or Associates) has any
agreement, arrangement, or understanding (whether or not in
writing), for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in the
proviso to subparagraph (ii) of this paragraph (d)), or
disposing of any Voting Securities; provided, however, that
nothing in this paragraph (d) shall cause a person engaged
in business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any
securities acquired through such person's participation in
good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
(e) "Business Day" shall mean any day other than
a Saturday, Sunday, or a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized or obligated by law
or executive order to close.
(f) "Close of business" on any given date shall
mean 5:00 P.M., New York time, on such date; provided, however,
that if such date is not a Business Day it shall mean 5:00 P.M.,
New York time, on the next succeeding Business Day.
(g) "Common Stock" shall mean the common stock,
no par value, of the Company, except that "Common Stock" when
used with reference to any Person other than the Company shall
mean the capital stock of such Person with the greatest voting
power, or the equity securities or other equity interest having
power to control, or direct the management of, such Person.
(h) "Common stock equivalents" shall have the
meaning set forth in Section 11(a)(iii) hereof.
(i) "Continuing Director" shall mean (i) any
member of the Board of Directors of the Company, while such
Person is a member of the Board, who is not an Acquiring Person,
an Adverse Person (or a Person with respect to whom the
Continuing Directors are considering making an Adverse Person
determination pursuant to Section 11(a)(ii)(B) hereof), or an
Affiliate or Associate of any such Person, or a representative of
any such Person, Affiliate, or Associate, and who was a member of
the Board prior to the date of this Agreement, or (ii) any Person
who subsequently becomes a member of the Board, while such Person
is a member of the Board, who is not an Acquiring Person, an
Adverse Person (or a Person with respect to whom the Continuing
Directors are considering making an Adverse Person
determination), or an Affiliate or Associate of any such Person,
or a representative of any such Person, Affiliate or Associate,
if such Person's nomination for election or election to the Board
is recommended or approved by a majority of the Continuing
Directors.
(j) "Current market price" shall have the meaning
set forth in Section 11(d)(i) hereof. <PAGE 3>
(k) "Current Value" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(l) "Distribution Date" shall have the meaning
set forth in Section 3(a) hereof.
(m) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(n) "Expiration Date" shall have the meaning set
forth in Section 7(a) hereof.
(o) "Final Expiration Date" shall have the
meaning set forth in Section 7(a) hereof.
(p) "Person" shall mean any individual, firm,
corporation, partnership, or other entity.
(q) "Preferred Stock" shall mean shares of
Series A Junior Participating Preferred Stock, without par value,
of the Company, and, to the extent that there are not a
sufficient number of shares of Series A Junior Participating
Preferred Stock authorized to permit the full exercise of the
Rights, any other series of preferred stock, without par value,
of the Company designated for such purpose containing terms
substantially similar to the terms of the Series A Junior
Participating Preferred Stock.
(r) "Principal Party" shall have the meaning set
forth in Section 13(b) hereof.
(s) "Purchase Price" shall have the meaning set
forth in Section 4(a) hereof.
(t) "Record Date" shall have the meaning set
forth in the BACKGROUND clause in the recital to this Agreement.
(u) "Redemption Price" shall have the meaning set
forth in Section 23(a) hereof.
(v) "Rights" shall have the meaning set forth in
the BACKGROUND clause in the recital to this Agreement.
(w) "Rights Certificates" shall have the meaning
set forth in Section 3(a) hereof.
(x) "Rights Dividend Declaration Date" shall have
the meaning set forth in the BACKGROUND clause in the recital to
this Agreement.
(y) "Section 11(a)(ii) Event" shall mean any
event described in clauses (A) or (B) of Section 11(a)(ii)
hereof.
<PAGE 4>
(z) "Section 11(a)(ii) Trigger Date" shall have
the meaning set forth in Section 11(a)(iii) hereof.
(aa) "Section 13 Event" shall mean any event
described in clauses (x), (y), or (z) of Section 13(a) hereof.
(bb) "Securities Act" shall mean the Securities
Act of 1933, as amended.
(cc) "Spread" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(dd) "Stock Acquisition Date" shall mean the
first date of public announcement (which, for purposes of this
definition, shall include, without limitation, a report filed
pursuant to Section 13(d) under the Exchange Act) by the Company
or an Acquiring Person that an Acquiring Person has become such.
(ee) "Subsidiary" shall mean, with reference to
any Person, any corporation of which an amount of voting
securities sufficient to elect at least a majority of the
directors of such corporation is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such
Person.
(ff) "Substitution Period" shall have the meaning
set forth in Section 11(a)(iii) hereof.
(gg) "Total Voting Power" on any given date shall
mean the total number of votes eligible to be cast in a general
election of directors of the Company.
(hh) "Trading Day" shall have the meaning set
forth in Section 11(d)(i) hereof.
(ii) "Triggering Event" shall mean any Section
11(a)(ii) Event or Section 13 Event.
(jj) "Voting Securities" shall mean any class or
classes of capital stock of the Company entitled to vote
generally in the election of directors.
Section 2. Appointment of Rights Agent. The
Company hereby appoints the Rights Agent to act as agent for the
Company and the holders of the Rights (who, in accordance with
Section 3 hereof, shall prior to the Distribution Date also be
the holders of Common Stock) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such Co-
Rights Agents as it may deem necessary or desirable.
<PAGE 5>
Section 3. Issue of Rights Certificates.
(a) Until the earliest of (i) the close of
business on the twentieth Business Day after the Stock
Acquisition Date, (ii) the close of business on the twentieth
Business Day (or such later date as may be determined by the
Board of Directors) after the date that a tender offer or
exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee stock option plan or
other employee benefit plan of the Company or of any Subsidiary
of the Company, or any Person or entity organized, appointed, or
established by the Company for or pursuant to the terms of any
such plan) is first published or sent or given within the meaning
of Rule 14d-2(a) of the General Rules and Regulations under the
Exchange Act, if, upon consummation thereof, such Person would be
the Beneficial Owner of (x) 19.9% or more of the shares of Common
Stock then outstanding or (y) Voting Securities representing
19.9% or more of the Total Voting Power, or (iii) the close of
business on the twentieth Business Day after the Board of
Directors determines, pursuant to the criteria set forth in
Section 11(a)(ii)(B) hereof, that a Person is an Adverse Person
(the earliest of (i), (ii), and (iii) being herein referred to as
the "Distribution Date"), (x) the Rights will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by
the certificates for the Common Stock registered in the names of
the holders of such Common Stock (which certificates for Common
Stock shall be deemed also to be certificates for Rights) and not
by separate certificates, and (y) the Rights will be transferable
only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as
practicable after the Distribution Date, the Rights Agent will
send by first-class, insured, postage prepaid mail, to each
record holder of the Common Stock as of the close of business on
the Distribution Date, at the address of such holder shown on the
records of the Company, one or more rights certificates, in
substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each share of Common
Stock so held, subject to adjustment as provided herein. In the
event that an adjustment in the number of Rights per share of
Common Stock has been made pursuant to Section 11(p) hereof, at
the time of distribution of the Rights Certificates, the Company
shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates
representing only whole numbers of Rights are distributed and
cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by
such Rights Certificates.
(b) As promptly as practicable following the
Record Date, the Company will send a copy of a Summary of Rights,
in substantially the form attached hereto as Exhibit C (the
"Summary of Rights"), by postage prepaid mail, to each record
holder of the Common Stock as of the close of business on the
<PAGE 6> Record Date, at the address of such holder shown on the
records of the Company.
(c) Rights shall be issued in respect of all
shares of Common Stock which are issued (whether originally
issued or from the Company's treasury) after the Record Date but
prior to the earlier of the Distribution Date or the Expiration
Date. Certificates representing such shares of Common Stock
shall also be deemed to be certificates for Rights, and shall
bear the following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights
Agreement between Old Guard Group, Inc. (the "Company") and
American Stock Transfer & Trust Company, as rights agent
(the "Rights Agent"), dated as of February 9, 1999 (the
"Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will
no longer be evidenced by this certificate. The Company or
the Rights Agent will mail to the holder of this certificate
a copy of the Rights Agreement, as in effect on the date of
mailing, without charge promptly after receipt of a written
request therefor. Under certain circumstances set forth in
the Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an Acquiring Person, an
Adverse Person, or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any
subsequent holder, may become null and void.
With respect to such certificates containing the foregoing
legend, until the earlier of (i) the Distribution Date or
(ii) the Expiration Date, the Rights associated with the Common
Stock represented by such certificates shall be evidenced by such
certificates alone and registered holders of Common Stock shall
also be the registered holders of the associated Rights, and the
transfer of any of such certificates shall also constitute the
transfer of the Rights associated with the Common Stock
represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of
election to purchase and of assignment to be printed on the
reverse thereof) may have such marks of identification or
designation and such legends, summaries, or endorsements printed
thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Rights may from time to time
<PAGE 7> be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever distributed, shall be dated as of the
Record Date and on their face shall entitle the holders thereof
to purchase such number of one one-hundredths of a share of
Preferred Stock as shall be set forth therein at the price set
forth therein (such exercise price per one one-hundredth of a
share, the "Purchase Price"), but the amount and type of
securities purchasable upon the exercise of each Right and the
Purchase Price thereof shall be subject to adjustment as provided
herein.
(b) Any Rights Certificate issued pursuant to
Section 3(a) or Section 22 hereof that represents Rights
beneficially owned by: (i) an Acquiring Person or an Adverse
Person or any Associate or Affiliate of an Acquiring Person or an
Adverse Person, (ii) a transferee of an Acquiring Person or an
Adverse Person (or of any such Associate or Affiliate) who
becomes a transferee after such Acquiring Person or Adverse
Person becomes such, or (iii) a transferee of an Acquiring Person
or an Adverse Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring
Person or Adverse Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or Adverse Person to
holders of equity interests in such Acquiring Person or Adverse
Person or to any Person with whom such Acquiring Person or
Adverse Person has any continuing agreement, arrangement, or
understanding regarding the transferred Rights or (B) a transfer
that the Board of Directors of the Company has determined is part
of a plan, arrangement, or understanding which has as a primary
purpose or effect avoidance of Section 7(e) hereof, and any
Rights Certificate issued pursuant to Section 6 or Section 11
hereof upon transfer, exchange, replacement, or adjustment of any
other Rights Certificate referred to in this sentence, shall
contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are
or were beneficially owned by a Person who was or became an
[Acquiring Person] [Adverse Person] or an Affiliate or
Associate thereof (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the
Rights represented hereby may become null and void under the
circumstances and with the effect specified in Section 7(e)
of such Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on
behalf of the Company by its Chairman of the Board, Chief
Executive Officer, President, or any Executive Vice President
either manually or by facsimile signature, and shall have affixed
thereto the Company's seal or a facsimile thereof which shall be
attested by the Secretary or an Assistant Secretary of the
<PAGE 8> Company, either manually or by facsimile signature. The
Rights Certificates shall be countersigned manually by the Rights
Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have
signed any of the Rights Certificates shall cease to be such
officer of the Company before countersignature by the Rights
Agent and issuance and delivery by the Company, such Rights
Certificates, nevertheless, may be countersigned by the Rights
Agent and issued and delivered by the Company with the same force
and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company;
and any Rights Certificates may be signed on behalf of the
Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company
to sign such Rights Certificate, although at the date of the
execution of this Rights Agreement any such person was not such
an officer.
(b) Following the Distribution Date, the Rights
Agent will keep or cause to be kept, at its principal office or
offices designated as the appropriate place for surrender of
Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the
respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates
and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination, or
Exchange of Rights Certificates; Mutilated, Destroyed, Lost, or
Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b),
Section 7(e), Section 14, and Section 24 hereof, at any time
after the close of business on the Distribution Date, and at or
prior to the close of business on the Expiration Date, any Rights
Certificate may be transferred, split up, combined, or exchanged
for another Rights Certificate entitling the registered holder to
purchase a like number of one one-hundredths of a share of
Preferred Stock (or, following a Triggering Event, Common Stock,
other securities, cash, or other assets, as the case may be) as
the Rights Certificate surrendered then entitled such holder (or
former holder in the case of a transfer) to purchase. Any
registered holder desiring to transfer, split up, combine, or
exchange any Rights Certificate shall make such request in
writing delivered to the Rights Agent, and shall surrender the
Rights Certificate to be transferred, split up, combined, or
exchanged at the principal office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the
Company shall be obligated to take any action whatsoever with
respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and
signed the certificate contained in the form of assignment on the
reverse side of such Rights Certificate and shall have provided
<PAGE 9> such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b),
Section 7(e), and Section 14 hereof, countersign and deliver to
the Person entitled thereto a Rights Certificate as so requested.
The Company may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with
any transfer, split up, combination, or exchange of Rights
Certificates.
(b) Upon receipt by the Company and the Rights
Agent of evidence reasonably satisfactory to them of the loss,
theft, destruction, or mutilation of a Rights Certificate, and,
in case of loss, theft, or destruction, of indemnity or security
reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental
thereto, and upon surrender to the Rights Agent and cancellation
of the Rights Certificate if mutilated, the Company will execute
and deliver a new Rights Certificate of like tenor to the Rights
Agent for countersignature and delivery to the registered owner
in lieu of the Rights Certificate so lost, stolen, destroyed, or
mutilated.
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the
registered holder of any Rights Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein
including, without limitation, the restrictions on exercisability
set forth in Section 9(c), Section 11(a)(iii), and Section 23(a)
hereof) in whole or in part at any time after the Distribution
Date upon surrender of the Rights Certificate, with the form of
election to purchase and the certificate on the reverse side
thereof duly executed, to the Rights Agent at the principal
office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price
with respect to the total number of one one-hundredths of a share
(or other securities, cash, or other assets, as the case may be)
as to which such surrendered Rights are then exercisable, at or
prior to the earliest of (i) the close of business on February 9,
2009 (the "Final Expiration Date"), (ii) the time at which the
Rights are redeemed as provided in Section 23 hereof (the earlier
of (i) and (ii) being herein referred to as the "Expiration
Date"), or (iii) the time at which such Rights are exchanged as
provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth
of a share of Preferred Stock pursuant to the exercise of a Right
shall initially be Sixty Dollars ($60.00), and shall be subject
to adjustment from time to time as provided in Sections 11
and 13(a) hereof and shall be payable in accordance with
paragraph (c) below. <PAGE 10>
(c) Upon receipt of a Rights Certificate
representing exercisable Rights, with the form of election to
purchase and the certificate on the reverse side thereof duly
executed, accompanied by payment, with respect to each Right so
exercised, of the Purchase Price per one one-hundredth of a share
of Preferred Stock (or other shares, securities, cash, or other
assets, as the case may be) to be purchased as set forth below
and an amount equal to any applicable transfer tax, the Rights
Agent shall, subject to Section 20(k) hereof, thereupon promptly
(i) (A) requisition from any transfer agent of the shares of
Preferred Stock (or make available, if the Rights Agent is the
transfer agent for such shares) certificates for the total number
of one one-hundredths of a share of Preferred Stock to be
purchased and the Company hereby irrevocably authorizes its
transfer agent to comply with all such requests, or (B) if the
Company shall have elected to deposit the total number of shares
of Preferred Stock issuable upon exercise of the Rights hereunder
with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one-hundredths of
a share of Preferred Stock as are to be purchased (in which case
certificates for the shares of Preferred Stock represented by
such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary
agent to comply with such request, (ii) requisition from the
Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder, and (iv) after
receipt thereof, deliver such cash, if any, to or upon the order
of the registered holder of such Rights Certificate. The payment
of the Purchase Price (as such amount may be reduced pursuant to
Section 11(a)(iii) hereof) shall be made in cash or by certified
bank check or bank draft payable to the order of the Company. In
the event that the Company is obligated to issue other securities
(including Common Stock) of the Company, pay cash, and/or
distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other
securities, cash, and/or other property are available for
distribution by the Rights Agent, if and when appropriate. The
Company reserves the right to require prior to the occurrence of
a Triggering Event that, upon any exercise of Rights, a number of
Rights be exercised so that only whole shares of Preferred Stock
would be issued.
(d) In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced
thereby, a new Rights Certificate evidencing Rights equivalent to
the Rights remaining unexercised shall be issued by the Rights
Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or
names as may be designated by such holder, subject to the
provisions of Section 14 hereof. <PAGE 11>
(e) Notwithstanding anything in this Agreement to
the contrary, from and after the first occurrence of a Section
11(a)(ii) Event, any Rights beneficially owned by (i) an
Acquiring Person, an Adverse Person, or an Associate or Affiliate
of an Acquiring Person or an Adverse Person, (ii) a direct or
indirect transferee of an Acquiring Person or an Adverse Person
(or of any such Associate or Affiliate) who becomes a transferee
after the Acquiring Person or Adverse Person becomes such, or
(iii) a direct or indirect transferee of an Acquiring Person or
an Adverse Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring
Person or Adverse Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or Adverse Person to
holders of equity interests in such Acquiring Person or Adverse
Person or to any Person with whom the Acquiring Person or Adverse
Person has any continuing agreement, arrangement, or
understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Company has determined is
part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e),
shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this
Agreement or otherwise. The Company shall use all reasonable
efforts to insure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no
liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect
to an Acquiring Person or an Adverse Person or any of their
respective Affiliates, Associates, or transferees hereunder.
(f) Notwithstanding anything in this Agreement to
the contrary, neither the Rights Agent nor the Company shall be
obligated to undertake any action with respect to a registered
holder upon the occurrence of any purported exercise as set forth
in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of
election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as
the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the
purpose of exercise, transfer, split up, combination, or exchange
shall, if surrendered to the Company or any of its agents, be
delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled
by it, and no Rights Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this
Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel
<PAGE 12> and retire, any other Rights Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all cancelled Rights Certificates
to the Company, or shall, at the written request of the Company,
destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the
Company.
Section 9. Reservation and Availability of Capital
Stock.
(a) The Company covenants and agrees that it will
cause to be reserved and kept available out of its authorized and
unissued shares of Preferred Stock (and, following the occurrence
of a Triggering Event, out of its authorized and unissued shares
of Common Stock and/or other securities or out of its authorized
and issued shares held in its treasury), the number of shares of
Preferred Stock (and, following the occurrence of a Triggering
Event, Common Stock and/or other securities) that, as provided in
this Agreement, including Section 11(a)(iii) hereof, will be
sufficient to permit the exercise in full of all outstanding
Rights.
(b) So long as the shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) issuable and deliverable upon the
exercise of the Rights may be quoted on any automated quotation
system of the National Association of Securities Dealers, Inc. or
listed on any national securities exchange, the Company shall use
its best efforts to cause, from and after such time as the Rights
become exercisable, all shares reserved for such issuance to be
so quoted or listed on such exchange upon official notice of
issuance upon such exercise.
(c) The Company shall use its best efforts to
(i) file, as soon as practicable following the first occurrence
of a Section 11(a)(ii) Event, or, if applicable, as soon as
practicable following the earliest date after the first
occurrence of a Section 11(a)(ii) Event on which the
consideration to be delivered by the Company upon exercise of the
Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement on an appropriate form under the
Securities Act, with respect to the securities purchasable upon
exercise of the Rights, (ii) cause such registration statement to
become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with
a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the
date of the expiration of the Rights. The Company will also take
such action as may be appropriate under, or to ensure compliance
with, the securities or "blue sky" laws of the various states in
connection with the exercisability of the Rights. The Company
may temporarily suspend, for a period of time not to exceed
<PAGE 13> ninety (90) days after the date set forth in clause (i)
of the first sentence of this Section 9(c), the exercisability of
the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating
that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the
suspension is no longer in effect. In addition, if the Company
shall determine that a registration statement is required
following the Distribution Date, the Company may temporarily
suspend the exercisability of the Rights until such time as a
registration statement has been declared effective.
Notwithstanding any provision of this Agreement to the contrary,
the Rights shall not be exercisable in any jurisdiction if the
requisite qualification in such jurisdiction shall not have been
obtained, the exercise thereof shall not be permitted under
applicable law, or a registration statement shall not have been
declared effective.
(d) The Company covenants and agrees that it will
take all such action as may be necessary to ensure that all one
one-hundredths of a share of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other
securities) delivered upon exercise of Rights shall, at the time
of delivery of the certificates for such shares (subject to
payment of the Purchase Price), be duly and validly authorized
and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that
it will pay when due and payable any and all federal and state
transfer taxes and charges which may be payable in respect of the
issuance or delivery of the Rights Certificates and of any
certificates for a number of one one-hundredths of a share of
Preferred Stock (or Common Stock and/or other securities, as the
case may be) upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable
in respect of any transfer or delivery of Rights Certificates to
a Person other than, or the issuance or delivery of a number of
one one-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name
other than that of, the registered holder of the Rights
Certificates evidencing Rights surrendered for exercise or to
issue or deliver any certificates for a number of one one-
hundredths of a share of Preferred Stock (or Common Stock and/or
other securities, as the case may be) in a name other than that
of the registered holder upon the exercise of any Rights until
such tax shall have been paid (any such tax being payable by the
holder of such Rights Certificate at the time of surrender) or
until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each person
in whose name any certificate for a number of one one-hundredths
of a share of Preferred Stock (or Common Stock and/or other
<PAGE 14> securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have
become the holder of record of such fractional shares of
Preferred Stock (or Common Stock and/or other securities, as the
case may be) represented thereby on, and such certificate shall
be dated, the date upon which the Rights Certificate evidencing
such Rights was duly surrendered and payment of the Purchase
Price (and all applicable transfer taxes) was made; provided,
however, that if the date of such surrender and payment is a date
upon which the Preferred Stock (or Common Stock and/or other
securities, as the case may be) transfer books of the Company are
closed, such Person shall be deemed to have become the record
holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on
which the Preferred Stock (or Common Stock and/or other
securities, as the case may be) transfer books of the Company are
open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any
rights of a shareholder of the Company with respect to shares for
which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends, or other
distributions or to exercise any preemptive rights, and shall not
be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and
Kind of Shares or Number of Rights. The Purchase Price, the
number and kind of shares covered by each Right and the number of
Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any
time after the date of this Agreement (A) declare a dividend
on the Preferred Stock payable in shares of Preferred Stock,
(B) subdivide the outstanding Preferred Stock, (C) combine
the outstanding Preferred Stock into a smaller number of
shares, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving
corporation), except as otherwise provided in this
Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or
of the effective date of such subdivision, combination, or
reclassification, and the number and kind of shares of
Preferred Stock or capital stock, as the case may be,
issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall
be entitled to receive, upon payment of the Purchase Price
then in effect, the aggregate number and kind of shares of
Preferred Stock or capital stock, as the case may be, which,
if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books
of the Company were open, such holder would have owned upon
<PAGE 15> such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination, or
reclassification. If an event occurs that would require an
adjustment under both this Section 11(a)(i) and
Section 11(a)(ii) hereof, the adjustment provided for in
this Section 11(a)(i) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.
(ii) Subject to Section 24 of this
Agreement, in the event:
(A) any Person shall at any time after
the Rights Dividend Declaration Date become an
Acquiring Person, unless the event causing such Person
to become an Acquiring Person (I) is a transaction set
forth in Section 13(a) hereof, or (II) is an
acquisition of shares of Common Stock and/or Voting
Securities pursuant to a tender offer or an exchange
offer for all outstanding shares of Common Stock and
other Voting Securities, if any, at a price and on
terms determined by at least a majority of the
Continuing Directors who are not representatives,
nominees, Affiliates or Associates of an Acquiring
Person, after receiving advice from one or more
investment banking firms, to be (x) at a price which is
fair to shareholders (taking into account all factors
which the Board of Directors deems relevant including,
without limitation, prices which could reasonably be
achieved if the Company or its assets were sold on an
orderly basis designed to realize maximum value) and
(y) otherwise in the best interests of the Company and
its shareholders; or
(B) the Board of Directors of the
Company shall declare any Person to be an Adverse
Person, upon a determination that such Person, alone or
together with its Affiliates and Associates, has, at
any time after the Rights Dividend Declaration Date,
become the beneficial owner of Voting Securities
representing at least 10% of the Total Voting Power and
a determination, after reasonable inquiry and
investigation, including consultation with such persons
as the Board of Directors shall deem appropriate, that
such beneficial ownership by such Person is
(1) intended to cause the Company to repurchase the
Voting Securities beneficially owned by such Person or
to cause pressure on the Company to take action or
enter into a transaction or series of transactions
intended to provide such Person (and not shareholders
generally) with short-term financial gain under
circumstances where the Board of Directors determines
that the best long-term interests of the Company and
its shareholders would not be served by taking such
<PAGE 16> action or entering into such transaction or
series of transactions at that time or (2) causing or
reasonably likely to cause a material adverse impact
(including, but not limited to, impairment of
relationships with customers, impairment of the
Company's business reputation or impairment of the
Company's ability to maintain its competitive position)
on the business or prospects of the Company; or
(C) any Acquiring Person or any
Associate or Affiliate of any Acquiring Person, at any
time after the date of this Agreement, directly or
indirectly, (1) shall merge into the Company or
otherwise combine with the Company and the Company
shall be the continuing or surviving corporation of
such merger or combination and the Voting Securities of
the Company shall remain outstanding and unchanged,
(2) shall, in one transaction or a series of
transactions, other than in connection with the
exercise of the Rights or the exercise or conversion of
securities exercisable or convertible into capital
stock of the Company or any of its Subsidiaries,
transfer any assets to the Company or to any of its
Subsidiaries in exchange (in whole or in part) for
shares of Voting Securities, for shares of other equity
securities of the Company, or for securities
exercisable for or convertible into shares of equity
securities of the Company (Common Stock or otherwise)
or otherwise obtain from the Company, with or without
consideration, any additional shares of such equity
securities or securities exercisable for or convertible
into shares of such equity securities (other than
pursuant to a pro rata distribution to all holders of
Common Stock), (3) shall sell, purchase, lease,
exchange, mortgage, pledge, transfer, or otherwise
acquire or dispose of, in one transaction or a series
of transactions, to, from, with, or of (as the case may
be) the Company or any of its Subsidiaries, assets on
terms and conditions less favorable to the Company than
the Company would be able to obtain in arm's-length
negotiation with an unaffiliated third party, other
than pursuant to a transaction set forth in
Section 13(a) hereof, (4) shall receive any
compensation from the Company or any of the Company's
Subsidiaries other than compensation for services as a
director or for full-time employment as a regular
employee at rates in accordance with the Company's (or
its Subsidiaries') past practices, or (5) shall receive
the benefit, directly or indirectly (except
proportionately as a shareholder and except if
resulting from a requirement of law or governmental
regulation), of any loans, advances, guarantees,
pledges, or other financial assistance or any tax
<PAGE 17> credits or other tax advantage provided by
the Company or any of its Subsidiaries; or
(D) during such time as there is an
Acquiring Person, there shall be any reclassification
of securities (including any reverse stock split), or
recapitalization of the Company, or any merger or
consolidation of the Company with any of its
Subsidiaries or any other transaction or series of
transactions involving the Company or any of its
Subsidiaries, other than a transaction or transactions
to which the provisions of Section 13(a) apply (whether
or not with or into or otherwise involving an Acquiring
Person) which has the effect, directly or indirectly,
of increasing by more than 1% the proportionate share
of the outstanding shares of any class of equity
securities of the Company or any of its Subsidiaries
which is directly or indirectly beneficially owned by
any Acquiring Person or any Associate or Affiliate of
any Acquiring Person;
then, promptly following the first occurrence of a
Section 11(a)(ii) Event, proper provision shall be made so
that each holder of a Right (except as provided below and in
Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase
Price in accordance with the terms of this Agreement, in
lieu of a number of one one-hundredths of a share of
Preferred Stock, such number of shares of Common Stock of
the Company as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the then
number of one one-hundredths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the
first occurrence of a Section 11(a)(ii) Event, and
(y) dividing that product (which, following such first
occurrence, shall thereafter be referred to as the "Purchase
Price" for each Right and for all purposes of this
Agreement) by 50% of the lowest closing price (as determined
pursuant to the second sentence of Section 11(d)(i) hereof)
per share of Common Stock on any Trading Day (as defined in
Section 11(d)(i) hereof) occurring within the twelve-month
period immediately preceding the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that (a) the number of
shares of Common Stock which are authorized by the Company's
Articles of Incorporation but not outstanding or reserved
for issuance for purposes other than upon exercise of the
Rights are not sufficient to permit the exercise in full of
the Rights in accordance with the foregoing
subparagraph (ii) of this Section 11(a), or (b) the quotient
(the "Quotient") obtained by dividing the Purchase Price by
the number of Adjustment Shares issuable upon exercise of a
Right is less than the then par value per share of the
<PAGE 18> Common Stock, the Company shall, to the extent
permitted by applicable law and regulation and subject to
such limitations as are necessary to prevent a default under
any agreement to which the Company is a party: (A) determine
the excess of (1) the value of the Adjustment Shares
issuable upon the exercise of a Right (the "Current Value")
over (2) the Purchase Price (such excess, the "Spread"), and
(B) with respect to each Right, make adequate provision to
substitute for the Adjustment Shares, upon payment of the
applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Stock or other equity securities
of the Company (including, without limitation, shares, or
units of shares, of preferred stock which the Board of
Directors of the Company has deemed to have the same value
as shares of Common Stock (such shares of preferred stock,
"common stock equivalents")), (4) debt securities of the
Company, (5) other assets, or (6) any combination of the
foregoing, having an aggregate value equal to the Current
Value, where such aggregate value has been determined by the
Board of Directors of the Company based upon the advice of a
nationally recognized investment banking firm selected by
the Board of Directors of the Company; provided, however, if
the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within 30 days
following the later of (x) the first occurrence of a
Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a)
expires (the later of (x) and (y) being referred to herein
as the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the
Purchase Price, shares of Common Stock (to the extent
available) and then, if necessary, cash, which shares and/or
cash have an aggregate value equal to the Spread. If the
Board of Directors of the Company shall determine in good
faith that it is likely that (a) sufficient additional
shares of Common Stock could be authorized for issuance upon
exercise in full of the Rights or (b) a reduction in the par
value per share of Common Stock to an amount that is equal
to or less than the Quotient could be authorized, the 30 day
period set forth above may be extended to the extent
necessary, but not more than 90 days after the
Section 11(a)(ii) Trigger Date, in order that the Company
may seek shareholder approval for the authorization of such
additional shares or for the reduction of such par value, as
the case may be (such period, as it may be extended, the
"Substitution Period"). To the extent that the Company
determines that some action need be taken pursuant to the
first and/or second sentences of this Section 11(a)(iii),
the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all
outstanding Rights, and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution
Period in order to seek any authorization of additional
<PAGE 19> shares or reduction in par value and/or to decide
the appropriate form of distribution to be made pursuant to
such first sentence and to determine the value thereof. In
the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in
effect. For purposes of this Section 11(a)(iii), the value
of the Common Stock shall be the current market price (as
determined pursuant to Section 11(d) hereof) per share of
the Common Stock on the Section 11(a)(ii) Trigger Date and
the value of any "common stock equivalent" shall be deemed
to have the same value as the Common Stock on such date.
(b) In case the Company shall fix a record date
for the issuance of rights, options, or warrants to all holders
of Preferred Stock entitling them to subscribe for or purchase
(for a period expiring within 45 calendar days after such record
date) Preferred Stock (or shares having the same rights,
privileges and preferences as the shares of Preferred Stock
("equivalent preferred stock")) or securities convertible into
Preferred Stock or equivalent preferred stock at a price per
share of Preferred Stock or per share of equivalent preferred
stock (or having a conversion price per share, if a security
convertible into Preferred Stock or equivalent preferred stock)
less than the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record
date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred
Stock outstanding on such record date, plus the number of shares
of Preferred Stock which the aggregate offering price of the
total number of shares of Preferred Stock and/or equivalent
preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered)
would purchase at such current market price, and the denominator
of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional
shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the
convertible securities so to be offered are initially
convertible). In case such subscription price may be paid by
delivery of consideration part or all of which may be in a form
other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. Shares of Preferred Stock
owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date
is fixed, and in the event that such rights or warrants are not
so issued, the Purchase Price shall be adjusted to be the
<PAGE 20> Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date
for a distribution to all holders of Preferred Stock (including
any such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation) of
evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred
Stock, but including any dividend payable in stock other than
Preferred Stock) or subscription rights or warrants (excluding
those referred to in Section 11(b) hereof), the Purchase Price to
be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be
the current market price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, less
the fair market value (as determined in good faith by the Board
of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent) of the
portion of the cash, assets, or evidences of indebtedness so to
be distributed or of such subscription rights or warrants
applicable to a share of Preferred Stock and the denominator of
which shall be such current market price (as determined pursuant
to Section 11(d) hereof) per share of Preferred Stock. Such
adjustments shall be made successively whenever such a record
date is fixed, and in the event that such distribution is not so
made, the Purchase Price shall be adjusted to be the Purchase
Price which would have been in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation
hereunder, other than computations made pursuant to
Section 11(a)(iii) hereof, the "current market price" per
share of Common Stock on any date shall be deemed to be the
average of the daily closing prices per share of such Common
Stock for the 30 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date, and for
purposes of computations made pursuant to Section 11(a)(iii)
hereof, the "current market price" per share of Common Stock
on any date shall be deemed to be the average of the daily
closing prices per share of such Common Stock for the
10 consecutive Trading Days immediately following such date;
provided, however, that in the event that the current market
price per share of the Common Stock is determined during a
period following the announcement by the issuer of such
Common Stock of (A) a dividend or distribution on such
Common Stock payable in shares of such Common Stock or
securities convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision,
combination, or reclassification of such Common Stock, and
the ex-dividend date for such dividend or distribution, or
the record date for such subdivision, combination or
<PAGE 21> reclassification shall not have occurred prior to
the commencement of the requisite 30 Trading Day or
10 Trading Day period, as set forth above, then, and in each
such case, the "current market price" shall be properly
adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York
Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities
listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to
trading or, if the shares of Common Stock are not listed or
admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the
high bid and low asked prices in the over-the-counter
market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any
such date the shares of Common Stock are not quoted by any
such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a
market in the Common Stock selected by the Board of
Directors of the Company. If on any such date no market
maker is making a market in the Common Stock, the fair value
of such shares on such date as determined in good faith by
the Board of Directors of the Company shall be used. The
term "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock
are not listed or admitted to trading on any national
securities exchange, a Business Day. If the Common Stock is
not publicly held or not so listed or traded, "current
market price" per share shall mean the fair value per share
as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be
conclusive for all purposes.
(ii) For the purpose of any computation
hereunder, the "current market price" per share of Preferred
Stock shall be determined in the same manner as set forth
above for the Common Stock in clause (i) of this
Section 11(d) (other than the last sentence thereof). If
the current market price per share of Preferred Stock cannot
be determined in the manner provided above or if the
Preferred Stock is not publicly held or listed or traded in
a manner described in clause (i) of this Section 11(d), the
<PAGE 22> "current market price" per share of Preferred
Stock shall be conclusively deemed to be an amount equal
to 100 (as such number may be appropriately adjusted for
such events as stock splits, stock dividends, and
recapitalizations with respect to the Common Stock occurring
after the date of this Agreement) multiplied by the current
market price per share of the Common Stock. If neither the
Common Stock nor the Preferred Stock is publicly held or so
listed or traded, current market price" per share of the
Preferred Stock shall mean the fair value per share as
determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be
conclusive for all purposes. For all purposes of this
Agreement, the "current market price" of one one-hundredth
of a share of Preferred Stock shall be equal to the "current
market price" of one share of Preferred Stock divided
by 100.
(e) Anything herein to the contrary
notwithstanding, no adjustment in the Purchase Price shall be
required unless such adjustment would require an increase or
decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are
not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under
this Section 11 shall be made to the nearest cent or to the
nearest ten-thousandth of a share of Common Stock or other share
or one-millionth of a share of Preferred Stock, as the case may
be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no later
than the earlier of (i) three (3) years from the date of the
transaction which mandates such adjustment, or (ii) the
Expiration Date.
(f) If as a result of an adjustment made pursuant
to Section 11(a)(ii) or Section 13(a) hereof, the holder of any
Right thereafter exercised shall become entitled to receive any
shares of capital stock other than Preferred Stock, thereafter
the number of such other shares so receivable upon exercise of
any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Preferred Stock contained in Sections 11(a), (b), (c), (e), (g),
(h), (i), (j), (k), and (m), and the provisions of Sections 7, 9,
10, 13, and 14 hereof with respect to the Preferred Stock shall
apply on like terms to any such other shares.
(g) All Rights originally issued by the Company
subsequent to any adjustment made to the Purchase Price hereunder
shall evidence the right to purchase, at the adjusted Purchase
Price, the number of one one-hundredths of a share of Preferred
Stock purchasable from time to time hereunder upon exercise of
the Rights, all subject to further adjustment as provided herein.
<PAGE 23>
(h) Unless the Company shall have exercised its
election as provided in Section 11(i), upon each adjustment of
the Purchase Price as a result of the calculations made in
Sections 11(b) and (c), each Right outstanding immediately prior
to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a share of Preferred Stock (calculated to
the nearest one-millionth) obtained by (i) multiplying (x) the
number of one one-hundredths of a share covered by a Right
immediately prior to this adjustment, by (y) the Purchase Price
in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase
Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of
any adjustment of the Purchase Price to adjust the number of
Rights, in lieu of any adjustment in the number of one one-
hundredths of a share of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after the
adjustment in the number of Rights shall be exercisable for the
number of one one-hundredths of a share of Preferred Stock for
which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment
of the number of Rights shall become that number of Rights
(calculated to the nearest one-ten-thousandth) obtained by
dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company
shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment,
and, if known at the time, the amount of the adjustment to be
made. This record date may be the date on which the Purchase
price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number
of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights
Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a
result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender
thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled
after such adjustment. Rights Certificates so to be distributed
shall be issued, executed, and countersigned in the manner
provided for herein (and may bear, at the option of the Company,
<PAGE 24> the adjusted Purchase Price) and shall be registered in
the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in
the Purchase Price or the number of one one-hundredths of a share
of Preferred Stock issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per one one-hundredth of a
share and the number of one one-hundredths of a share which were
expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an
adjustment reducing the Purchase Price below the then stated
value, if any, of the number of one one-hundredths of a share of
Preferred Stock issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable such number of one
one-hundredths of a share of Preferred Stock at such adjusted
Purchase Price.
(l) In any case in which this Section 11 shall
require that an adjustment in the Purchase Price be made
effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record
date the number of one one-hundredths of a share of Preferred
Stock and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the number of one
one-hundredths of a share of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to
such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such
reductions in the Purchase Price, in addition to those
adjustments expressly required by this Section 11, as and to the
extent that in their good faith judgment the Board of Directors
of the Company shall determine to be advisable in order that any
(i) consolidation or subdivision of the Preferred Stock,
(ii) issuance wholly for cash of any shares of Preferred Stock at
less than the current market price, (iii) issuance wholly for
cash of shares of Preferred Stock or securities which by their
terms are convertible into or exchangeable for shares of
Preferred Stock, (iv) stock dividends, or (v) issuance of rights,
options, or warrants referred to in this Section 11, hereafter
made by the Company to holders of its Preferred Stock shall not
be taxable to such stockholders. <PAGE 25>
(n) The Company covenants and agrees that it
shall not, at any time after the Distribution Date,
(i) consolidate with any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series
of related transactions, assets or earning power aggregating more
than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or
more transactions each of which complies with Section 11(o)
hereof), if (x) at the time of or immediately after such
consolidation, merger, or sale there are any rights, warrants,
or, other instruments or securities outstanding or agreements in
effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights or (y) prior
to, simultaneously with, or immediately after such consolidation,
merger, or sale, the shareholders of the Person who constitutes,
or would constitute, the "Principal Party" for purposes of
Section 13(a) hereof shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and
Associates.
(o) The Company covenants and agrees that, after
the Distribution Date, it will not, except as permitted by
Section 27 hereof, take (or permit any Subsidiary to take) any
action if at the time such action is taken it is reasonably
foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time
after the Rights Dividend Declaration Date and prior to the
Distribution Date (i) declare a dividend on the outstanding
shares of Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a
smaller number of shares, the number of Rights associated with
each share of Common Stock then outstanding, or issued or
delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter
associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number
of Rights associated with each share of Common Stock immediately
prior to such event by a fraction the numerator of which shall be
the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of
Common Stock outstanding immediately following the occurrence of
such event.
<PAGE 26>
(q) The failure by the Board of Directors to
declare a Person to be an Adverse Person following such Person
becoming the Beneficial Owner of Voting Securities representing
10% or more of the Total Voting Power shall not imply that such
Person is not an Adverse Person or limit the Board of Directors'
right at any time in the future to declare such Person to be an
Adverse Person.
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares. Whenever an adjustment is made as provided in
Section 11 and Section 13 hereof, the Company shall (a) promptly
prepare a certificate setting forth such adjustment and a brief
statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Stock and the Common Stock, a copy of
such certificate, and (c) mail a brief summary thereof to each
holder of a Rights Certificate (or, if prior to the Distribution
Date, to each holder of a certificate representing shares of
Common Stock) in accordance with Section 26 hereof. The Rights
Agent shall be fully protected in relying on any such certificate
and on any adjustment therein contained.
Section 13. Consolidation, Merger, or Sale or Transfer
of Assets or Earning Power.
(a) In the event that, following the Stock
Acquisition Date, directly or indirectly, (x) the Company shall
consolidate with, or merge with and into, any other Person (other
than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), and the Company shall not be the
continuing or surviving corporation of such consolidation or
merger, (y) any Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall
consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares of
Voting Securities shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or
one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related
transactions, assets or earning power aggregating more than 50%
of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other
than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof);
then, and in each such case (except as may be contemplated by
Section 13(d) hereof), proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance
with the terms of this Agreement, such number of validly
authorized and issued, fully paid, nonassessable, and freely
<PAGE 27> tradeable shares of Common Stock of the Principal Party
(as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal, or other adverse claims,
as shall be equal to the result obtained by (1) multiplying the
then current Purchase Price by the number of one one-hundredths
of a share of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event
(or, if a Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13 Event, multiplying the number of such
one one-hundredths of a share for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii)
Event by the Purchase Price in effect immediately prior to such
first occurrence), and dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to
as the "Purchase Price" for each Right and for all purposes of
this Agreement) by (2) 50% of the current market price
(determined pursuant to Section 11(d)(i) hereof) per share of the
Common Stock of such Principal Party on the date of consummation
of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such
Section 13 Event, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof
shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall
take such steps (including, but not limited to, the reservation
of a sufficient number of shares of its Common Stock) in
connection with the consummation of any such transaction as may
be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in
relation to its shares of Common Stock thereafter deliverable
upon the exercise of the Rights; and (v) the provisions of
Section 11(a)(ii) hereof shall be of no effect following the
first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean (i) in the case
of any transaction described in clause (x) or (y) of the first
sentence of Section 13(a), the Person that is the issuer of any
securities into which shares of Common Stock of the Company are
converted in such merger or consolidation and if no securities
are so issued, the Person that is the other party to such merger
or consolidation and (ii) in the case of any transaction
described in clause (z) of the first sentence of Section 13(a),
the Person that is the party receiving the greatest portion of
the assets or earning power transferred pursuant to such
transaction or transactions; provided, however, that in any such
case, (1) if the Common Stock of such Person is not at such time
and has not been continuously over the preceding 12 month period
registered under Section 12 of the Exchange Act, and such Person
is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, "Principal Party"
shall refer to such other Person; and (2) in case such Person is
a Subsidiary, directly or indirectly, of more than one Person,
<PAGE 28> the Common Stock of two or more of which are and have
been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Stock having the
greatest aggregate market value.
(c) The Company shall not consummate any such
consolidation, merger, sale, or transfer unless the Principal
Party shall have a sufficient number of authorized shares of its
Common Stock which have not been issued or reserved for issuance
to permit the exercise in full of the Rights in accordance with
this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights
Agent a supplemental agreement providing for the terms set forth
in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable after the date of any
consolidation, merger or sale of assets mentioned in
paragraph (a) of this Section 13, the Principal Party will
(i) prepare and file a registration
statement under the Securities Act, with respect to the
Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts
to cause such registration statement to (A) become effective
as soon as practicable after such filing and (B) remain
effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights
historical financial statements for the Principal Party and
each of its Affiliates which comply in all respects with the
requirements for registration on Form 10 under the Exchange
Act.
The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
In the event that a Section 13 Event shall occur at any time
after the occurrence of a Section 11(a)(ii) Event, the Rights
which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to
the contrary, Section 13 shall not be applicable to a transaction
described in subparagraphs (x) and (y) of Section 13(a) if
(i) such transaction is consummated with a Person or Persons (or
a wholly-owned subsidiary of any such Person or Persons) who
acquired shares of Common Stock pursuant to a tender offer or
exchange offer for all outstanding shares of Common Stock at a
price and on terms determined to be in accordance with Section
11(a)(ii)(A) hereof, (ii) the price per share of Common Stock
offered in such transaction is not less than the price per share
of Common Stock paid to all holders of shares of Common Stock
whose shares were purchased pursuant to such tender offer or
exchange offer, and (iii) the form of consideration being offered
to the remaining holders of shares of Common Stock pursuant to
<PAGE 29> such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange
offer. Upon consummation of any such transaction contemplated by
this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue
fractional Rights, except prior to the Distribution Date as
provided in Section 11(p) hereof, or to distribute Rights
Certificates that evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders
of the Rights Certificates with regard to which such fractional
Rights would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Right.
For purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The
closing price of the Rights for any day shall be the last sale
price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the
Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights
are listed or admitted to trading, or if the Rights are not
listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average
of the high bid and low asked prices in the over-the-counter
market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the
Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be
used.
(b) The Company shall not be required to issue
fractional shares of Preferred Stock (other than fractions which
are integral multiples of one one-hundredth of a share of
Preferred Stock) upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-
hundredth of a share of Preferred Stock). In lieu of fractional
shares of Preferred Stock that are not integral multiples of one
one-hundredth of a share of Preferred Stock, the Company may pay
to the registered holders of Rights Certificates at the time such
Rights are exercised as herein provided an amount in cash equal
<PAGE 30> to the same fraction of the current market value of one
one-hundredth of a share of Preferred Stock. For purposes of
this Section 14(b), the current market value of one one-hundredth
of a share of Preferred Stock shall be one one-hundredth of the
closing price of a share of Preferred Stock (as determined
pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering
Event, the Company shall not be required to issue fractional
shares of Common Stock upon exercise of the Rights or to
distribute certificates that evidence fractional shares of Common
Stock. In lieu of fractional shares of Common Stock, the Company
may pay to the registered holders of Rights Certificates at the
time such Rights are exercised as herein provided an amount in
cash equal to the same fraction of the current market value of
one share of Common Stock. For purposes of this Section 14(c),
the current market value of one share of Common Stock shall be
the closing price of one share of Common Stock (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of
the Rights expressly waives his right to receive any fractional
Rights or any fractional shares upon exercise of a Right, except
as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in
respect of this Agreement are vested in the respective registered
holders of the Rights Certificates (and, prior to the
Distribution Date, the registered holders of the Common Stock);
and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent
of the Rights Agent or of the holder of any other Rights
Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce,
and may institute and maintain any suit, action, or proceeding
against the Company to enforce, or otherwise act in respect of,
his right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and
in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement and shall
be entitled to specific performance of the obligations hereunder
and injunctive relief against actual or threatened violations of
the obligations hereunder of any Person subject to this
Agreement.
Section 16. Agreement of Rights Holders. Every
holder of a Right by accepting the same consents and agrees with
the Company and the Rights Agent and with every other holder of a
Right that:
<PAGE 31>
(a) prior to the Distribution Date, the Rights
will be transferable only in connection with the transfer of
Common Stock;
(b) after the Distribution Date, the Rights
Certificates are transferable only on the registry books of the
Rights Agent if surrendered at the principal office or offices of
the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f)
hereof, the Company and the Rights Agent may deem and treat the
person in whose name a Rights Certificate (or, prior to the
Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or
writing on the Rights Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights
Agent) for all purposes whatsoever, and neither the Company nor
the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to
the contrary, neither the Company nor the Rights Agent shall have
any liability to any holder of a Right or other Person as a
result of its inability to perform any of its obligations under
this Agreement by reason of any preliminary or permanent
injunction or other order, decree, or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory, or
administrative agency or commission, or any statute, rule,
regulation, or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company
must use its best efforts to have any such order, decree, or
ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Shareholder. No holder, as such, of any Rights Certificate shall
be entitled to vote, receive dividends, or be deemed for any
purpose the holder of the number of one one-hundredths of a share
of Preferred Stock or any other securities of the Company which
may at any time be issuable upon the exercise of the Rights
represented thereby, nor shall anything contained herein or in
any Rights Certificate be construed to confer upon the holder of
any Rights Certificate, as such, any of the rights of a
shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate
action, or to receive notice of meetings or other actions
affecting shareholders (except as provided in Section 25 hereof),
or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by such Rights Certificate
<PAGE 32> shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its
reasonable expenses and counsel fees and disbursements and other
disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability, or
expense, incurred without negligence, bad faith, or willful
misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the
premises.
(b) The Rights Agent shall be protected and shall
incur no liability for or in respect of any action taken,
suffered, or omitted by it in connection with its administration
of this Agreement in reliance upon any Rights Certificate or
certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice,, direction, consent,
certificate, statement, or other paper or document believed by it
to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name
of Rights Agent.
(a) Any corporation into which the Rights Agent
or any successor Rights Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or
consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or
any further act on the part of any of the parties hereto;
provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any
of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such
Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor or in the name
<PAGE 33> of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights
Agent shall be changed and at such time any of the Rights
Certificates shall have been countersigned but not delivered, the
Rights Agent may adopt the countersignature under its prior name
and deliver Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and
in all such cases such Rights Certificates shall have the full
force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions, by all of which the
Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal
counsel (who may be legal counsel for the Company), and the
opinion of such counsel shall be full and complete authorization
and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties
under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter (including, without limitation,
the identity of any Acquiring Person or Adverse Person and the
determination of "current market price") be proved or established
by the Company prior to taking or suffering any action hereunder,
such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of
the Board, the President, any Executive Vice President, the Chief
Financial Officer, or the Secretary of the Company and delivered
to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or
suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder
only for its own gross negligence, bad faith, or willful
misconduct.
(d) The Rights Agent shall not be liable for or
by reason of any of the statements of fact or recitals contained
in this Agreement or in the Rights Certificates or be required to
verify the same (except as to its countersignature on such Rights
Certificates), but all such statements and recitals are and shall
be deemed to have been made by the Company only.
<PAGE 34>
(e) The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or
the execution and delivery hereof (except the due execution and
delivery hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its
countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in
this Agreement or in any Rights Certificate; nor shall it be
responsible for any adjustment required under the provisions of
Section 11 or Section 13 hereof or responsible for the manner,
method or amount of any such adjustment or the ascertaining of
the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment);
nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation
of any shares of Common Stock or Preferred Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to
whether any shares of Common Stock or Preferred Stock will, when
so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform,
execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further and other
acts, instruments and assurances as may reasonably be required by
the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and
directed to accept instructions with respect to the performance
of its duties hereunder from the Chairman of the Board, the
President, any Executive Vice President, the Chief Financial
Officer, or the Secretary of the Company, and to apply to such
officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with
instructions of any such officer.
(h) The Rights Agent and any shareholder,
director, officer, or employee of the Rights Agent may buy, sell,
or deal in any of the Rights or other securities of the Company
or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were
not Rights Agent under this Agreement. Nothing herein shall
preclude the Rights Agent from acting in any other capacity for
the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any
of the rights or powers hereby vested in it or perform any duty
hereunder either itself or by or through its attorneys or agents,
and the Rights Agent shall not be answerable or accountable for
any act, default, neglect, or misconduct of any such attorneys or
<PAGE 35> agents or for any loss to the Company resulting from
any such act, default, neglect, or misconduct; provided,
however, reasonable care was exercised in the selection and
continued employment thereof.
(j) No provision of this Agreement shall require
the Rights Agent to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its
duties hereunder or in the exercise of its rights if there shall
be reasonable grounds for believing that repayment of such funds
or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate
surrendered to the Rights Agent for exercise or transfer, the
certificate attached to the form of assignment or form of
election to purchase, as the case may be, has either not been
completed or indicates an affirmative response to clause 1
and/or 2 thereof, the Rights Agent shall not take any further
action with respect to such requested exercise or transfer
without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent
or any successor Rights Agent may resign and be discharged from
its duties under this Agreement upon 30 days' notice in writing
mailed to the Company, and to each transfer agent of the Common
Stock and Preferred Stock, by registered or certified mail, and
to the holders, if any, of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 10 days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and
to each transfer agent of the Common Stock and Preferred Stock,
by registered or certified mail, and to the holders of the Rights
Certificates by first-class mail. If the Rights Agent shall
resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights
Agent. If the Company shall fail to make such appointment within
a period of 10 days after giving notice of such removal, or
within a period of 30 days after it has been notified in writing
of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights
Certificate (who shall, with such notice, submit his Rights
Certificate for inspection by the Company), as the case may be,
then any registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by
the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of any
state of the United States so long as such corporation is
authorized under such laws to exercise corporate trust powers and
is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights
Agent a combined capital and surplus of at least $50,000,000 or
the performance of which is guaranteed by a corporation with a
<PAGE 36> combined capital and surplus of at least $50,000,000.
After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties, and responsibilities as if
it had been originally named as Rights Agent without further act
or deed; but the predecessor Rights Agent shall deliver and
transfer to the successor Rights Agent any property at the time
held by it hereunder, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose.
Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor
Rights Agent and each transfer agent of the Common Stock and the
Preferred Stock, and mail a notice thereof in writing to the
registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the
resignation or removal of, the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the
Rights to the contrary, the Company may, at its option, issue new
Rights Certificates evidencing Rights in such form as may be
approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price and the number, kind, or class of
shares or other securities or property purchasable under the
Rights Certificates made in accordance with the provisions of
this Agreement. In addition, in connection with the issuance or
sale of shares of Common Stock following the Distribution Date
and prior to the redemption or expiration of the Rights, the
Company (a) shall, with respect to shares of Common Stock so
issued or sold pursuant to the exercise of stock options or under
any employee plan or arrangement, granted or awarded on or prior
to the Distribution Date, or upon the exercise, conversion, or
exchange of securities hereinafter issued by the Company, and
(b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates
representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights
Certificate shall be issued if, and to the extent that, the
Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to
the Company or the Person to whom such Rights Certificate would
be issued, and (ii) no such Rights Certificate shall be issued
if, and to the extent that, appropriate adjustment shall
otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at
its option, at any time prior to the earlier of (i) the close of
business on the twentieth Business Day following the Stock
Acquisition Date (or such later date as may be determined by a
majority of the Continuing Directors; provided, however, that
such date shall not be extended at such time if the Rights are
<PAGE 37> not then redeemable), or (ii) the Final Expiration
Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $.001 per Right, as such amount
may be appropriately adjusted to reflect any stock split, stock
dividend, or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the
"Redemption Price"); provided, however, that if, following the
occurrence of the Stock Acquisition Date and following the
expiration of the right of redemption hereunder but prior to any
Triggering Event, (i) a Person who is an Acquiring Person shall
have transferred or otherwise disposed of a number of shares of
Common Stock in one transaction or series of transactions, not
directly or indirectly involving the Company or any of its
Subsidiaries, such that such Person is thereafter a Beneficial
Owner of less than 10% of the outstanding shares of Common Stock
or Voting Securities representing less than 10% of Total Voting
Power, and (ii) there are no other Persons, immediately following
the occurrence of the event described in clause (i), who are
Acquiring Persons, then the right of redemption shall be
reinstated and thereafter be subject to the provisions of this
Section 23. Notwithstanding the foregoing, the Board of
Directors may not redeem any Rights following a determination
pursuant to Section 11(a)(ii)(B) that any Person is an Adverse
Person. Notwithstanding anything contained in this Agreement to
the contrary, the Rights shall not be exercisable after the first
occurrence of a Section 11(a)(ii) Event until such time as the
Company's right of redemption hereunder has expired. The Company
may, at its option, pay the Redemption Price in cash, shares of
Common Stock (based on the "current market price", as defined in
Section 11(d)(i) hereof, of the Common Stock at the time of
redemption), or any other form of consideration deemed
appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of
Directors of the Company ordering the redemption of the Rights,
and without any further action and without any notice, the right
to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held. The Company shall
promptly give public notice of such redemption and notice to the
Rights Agent; provided, however, the failure to give, or any
defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of
Directors ordering the redemption of the Rights, the Company
shall mail a notice to all holders of the then outstanding Rights
at each holder's last address as it appears upon the registry
books of the Rights Agent or, prior to the Distribution Date, on
the registry books of the transfer agent for the Common Stock.
Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice.
Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
<PAGE 38>
Section 24. Exchange.
(a) The Board of Directors of the Company may, at
its option, at any time and from time to time after the first
occurrence of a Section 11(a)(ii) Event, exchange all or part of
the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant to the provisions
of Section 7(e) hereof) for shares of Common Stock or common
stock equivalents (as defined in Section 11(a)(iii) hereof), or
any combination thereof, at an exchange ratio of one share of
Common Stock, or such number of common stock equivalents or units
representing fractions thereof as would be deemed to have the
same value as one share of Common Stock, per Right, appropriately
adjusted to reflect any stock split, stock dividend, or similar
transaction occurring after the date hereof (such exchange ratio
being hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Board of
Directors of the Company ordering the exchange of any Rights
pursuant to subsection (a) of this Section 24 and without any
further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of
Common Stock and/or common stock equivalents equal to the number
of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any
defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such
exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by
which the exchange of the shares of Common Stock and/or common
stock equivalents for Rights will be effected and, in the event
of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof) held by each
holder of Rights.
(c) In the event that the number of shares of
Common Stock which are authorized by the Company's Articles of
Incorporation but not outstanding or reserved for issuance for
purposes other than upon exercise of the Rights are not
sufficient to permit an exchange of Rights as contemplated in
accordance with this Section 24, the Company may, at its option,
take all such action as may be necessary to authorize additional
shares of Common Stock for issuance upon exchange of the Rights.
(d) The Company shall not be required to issue
fractional shares of Common Stock or to distribute certificates
which evidence fractional shares of Common Stock. In lieu of
<PAGE 39> such fractional shares of Common Stock, the Company
shall pay to the registered holders of Rights with regard to
which such fractional shares of Common Stock would otherwise be
issuable an amount in cash equal to the same fraction of the
value of a whole share of Common Stock. For purposes of this
Section 24, the value of a whole share of Common Stock shall be
the closing price (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior
to the date of exchange pursuant to this Section 24, and the
value of any common stock equivalent shall be deemed to have the
same value as the Common Stock on such date.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any
time after the Distribution Date, (i) to pay any dividend payable
in stock of any class to the holders of Preferred Stock or to
make any other distribution to the holders of Preferred Stock
(other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the
holders of Preferred Stock rights or warrants to subscribe for or
to purchase any additional shares of Preferred Stock or shares of
stock of any class or any other securities, rights or options, or
(iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than
a Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), or to effect any sale or other transfer
(or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related
transactions of more than 50% of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies
with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution, or winding up of the Company, then, in each such
case, the Company shall give to each holder of a Rights
Certificate, to the extent feasible and in accordance with
Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend,
distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the shares of
Preferred Stock, if any such date is to be fixed, and such notice
shall be so given in the case of any action covered by clause (i)
or (ii) above at least 20 days prior to the record date for
determining holders of the shares of Preferred Stock for purposes
of such action, and in the case of any such other action, at
least 20 days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of the
shares of Preferred Stock whichever shall be the earlier.
<PAGE 40>
(b) In case any Section 11(a)(ii) Event shall
occur, then, (i) the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, to the
extent feasible and in accordance with Section 26 hereof, a
notice of the occurrence of such event, which shall specify the
event and the consequences of the event to holders of Rights
under Section 11(a)(ii) hereof, and (ii) all references in the
preceding paragraph to Preferred Stock shall be deemed thereafter
to refer to Common Stock and/or, if appropriate, other
securities.
Section 26. Notices. Notices or demands authorized by
this Agreement to be given or made by the Rights Agent or by the
holder of any Rights Certificate to or on the Company shall be
sufficiently given or made if sent by United States mail, postage
prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:
Old Guard Group, Inc.
2929 Lititz Pike
Lancaster, PA 17601
Attention: David E. Hosler
Chairman, President and Chief
Executive Officer
Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company
or by the holder of any Rights Certificate to or on the Rights
Agent shall be sufficiently given or made if sent by United
States mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attention: _______________
President and
Chief Executive Officer
Notices or demands authorized by this Agreement to be
given or made by the Company or the Rights Agent to the holder of
any Rights Certificate (or, if prior to the Distribution Date, to
the holder of certificates representing shares of Common Stock)
shall be sufficiently given or made if sent by United States
mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Prior to the
Distribution Date and subject to the penultimate sentence of this
Section 27, the Company and the Rights Agent shall, if the
Company so directs, supplement or amend any provision of this
Agreement without the approval of any holders of certificates
<PAGE 41> representing shares of Common Stock. From and after
the Distribution Date and subject to the penultimate sentence of
this Section 27, the Company and the Rights Agent shall, if the
Company so directs, supplement or amend this Agreement without
the approval of any holders of Rights Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any
provision contained herein which may be defective or inconsistent
with any other provisions herein, or (iii) to change or
supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Rights
Certificates. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed
supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or
amendment.
Section 28. Successors. All the covenants and
provisions of this Agreement by or for the benefit of the Company
or the Rights Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of
Directors. For all purposes of this Agreement, any calculation
of the number of shares of Voting Securities outstanding at any
particular time, including for purposes of determining the
particular percentage of such outstanding shares of Voting
Securities of which any Person is the Beneficial Owner, shall be
made in accordance with the last sentence of Rule 13d-3(d)(1)(i)
of the General Rules and Regulations under the Exchange Act as in
effect on the date hereof. The Board of Directors of the Company
(with, where specifically provided for herein, the concurrence of
the Continuing Directors) shall have the exclusive power and
authority to administer this Agreement and to exercise all rights
and powers specifically granted to the Board (with, where
specifically provided for herein, the concurrence of the
Continuing Directors) or to the Company, or as may be necessary
or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the
provisions of this Agreement, and (ii) make all determinations
deemed necessary or advisable for the administration of this
Agreement (including (i) a determination as to the identity of
the Affiliates and Associates of any person, (ii) a determination
as to the extent of the Beneficial Ownership of any Person, and
(iii) a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations,
interpretations, and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board (with, where specifically
provided for herein, the concurrence of the Continuing Directors)
in good faith, shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all
other parties, and (y) not subject the Board (or the Continuing
Directors) to any liability to the holders of the Rights.
<PAGE 42>
Section 30. Benefits of this Agreement. Nothing in
this Agreement shall be construed to give to any Person other
than the Company, the Rights Agent, and the registered holders of
the Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock) any legal or equitable
right, remedy, or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the
Rights Agent, and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, registered
holders of the Common Stock).
Section 31. Severability. If any term, provision,
covenant, or restriction of this Agreement is held by a court of
competent jurisdiction or other authority to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants,
and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated;
provided, however, that notwithstanding anything in this
Agreement to the contrary, if any such term, provision, covenant,
or restriction is held by such court or authority to be invalid,
void, or unenforceable and the Board of Directors of the Company
determines in its good faith judgment that severing the invalid
language from this Agreement would adversely affect the purpose
or effect of this Agreement, the right of redemption set forth in
Section 23 hereof shall be reinstated and shall not expire until
the close of business on the tenth day following the date of such
determination by the Board of Directors. Without limiting the
foregoing, if any provision requiring that a determination be
made by less than the entire Board is held by a court of
competent jurisdiction or other authority to be invalid, void, or
unenforceable, such determination shall then be made by the
entire Board.
Section 32. Governing Law. This Agreement, each Right
and each Rights Certificate issued hereunder shall be deemed to
be a contract made under the laws of the Commonwealth of
Pennsylvania and for all purposes shall be governed by and
construed in accordance with the laws of the Commonwealth
applicable to contracts made and to be performed entirely within
the Commonwealth.
Section 33. Counterparts. This Agreement may be
executed in any number of counterparts and each of such
counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive
headings of the several Sections of this Agreement are inserted
<PAGE 43> for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
OLD GUARD GROUP, INC.
By
David E. Hosler
Chairman, President and
Chief Executive Officer
Attest:
Steven D. Dyer
Secretary
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By
Name:________________
President and
Chief Executive Officer
Attest:
Secretary
PAGE 44
<PAGE>
Exhibit A
TERMS OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
OLD GUARD GROUP, INC.
RESOLVED that, pursuant to the authority vested in the
Board of Directors of the Corporation by the Articles of
Incorporation, the Board of Directors does hereby provide for the
issue of a series of Preferred Stock, without par value, of the
Corporation, to be designated "Series a Junior Participating
Preferred Stock" (hereinafter referred to as the "Series A
Preferred Stock" or "this Series"), initially consisting of
40,000 shares, and to the extent that the designations, powers,
preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series A
Preferred Stock are not stated and expressed in the Articles of
Incorporation, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in
the Articles of Incorporation shall be deemed to have the
meanings provided therein):
1. Designation and Amount. The designation of the
series of Preferred Stock created by this resolution shall be
Series A Junior Participating Preferred Stock and the number of
shares constituting such Series is Forty Thousand (40,000). Such
number of shares may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less
than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any
outstanding securities of the Corporation convertible into shares
of this Series.
2. Dividends.
(A) Subject to the prior and superior rights of
the holders of any shares of any series of Preferred Stock
ranking prior and superior to the shares of this Series with
respect to dividends, the holders of shares of this Series shall
be entitled to receive, when and as declared by the Board of
Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on April 1, July 1,
October 1, and January 1 of each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
<PAGE A-1> first issuance of a share or fraction of a share of
this Series, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $10.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares
of Common Stock (by reclassification or otherwise), declared on
the Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or
fraction of a share of this Series. In the event the Company
shall at any time after February 9, 1999 (the "Rights Declaration
Date") declare any dividend on the Common Stock payable in shares
of Common Stock, subdivide the outstanding shares of Common
Stock, or combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the amount to
which holders of shares of this Series were entitled immediately
prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Company shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $10.00 per share on Series A Preferred Stock
shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of
issue of such shares of this Series, unless the date of issue of
such shares is prior to the record date for the first Quarterly
Dividend Payment Date in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders
of shares of this Series entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on
the shares of this Series in an amount less than the total amount
of such dividends at the time accrued and payable on such shares
<PAGE A-2> shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders
of shares of this Series entitled to receive payment of a
dividend or distribution declared thereon, which record date
shall be no more than ten (10) days prior to the date fixed for
the payment thereof.
3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock
shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the shareholders of the Corporation. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such
case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any
other resolutions creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of Common Stock and any other
capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock shall have
no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate
action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other
dividends or distributions payable on the Series A Preferred
Stock as provided in Section 2 are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall
not:
<PAGE A-3>
(i) declare or pay dividends, or make any
other distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any
other distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock;
or
(iv) redeem or purchase or otherwise acquire
for consideration any shares of Series A Preferred Stock, or
any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary
of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the
Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other resolutions creating a series of
<PAGE A-4> Preferred Stock or any similar stock or as otherwise
required by law.
6. Liquidation, Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (A) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100.00 per share, plus an
amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount to be distributed per
share to holders of Common Stock, or (B) to the holders of shares
of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion
to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. In
the event the Corporation shall at any time declare or pay any
dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the aggregate amount to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under the proviso in clause (A)
of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
7. Consolidation, Merger, Etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the outstanding shares
of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case
each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject
to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in
<PAGE A-5> shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding
immediately prior to such event.
8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
9. Rank. The Series A Preferred Stock shall rank,
with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the
Corporation's Preferred Stock.
10. Amendment. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock,
voting together as a single class.
PAGE A-6
<PAGE>
Exhibit B
[Form of Rights Certificate]
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER FEBRUARY 9, 2009, OR EARLIER IF REDEEMED OR
EXCHANGED BY OLD GUARD GROUP, INC. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF OLD GUARD GROUP, INC., AT $.001 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR
ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT)
AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
[THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN (ACQUIRING)
(ADVERSE) PERSON OR AN AFFILIATE OR ASSOCIATE OF AN (ACQUIRING)
(ADVERSE) PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED
HEREBY MAY BECOME NULL AND VOID UNDER THE CIRCUMSTANCES AND WITH THE
EFFECT SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]
Rights Certificate
OLD GUARD GROUP, INC.
This certifies that _____________________, or registered
assigns, is the registered owner of the number of Rights set forth
above, each of which entitles the owner thereof, subject to the
terms, provisions and conditions of the Rights Agreement, dated as of
February 9, 1999 (the "Rights Agreement"), between Old Guard Group,
Inc. a Pennsylvania corporation (the "Company"), and American Stock
Transfer & Trust Company, a New York trust company, as rights agent
(the "Rights Agent), to purchase from the Company at any time prior
to 5:00 P.M. (New York City time) on February 9, 2009, at the office
or offices of the Rights Agent designated for such purpose, or its
successors as Rights Agent, one one-hundredth of a fully paid,
nonassessable share of Series A Junior Participating Preferred Stock
(the "Preferred Stock") of the Company, at a purchase price of Sixty
Dollars ($60.00) per one one-hundredth of a share (the "Purchase
Price"), upon presentation and surrender of this Rights Certificate
with the Form of Election to Purchase and related Certificate duly
executed. The number of Rights evidenced by this Rights Certificate
(and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Purchase Price per share set forth
above, are the number and Purchase Price as of March 2, 1999, based
on the Preferred Stock as constituted at such date. The Company
reserves the right to require prior to the occurrence of a Triggering
Event (as defined in the Rights Agreement) that a number of Rights be
<PAGE B-1> exercised so that only whole shares of Preferred Stock
will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as
defined in the Rights Agreement), if the Rights evidenced by this
Rights Certificate are beneficially owned by (i) an Acquiring Person,
an Adverse Person, or an Affiliate or Associate of any such Person
(as such terms are defined in the Rights Agreement), (ii) a
transferee of any such Acquiring Person, Adverse Person, Associate,
or Affiliate, or (iii) under certain circumstances specified in the
Rights Agreement, a transferee of a person who, after such transfer,
became an Acquiring Person, an Adverse Person, or an Affiliate or
Associate of any such Person, such Rights shall become null and void
and no holder hereof shall have any right with respect to such Rights
from and after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of shares of Preferred Stock or other securities
which may be purchased upon the exercise of the Rights evidenced by
this Rights Certificate are subject to modification and adjustment
upon the happening of certain events, including a Triggering Event.
This Rights Certificate is subject to all of the terms,
provisions, and conditions of the Rights Agreement, which terms,
provisions, and conditions are hereby incorporated herein by
reference and made a part hereof and to which Rights Agreement
reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties, and immunities hereunder
of the Rights Agent, the Company, and the holders of the Rights
Certificates, which limitations of rights include the temporary
suspension of the exercisability of such Rights under the specific
circumstances set forth in the Rights Agreement. Copies of the
Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the
Rights Agent.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices of
the Rights Agent designated for such purpose, may be exchanged for
another Rights Certificate or Rights Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like
aggregate number of one one-hundredths of a share of Preferred Stock
as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase.
If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not
exercised.
Subject to the provisions of the Rights Agreement, the
Rights evidenced by this Certificate (i) may (unless the Board of
Directors shall have made a determination pursuant to
Section 11(a)(ii)(B) of the Rights Agreement that a Person is an
Adverse Person) be redeemed by the Company at its option at a
<PAGE B-2> redemption price of $.001 per Right at any time prior to
the earlier of the close of business on (a) the twentieth business
day following the Stock Acquisition Date (as such time period may be
extended pursuant to the Rights Agreement), and (b) the Final
Expiration Date.
No fractional shares of Preferred Stock will be issued upon
the exercise of any Right or Rights evidenced hereby (other than
fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock, which may, at the election of the Company,
be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of
shares of Preferred Stock or of any other securities of the Company
which may at any time be issuable on the exercise hereof, nor shall
anything contained in the Rights Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action, or,
to receive notice of meetings or other actions affecting shareholders
(except as provided in the Rights Agreement), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights
evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory
for any purpose until it shall have been countersigned by the Rights
Agent.
WITNESS the facsimile signature of the proper officers of
the Company and its corporate seal.
Dated as of _________________, ____
OLD GUARD GROUP, INC.
By________________________________
Title:
Attest:___________________________
Secretary
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as rights agent
By________________________
Authorized Signature
PAGE B-3
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED _____________________________________________
hereby sells, assigns and transfers unto _______________________
________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________
this Rights Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the within Rights
Certificate on the books of the within-named Company, with full power
of substitution.
Dated: _______________, _____
__________________________________
Signature
Signature Guaranteed: ______________________________
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States.
PAGE B-4
<PAGE>
Certificate
The undersigned hereby certifies by checking the
appropriate boxes that
(1) this Rights Certificate [ ] is [ ] is not being
sold, assigned and transferred by or on behalf of a Person who is or
was an Acquiring Person, an Adverse Person, or an Affiliate or
Associate of any such Person (as such terms are defined pursuant to
the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by
this Rights Certificate from any Person who is, was or subsequently
became an Acquiring Person, an Adverse Person, or an Affiliate or
Associate of any such Person.
Dated: _______________, _____ __________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate
must correspond to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or
any change whatsoever.
PAGE B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
To: OLD GUARD GROUP, INC.:
The undersigned hereby irrevocably elects to exercise
______________ Rights represented by this Rights Certificate to
purchase the shares of Preferred Stock issuable upon the exercise
of the Rights (or such other securities of the Company or of any
other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued
in the name of and delivered to:
Please insert social security
or other identifying number
________________________________________________________________
(Please print name and address)
________________________________________________________________
If such number of Rights shall not be all the Rights
evidenced by this Rights Certificate, a new Rights Certificate
for the balance of such Rights shall be registered in the name of
and delivered to:
Please insert social security
or other identifying number
________________________________________________________________
(Please print name and address)
________________________________________________________________
________________________________________________________________
Dated: ___________________, _____
__________________________________
Signature
Signature Guaranteed: ____________________________
Signatures must be guaranteed by a member firm of a
registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office or correspondent in the United
States.
PAGE B-6
<PAGE>
Certificate
The undersigned hereby certifies by checking the
appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate
[ ] are [ ] are not being exercised by or on behalf of a Person
who is or was an Acquiring Person, an Adverse Person or an
Affiliate or Associate of any such Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced
by this Rights Certificate from any Person who is, was or became
an Acquiring Person, an Adverse Person or an Affiliate or
Associate of any such Person.
Dated: ______________, ____ __________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face
of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
PAGE B-7
<PAGE>
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
On February 9, 1999, the Board of Directors of Old
Guard Group, Inc. (the "Company") declared a dividend
distribution of one Right for each outstanding share of the
Company's Common Stock, no par value (the "Common Stock"), to
shareholders of record at the close of business on March 2, 1999.
Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, without par value (the "Preferred
Stock"), at a Purchase Price of $60.00, subject to adjustment.
The description and terms of the Rights are set forth
in a Rights Agreement dated February 9, 1999 (the "Rights
Agreement") between the Company and American Stock Transfer &
Trust Company, as rights agent, which is incorporated herein by
reference.
Initially, the Rights will not be exercisable and no
separate certificates evidencing the Rights ("Rights
Certificates") will be distributed. The Rights will be evidenced
by Common Stock certificates representing shares then outstanding
and will automatically trade with the Common Stock. The Rights
will separate from the Common Stock on a "Distribution Date." A
"Distribution Date" will occur upon the earlier of
(i) 20 business days following a public announcement that a
person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to
acquire, 19.9% or more of the outstanding shares of Common Stock
or voting securities representing 19.9% or more of the total
voting power of the Company (the "Stock Acquisition Date"),
(ii) 20 business days (or such later date as the Board of
Directors shall determine) following the commencement of a tender
offer or exchange offer that would result in a person or group
acquiring 19.9% or more of such outstanding shares of Common
Stock or total voting power, or (iii) 20 business days following
the determination by the Board of Directors, after reasonable
inquiry and investigation, including consultation with such
persons as such directors shall deem appropriate, that, with
respect to any person who has, along or together with his
affiliates or associates, acquired 10% or more of such
outstanding shares of Common Stock or total voting power of the
Company (i) such beneficial ownership by such person is intended
to cause the Company to repurchase the voting securities
beneficially owned by such person or to cause pressure on the
Company to take action or enter into a transaction or series of
transactions intended to provide such person with short-term
financial gain under circumstances where the Board determines
that the best long-term interests of the Company and its
shareholders would not be served by taking such action or
<PAGE C-1> entering into such transaction or transactions at that
time or (ii) such ownership is causing or is likely to cause a
material adverse impact on the business or prospects of the
Company (any such person being referred to herein and in the
Rights Agreement as an "Adverse Person").
Until the Distribution Date, (i) the Rights will be
evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates,
(ii) new Common Stock certificates issued after March 2, 1999
will contain a notation incorporating the Rights Agreement by
reference, and (iii) the surrender for transfer of any
certificate for Common Stock outstanding will also constitute the
transfer of the Rights associated with the Common Stock
represented by such certificate.
The Rights are not exercisable until the Distribution
Date and will expire at the close of business on February 9,
2009, unless earlier redeemed as described below. Pursuant to
the Rights Agreement, the Company reserves the right to require
prior to the occurrence of a Triggering Event (as defined below)
that, upon any exercise of Rights, a number of Rights be
exercised so that only whole share of Preferred Stock will be
issued.
As soon as practicable after the Distribution Date,
Rights Certificates will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date
and, thereafter, the separate Rights Certificate alone will
represent the Rights. Except as otherwise provided in the Rights
Agreement or determined by the Board of Directors, only shares of
Common Stock issued prior to the Distribution Date will be issued
with Rights.
In the event that (i) a person becomes an Acquiring
Person (except pursuant to an offer for all outstanding shares of
the Company's voting securities which at least a majority of the
Continuing Directors (as defined below) determines to be fair to
and otherwise in the best interests of the Company and its
shareholders), (ii) an Acquiring Person engages in one or more
"self-dealing" transactions as defined in the Rights Agreement,
(iii) the Company is the surviving corporation in a merger with
an Acquiring Person, (iv) during such time that there exists an
Acquiring Person, a recapitalization or reverse stock split
occurs which results in such Acquiring Person's proportionate
ownership interest being increased by more than 1%, or (v) any
person is determined to be an Adverse Person (any of the
foregoing, a "Flip-in Event"), each holder of a Right will
thereafter have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property, or other
securities of the Company) having a value (based on the lowest
closing price of the Common Stock during the twelve-month period
preceding the Flip-in Event) equal to two times the exercise
price of the Right. Notwithstanding the foregoing, following the
<PAGE C-2> occurrence of a Flip-in Event, all Rights that are, or
(under certain circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person or an Adverse
Person (or by certain related parties) will be null and void.
Rights are not exercisable following the occurrence of a Flip-in
Event, however, until such time as the Rights are no longer
redeemable by the Company as set forth below.
For example, at an exercise price of $60.00 per Right,
each Right not owned by an Acquiring Person or an Adverse Person
(or by certain related parties) following a Flip-in Event would
entitle its holder to purchase $120.00 worth of Common Stock
based on the lowest closing price of the Common Stock during the
twelve-month period preceding the Flip-in Event (or other
consideration, as noted above) for $60.00. Assuming that the
lowest closing price of the Common Stock during such period was
$10.00, the holder of each valid Right would be entitled to
purchase 12 shares of Common Stock for $60.00.
The term "Continuing Directors" means any member of the
Board of Directors of the Company who was a member of the Board
prior to the date of the Rights Agreement, and any person who is
subsequently elected to the Board if such person is recommended
or approved by a majority of the Continuing Directors, but shall
not include an Acquiring Person, an Adverse Person, or an
affiliate or associate of an Acquiring Person or Adverse Person,
or any representative of the foregoing entities.
In the event that, at any time following the Stock
Acquisition Date, (i) the Company is acquired in a merger or
other business combination transaction in which the Company is
not the surviving corporation (other than a merger which follows
an offer for all outstanding voting securities of the Company,
which at least a majority of the Continuing Directors determines
to be fair to and otherwise in the best interests of the Company
and its shareholders, and the merger price is not less than, and
the form of consideration is the same as, that paid in the tender
or exchange offer) or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right
(except Rights which previously have been voided as set forth
above) shall thereafter have the right to receive, upon exercise,
common stock of the acquiring company having a value equal to two
times the exercise price of the Right. The events set forth in
this paragraph and in the second preceding paragraph are referred
to as "Triggering Events."
The Purchase Price payable and the amount of Preferred
Stock or other securities or property issuable upon exercise of
the Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a
subdivision, combination, or reclassification of, the Preferred
Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or
convertible securities at less than the current market price of
<PAGE C-3> the Preferred Stock, or (iii) upon the distribution to
holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Purchase
Price will be required until cumulative adjustments amount to at
least 1% of the Purchase Price. No fractional shares of
Preferred Stock will be issued and, in lieu thereof, an
adjustment in cash will be made based on the market price of the
Preferred Stock on the last trading date prior to the date of
exercise.
At any time during the twenty business days following
the Stock Acquisition Date, the Company may redeem the Rights in
whole, but not in part, at a price of $.001 per Right (payable in
cash, Common Stock, or other consideration deemed appropriate as
determined by the Board of Directors). At any time prior to the
date the Rights would otherwise become nonredeemable, a majority
of the Continuing Directors may extend the period for redemption.
The Company's right of redemption may be reinstated if an
Acquiring Person reduces such Person's beneficial or total voting
power ownership to less than 10% of the outstanding shares of
Common Stock or total voting power in a transaction or series of
transactions not involving the Company and there is then no other
Acquiring Person. Immediately upon the action of the Board of
Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to
receive the $.001 redemption price. Notwithstanding the
foregoing, the Board of Directors may not redeem the Rights
following a determination that any person is an Adverse Person.
At any time after the occurrence of a Flip-in Event,
the Board of Directors may exchange the Rights (other than Rights
owned by an Acquiring Person or an Adverse Person or an affiliate
or an associate of any such person, which have become void), in
whole or in part, at an exchange ratio of one share of Common
Stock, and/or other equity securities deemed to have the
equivalent value, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as
such, will have no rights as a shareholder of the Company,
including, without limitation, the right to vote or to receive
dividends. While the distribution of the Rights will not be
taxable to shareholders or to the Company, shareholders may,
depending upon the circumstances, recognize taxable income in the
event that the Rights become exercisable for Common Stock (or
other consideration) of the Company or for common stock of the
acquiring company as set forth above, or are exchanged as
provided in the preceding paragraph.
Other than those provisions relating to the principal
economic terms of the Rights, any of the provisions of the Rights
<PAGE C-4> Agreement may be amended by the Board of Directors of
the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be
amended by the Board in order to cure any ambiguity, to make
changes which do not adversely affect the interests of holders of
Rights (excluding the interests of any Acquiring Person or
Adverse Person or an affiliate or associate of any such person),
or to shorten or lengthen any time period under the Rights
Agreement; however, no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are
not redeemable.
A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to a
Registration Statement on Form 8-A dated _______ __, 1999. A
copy of the Rights Agreement is available free of charge from the
Rights Agent. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by
reference to the Rights Agreement.
<PAGE C-5>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Old Guard Group, Inc. and Subsidiaries
on Form S-8 (File No. 333-46175) of our reports dated
February 24, 1999, except for Notes 15 and 16 for which the date
is March 5, 1999, on our audits of the consolidated financial
statements and financial statement schedules of Old Guard Group,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998,
which reports are included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 30, 1999
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