<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
____________.
0-16533
------------------------
(Commission File Number)
Old Guard Group, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2852984
---------------------- ----------------------
(State of Incorporation) (IRS Employer ID Number)
2929 Lititz Pike, Lancaster, PA 17604
-------------------------------------- ---------
(Address of Principal Executive Offices) ( Zip Code)
717-569-5361
-----------------------------
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of Shares Outstanding as of April 30, 2000:
Common Stock (No Par Value) 3,708,571
- --------------------------- ----------------------
(Title of Class) (Outstanding Shares)
<PAGE>
OLD GUARD GROUP, INC.
Form 10-Q
For the Quarter Ended March 31, 2000
Contents
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended March 31,
2000 and 1999 4
Consolidated Statement of Shareholders' Equity for
the Three Months Ended March 31, 2000 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Change in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8 - K 15
</TABLE>
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost ..................... $ 34,333,234 $ 35,128,390
Available for sale, at fair value ....................... 62,444,363 62,142,865
Preferred stocks, available for sale, at fair value .......... 6,379,689 6,441,999
Common stocks, available for sale, at fair value ............. 17,802,960 16,437,575
Other invested assets ........................................ 4,532,762 4,541,644
------------- -------------
Total investments ................................. 125,493,008 124,692,473
Cash and cash equivalents ........................................... 10,966,877 14,092,314
Receivables:
Premiums ..................................................... 16,689,651 14,556,771
Reinsurance .................................................. 2,949,331 8,992,729
Investment income ............................................ 1,401,196 1,343,594
Affiliates ................................................... 1,053,624 444,521
Prepaid reinsurance premiums ........................................ 9,777,152 419,842
Deferred policy acquisition costs ................................... 9,597,438 11,306,258
Deferred income taxes ............................................... 969,502 1,009,666
Property and equipment .............................................. 19,149,939 19,220,861
Goodwill ............................................................ 647,949 661,735
Other assets ........................................................ 3,451,461 2,734,526
------------- -------------
Total assets ................................................... $ 202,147,128 $ 199,475,290
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses .......................... $ 56,664,798 $ 55,697,390
Unearned premiums ............................................ 49,056,597 46,371,346
Accrued expenses ............................................. 4,065,513 5,949,491
Long-term debt ............................................... 12,583,396 12,822,562
ESOP liability ............................................... 3,151,597 3,234,293
Other liabilities ............................................ 4,591,061 3,833,748
------------- -------------
Total liabilities ....................................... 130,112,962 127,908,830
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Minority interest ................................................... 895,433 935,675
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Shareholders' Equity:
Preferred stock (5,000,000 shares authorized; none issued and
outstanding) ............................................ -- --
Common Stock (15,000,000 shares authorized;
4,257,327 shares issued; 3,599,634 and
3,596,353 shares outstanding; no par) ................... 38,865,703 38,865,703
Additional paid-in capital ................................... 4,201,377 4,212,021
Deferred compensation ........................................ (4,562,345) (4,778,432)
Retained earnings ............................................ 38,905,724 38,540,660
Net unrealized investment gains, net of deferred income taxes 3,098,898 3,215,957
Treasury stock, at cost (657,693 and 660,974 shares) ......... (9,370,624) (9,425,124)
------------- -------------
Total shareholders' equity .............................. 71,138,733 70,630,785
------------- -------------
Total liabilities and shareholders' equity .............. $ 202,147,128 $ 199,475,290
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- ---------------
<S> <C> <C>
Revenue:
Net premiums written ................................. $ 18,254,269 $ 26,482,463
Change in net unearned premiums ...................... 6,672,059 (1,100,385)
------------ ------------
Net premiums earned .................................. 24,926,328 25,382,078
Investment income, net of expenses ................... 1,747,318 1,444,410
Net realized investment gains ........................ 613,672 907,703
Other revenue ........................................ 779,120 1,165,455
------------ ------------
Total revenue ........................................ 28,066,438 28,899,646
------------ ------------
Expenses:
Losses and loss adjustment expenses incurred ......... 17,131,531 15,830,450
Operating expenses ................................... 9,849,027 12,562,329
Interest expense ..................................... 305,900 146,607
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Total expenses ....................................... 27,286,458 28,539,386
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Income before income tax and minority interest ................ 779,980 360,260
Income tax expense ............................................ 262,173 96,710
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Income before minority interest ............................... 517,807 263,550
Minority interest in income (loss) of consolidated subsidiaries (16,469) 91,708
------------ ------------
Net income .................................................... $ 534,276 $ 171,842
------------ ------------
Other comprehensive loss, before tax:
Unrealized holding gains (losses) .................... 436,310 (250,833)
Less: Reclassification adjustment for gains
included in net income ............................. 613,672 907,703
------------ ------------
Other comprehensive loss, before tax .......................... (177,362) (1,158,536)
Income tax expense related to items of other
comprehensive income ................................. (60,303) (367,615)
------------ ------------
Other comprehensive loss, net of tax .......................... (117,059) (790,921)
------------ ------------
Comprehensive income (loss) ................................... $ 417,217 $ (619,079)
============ ============
Earnings per share
Basic ................................................ 0.16 0.05
Diluted .............................................. 0.16 0.05
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
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>
Balance, January 1, 2000 3,596,353 $38,865,703 $4,212,021 $(4,778,432) $38,540,660 $3,215,957 $(9,425,124) $70,630,785
Comprehensive income:
Net income 534,276 534,276
Unrealized losses on
investments, net of
reclassification
adjustment (117,059) (117,059)
----------
Comprehensive income 417,217
----------
Dividends ($.05 per share) (169,212) (169,212)
Reissuance of treasury stock 2,081 (10,183) 31,475 21,292
Stock-based compensation 1,200 (461) 216,087 23,025 238,651
--------- ----------- ---------- ------------ ----------- ---------- ------------ -----------
Balance, March 31, 2000 3,599,634 $38,865,703 $4,201,377 $(4,562,345) $38,905,724 $3,098,898 $(9,370,624) $71,138,733
========= =========== ========== ============ =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income .......................................................... $ 534,276 $ 171,842
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................... 571,825 587,429
Net realized investment gains ............................... (613,672) (907,426)
Deferred income tax expenses ................................ 100,468 129,403
Non-cash compensation expense ............................... 238,650 223,479
Other ....................................................... (19,655) 22,641
(Increase) decrease in assets:
Receivables .......................................... 3,243,813 (2,643,290)
Prepaid reinsurance premiums ......................... (9,357,310) 313,342
Deferred policy acquisition costs .................... 1,708,820 (263,226)
Other assets ......................................... (806,935) (301,637)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses .................. 967,408 2,641,916
Unearned premiums .................................... 2,685,251 787,042
Accrued expenses ..................................... (1,883,978) (648,617)
Other liabilities .................................... 1,330,538 (449,826)
------------ ------------
Net cash used by operating activites ........................ (1,300,501) (336,928)
------------ ------------
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity ............................................ (244,783) (1,380,472)
Available for sale .......................................... (6,591,075) (3,879,155)
Proceeds from sales of fixed income securities
Available for sale .......................................... 5,391,320 6,201,427
Proceeds from maturities of fixed income securities
Held to maturity ............................................ 1,036,370 2,295,200
Available for sale .......................................... 1,437,431 1,217,473
Cost of equity securities acquired .................................. (2,370,997) (1,880,173)
Proceeds from sales of equity securities ............................ 1,069,293 1,824,506
Change in receivable/payable for securities ......................... (483,225) 223,781
Proceeds from sales of other invested assets ........................ -- 18,000
Acquisition of subsidiary, net of cash acquired ..................... -- (3,659,431)
Cost of purchases of property and equipment ......................... (575,715) (844,461)
Proceeds from sales of property and equipment ....................... -- 350
------------ ------------
Net cash provided (used) by investing activities ............ (1,331,381) 137,045
------------ ------------
Cash flows from financing activities:
Exercise of common stock options .................................... -- 79,100
Purchase of treasury stock .......................................... -- (297,903)
Proceeds from reissuance of treasury stock .......................... 21,292 36,888
Payment of dividends ................................................ (169,212) (185,237)
Distributions to minority interest .................................. (23,773)
Proceeds from issuance of long-term debt ............................ -- 6,000,000
Repayment of long-term debt ......................................... (321,862) (143,078)
------------ ------------
Net cash provided (used) by financing activities ............ (493,555) 5,489,770
------------ ------------
Net increase (decrease) in cash and cash equivalents ........ (3,125,437) 5,289,887
------------ ------------
Cash and cash equivalents at beginning of period ............................. 14,092,314 6,121,983
------------ ------------
Cash and cash equivalents at end of period ................................... $ 10,966,877 $ 11,411,870
============== ==============
Cash paid (received) during the year for:
Interest ............................................................ $ 303,814 $ 125,652
Income taxes ........................................................ $ (48,667) $ 17,093
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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OLD GUARD GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The consolidated financial statements include the accounts of Old Guard
Group, Inc. 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), Investors Southern Corporation
(Southern), Old Guard Insurance Management Company (OGIMC), 2929 Service
Corporation and OGGI's 80% owned subsidiary, First Delaware Insurance Company
(First Delaware). Effective January 1, 2000, New Castle Insurance Company of
Delaware, previously a wholly owned subsidiary of Old Guard Group, Inc., merged
into Old Guard.
2. BASIS OF PRESENTATION
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management, necessary
to a fair presentation of the financial position, results of operations, and
cash flows for the interim periods. The results of operations for interim
periods are not necessarily indicative of results to be expected for the full
year.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes for the year ended December
31, 1999 included in OGGI's 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the current year presentation.
3. EARNINGS PER SHARE
The following table reconciles the numerator and denominator used in
basic earnings per share to diluted earnings per share for the three months
ended:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
---------------------- --------------------
<S> <C> <C>
Net income for basic and diluted
earnings per share $ 534,276 $ 171,842
====================== ====================
Average common shares outstanding 3,279,502 3,563,037
Treasury shares in MRP trust 108,978 133,736
Outstanding stock options 42,031 40,250
---------------------- --------------------
Average dilutive shares outstanding 3,430,511 3,737,023
====================== ====================
</TABLE>
7
<PAGE>
4. BUSINESS SEGMENTS
OGGI has two business segments, property and casualty (P&C) and title.
Old Guard, Old Guard Fire, First Patriot and First Delaware make up the P&C
segment while Southern makes up the title segment. The following table reflects
OGGI's total revenues and pre-tax income by principle business segment.
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Revenue:
P & C operations .............. $ 24,289,523 $ 24,007,775
Title operations .............. 2,956,943 3,755,267
Net realized investment gains . 613,672 907,703
Other ......................... 206,300 228,901
------------ ------------
Total revenue ................. $ 28,066,438 $ 28,899,646
============ ============
Pretax income:
P & C operations .............. $ 570,953 $ (677,369)
Title operations .............. (162,267) 259,147
Net realized investment gains . 613,672 907,703
Other ......................... (242,378) (129,221)
------------ ------------
Income before income taxes
and minority interest .............. 779,980 360,260
Income tax expense .................... 262,173 96,710
------------ ------------
Income before minority interest ....... 517,807 263,550
Minority interest in earnings (loss) of
consolidated subsidiaries ..... (16,469) 91,708
------------ ------------
Net income ............................ $ 534,276 $ 171,842
============ ============
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (i) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (ii) a hedge of the exposure of variable
cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure
8
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of a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. In June 1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," was issued which defers the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. While OGGI is presently
evaluating the impact of SFAS No. 133, the adoption of SFAS No. 133 is not
expected to have a material impact on OGGI's financial condition, results of
operations or liquidity.
6. SUBSEQUENT EVENT
On May 10, 2000, OGGI and Ohio Farmers Insurance Company (Ohio
Farmers) signed an Agreement and Plan of Reorganization whereby Ohio Farmers
has agreed to purchase all of the outstanding capital stock of OGGI for $12
per share in cash. The transaction, which is subject to shareholder approval
and regulatory approvals, is expected to close in the fourth quarter of 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PROPERTY AND CASUALTY (P&C) OPERATIONS
PREMIUMS. Gross P&C premiums written increased $7.6 million, or 31.2%,
to $32.0 million for the three months ended March 31, 2000 compared to the three
months ended March 31, 1999. The cause of this increase was significant growth
in direct written premium in personal automobile and workers' compensation
lines, as well as moderate growth in commercial package and commercial
automobile lines of business.
Premiums ceded to reinsurers increased $15.4 million to $16.0 million
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999. The increase in ceded premiums was directly attributable to the
institution of a 20% quota share reinsurance agreement effective January 1, 2000
on all business written by Old Guard, Old Guard Fire, and First Patriot (the
Insurance Companies). Under the agreement, the Insurance Companies cede 20% of
subject premiums and losses and loss adjustment expenses, subject to a loss
corridor, and receive a 36% ceding commission on the premium ceded. Ceded
premiums written and ceded premiums earned under the agreement amounted to $14.6
million, which includes $8.8 million related to the transfer of unearned premium
at the inception of the agreement, and $5.3 million, respectively, for the
quarter ending March 31, 2000. The result is a pro-rata sharing of risk with the
reinsurer and protection of the Insurance Companies' surplus from high
frequency, low severity losses.
Net premiums written decreased $7.8 million, or 32.7%, to $16.0 million
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999. The change in net premiums earned was negligible during the
three months ended March 31, 2000 compared to the three months ended March 31,
1999. The decrease in net premiums written and the relatively unchanged level of
net premiums earned were directly attributable to the effects of the
implementation of the Insurance Companies' quota share treaty offset by
increases in gross premiums written as previously discussed.
OTHER REVENUE. Other revenue of P&C operations decreased $29,000,
or 13.2% to $189,000 for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Net losses and loss adjustment
expenses incurred in P&C operations increased by $1.3 million, or 8.3%, to $17.0
million for the three months ended March 31, 2000 compared to the three months
ended March 31, 1999. The loss and loss adjustment expense ratio was 75.1% for
the three months ended March 31, 2000 versus 69.4% for the comparable period in
1999. The increase in loss and loss adjustment expenses can be attributed to
higher than expected losses in personal lines products including personal
automobile and homeowners.
OPERATING EXPENSES. Operating expenses of P&C operations decreased by
$2.3 million, or 25.5%, to $6.8 million for the three months ended March 31,
2000 compared to the three months ended March 31, 1999. The expense ratio was
29.4% for the three months ended March 31, 2000 compared to 39.7% for the three
months ended March 31, 1999. These decreases are
10
<PAGE>
primarily the result of the implementation of the 20% quota share agreement that
generated $2.9 million in commission income in the first quarter of 2000.
TITLE OPERATIONS
PREMIUMS. Title insurance premiums decreased approximately $476,000, or
17.4%, to $2.3 million for the three months ended March 31, 2000, compared to
$2.7 million for the three months ended March 31, 1999. Higher interest rates
during the current quarter, which tend to reduce the number of real estate
transactions, contributed to both a decline in direct premiums of 38.6% and
affiliated and non-affiliated agency premiums of 13.0% as compared to the same
period of the prior year.
OTHER REVENUE. Other revenues of title operations, which consist
primarily of search, title exam, copy charges and escrow fees, decreased
approximately $357,000, or 37.8%, to $0.6 million for the current period as
compared to $0.9 million for the comparable prior year period. Higher interest
rates and their impact on real estate transactions also negatively impacted
other revenues.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment
expenses incurred in title operations decreased $8,000, or 6.9%, to $109,000 for
the three months ended March 31, 2000 compared to $117,000 for the three months
ended March 31, 1999 primarily as a result of the decrease in earned premiums
for the same period. The expense related to the change in reserves for known
claims increased $21,000 to $94,000 for the three months ended March 31, 2000
versus $73,000 for the comparable period in 1999, while the expense related to
the change in the reserve for incurred but not reported (IBNR) claims decreased
$29,000 to $15,000 for the current year period compared to $44,000 in the prior
year period.
OPERATING EXPENSES. Operating expenses of title operations decreased
approximately $366,000, or 10.9%, to $3.0 million for the current year quarter
compared to $3.4 million for the comparable quarter of the prior year. The
decrease is comprised of a decrease in agent commissions of approximately
$125,000 and a decrease in other operating expenses of approximately $240,000.
The decrease in commissions paid to agents of approximately 9.1% was due
primarily to the 8.9% decrease in premiums written by non-affiliated agencies
during the period. The decrease in other operating expenses is primarily the
result of a decrease in salary and employee benefits of $196,000 and other costs
of $44,000.
COMBINED P&C AND TITLE OPERATIONS
NET INVESTMENT INCOME. Net investment income increased 21.0%, to
$1,747,000 for the three months ended March 31, 2000 from $1,444,000 for the
three months ended March 31, 1999 while average cash and invested assets
increased $8.5 million, or 6.7%. For the three months ended March 31, 2000, the
yield on average cash and invested assets was 5.2% compared to 4.6% for the
three months ended March 31, 1999. The increase in yield is primarily a result
of the increasing interest rate environment.
NET REALIZED INVESTMENT GAINS. Net realized investment gains were
$614,000 for the three months ended March 31, 2000, compared to $908,000 for the
comparable period in 1999.
11
<PAGE>
The reduction in realized investment gains is a result of increasing interest
rates which caused a decline in the prices of fixed income securities.
FEDERAL INCOME TAX EXPENSE. Federal income tax as a percentage of
pre-tax income was 33.6% and 26.8% for the three months ended March 31, 2000 and
1999, respectively. The increase in the effective tax rate is primarily
attributable to the reduction in tax exempt income from minority interests in
subsidiaries of Southern.
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's property and casualty subsidiaries have in place an unsecured
line of credit with a financial institution under which they may borrow up to an
aggregate of $1.5 million to fund claims in the event of catastrophic losses not
covered under reinsurance. As of March 31, 2000, no amounts were borrowed
against these lines of credit. Under a separate $400,000 unsecured operating
line of credit, Southern has borrowed $352,368 to meet its operating cash
requirements.
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 and bears interest at LIBOR plus 1.50%. At March 31, 2000, OGGI maintained
a balance of $9,069,000 on this line of credit of which $5,400,000 was used to
fund the acquisition of Southern and $3,669,000 used to purchase treasury stock.
Net cash used by operating activities was $1,301,000 and $337,000
during the first three months of 2000 and 1999, respectively. In 2000, the
negative cash flow from operations is primarily a result of increased loss and
loss adjustment expense payments.
In 2000, cash used by investing activities was $1.3 million as OGGI
continued to invest in computer systems as well as lowered its cash balance by
investing in equity securities. In 1999, cash provided by investing activities
was $137,000 as OGGI sold some fixed income securities and invested the proceeds
in Southern.
In 2000, cash used by financing activities was $494,000, a direct
result of the repayment of bank loans and the payment of dividends. In 1999,
cash provided by financing activities was $5.5 million as OGGI obtained a $6.0
million loan to help it finance its acquisition of Southern. The $6,000,000 loan
has a term of five years with a fixed interest rate of 7.05%.
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. Insurance companies are restricted by the insurance laws of the
state of domicile as to the amount of dividends or other distributions they may
pay without the prior approval of the state regulatory authority. Under
12
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Pennsylvania law, the maximum amount that may generally be paid by an insurance
company during any twelve-month period after notice to, but without prior
approval of, the Pennsylvania Insurance Department, cannot exceed the greater of
10% of the insurance company's statutory surplus as reported on the most recent
annual statement filed with the Department, or the net income of the insurance
company for the period covered by such annual statement.
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 loss adjustment expenses,
including losses that have been incurred but not yet reported, make adequate
provision for the effects of inflation.
YEAR 2000 ISSUE
As a consequence of the programming convention which utilized a
two-digit field rather than a four-digit field, certain information technology
("IT") systems and non-IT systems, such as equipment with embedded chips or
microprocessors, required reprogramming or replacement to enable them to perform
correctly date operations involving year 2000 or later ("Year 2000 Issue").
With the assistance of outside consulting groups, OGGI began evaluating
and reprogramming its IT systems to address the Year 2000 Issue in late 1995.
OGGI's Year 2000 systems' program consisted of four phases: (i) identifying
systems requiring remediation; (ii) assessing the requirements to remediate
those systems; (iii) remediating those systems to make them Year 2000 ready by
either modifying or replacing them; and (iv) testing the systems for Year 2000
readiness, including, where applicable, that they properly interface with third
parties. Prior to the end of 1999, OGGI remediated and tested its IT systems
that were determined to be critical to maintaining operations or the failure of
which would result in significant costs or disruption of operation ("mission
critical systems") and its non-IT systems. As of May 1, 2000, OGGI has not
experienced any material disruptions to its business due to Year 2000 Issues
with its mission critical systems or non-IT systems. The cost of OGGI's Year
2000 readiness work was approximately $200,000.
As of May 1, 2000, OGGI was not aware of any Year 2000 problems with
third parties with which OGGI has a direct and material relationship.
It is possible that OGGI's computerized systems could be affected in
the future by the Year 2000 Issue. OGGI has numerous computerized interfaces
with third parties that are possibly vulnerable to failure if those third
parties have not adequately addressed their Year 2000 Issues. Systems failures
resulting from these issues could cause significant disruptions to OGGI's
operations. As of May 1, 2000, there do not appear to have been any such
failures.
Although there have been no apparent Year 2000 problems related to
internal systems and third parties, OGGI may have underwriting exposure related
to the Year 2000 Issue. Businesses materially damaged as a result of the Year
2000 Issue may attempt to recoup their
13
<PAGE>
losses by claiming coverage under various types of insurance policies
underwritten by OGGI and by ceding companies to whom OGGI provides reinsurance.
OGGI has attempted, whenever possible, to avoid or otherwise limit its potential
Year 2000 exposure through its underwriting process. In the event that claims
for Year 2000 Issues are asserted against OGGI, it is not possible to predict
whether or not coverage could ultimately be found to exist by courts in various
jurisdictions, or, if found, the effect thereof on OGGI. In addition, even if
such coverage were found not to exist, which cannot be predicted, the costs of
litigation could be material. In the absence of any claims experience at this
time, such losses and costs are not currently reasonably estimable. As of May 1,
2000, OGGI has not received notice of any material claims from insureds based on
the Year 2000 Issue.
FORWARD-LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and other statements
made throughout this report constitute "forward-looking statements" (as such
term is defined in the Private Securities Litigation Reform Act of 1995). Such
forward-looking statements involve certain assumptions, risks and uncertainties
that could cause actual results to differ materially from those included in or
contemplated by the statements. These assumptions, risks and uncertainties
include, but are not limited to those associated with factors affecting the
property-casualty and title insurance industries 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; the inability of OGGI or third parties to achieve Year 2000 compliance
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.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1997, four policyholders, purportedly on behalf of all
policyholders, filed an action against the Group, the Insurance Companies, and
their directors in the United States District Court for the eastern District of
Pennsylvania. Plaintiffs seek damages for the loss of their alleged equity
interest in the Insurance Companies as a result of the conversion, based on
numerous theories, including breach of fiduciary duty and civil rights claims.
In April 1997, defendants filed a motion to dismiss for failure to state a cause
of action. The motion to dismiss was granted as to two counts and denied as to
the remaining nine counts. In January 1998, plaintiffs filed a motion for class
certification which was granted in September 1998. In July 1998, defendants
filed a motion for summary judgment with respect to the remaining constitutional
claims. In March 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. OGGI has filed a motion for
summary judgment on all remaining claims. The issues relating to that motion
have been fully briefed, but no hearing has yet been scheduled. Discovery is
concluded, but no trial date has been set.
ITEM 2. CHANGE IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K - None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLD GUARD GROUP, INC.
Date: May 12, 2000 /s/ Henry J. Straub
--------------------- -----------------------------------------
Henry J. Straub,
Chief Financial Officer and
Treasurer (principal financial officer and
principal accounting officer)
16
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
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0
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