SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED].
For the fiscal year ended December 31, 2001.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED].
For the transition period from _____________ to ____________.
Commission file number
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below: Highlands Insurance Group Employees'
Retirement and Savings Plan.
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office: Highlands Insurance Group, Inc., 1000
Lenox Drive, Lawrenceville, New Jersey 08648.
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
ANNUAL REPORT ON FORM 11-K
December 31, 2001
INDEX
PAGE
----
AUDITED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS ..................................... ii
Exhibits ............................................................... iv
i
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Plan administrators have duly caused this annual report to be signed on the
Plan's behalf by the undersigned hereunto duly authorized.
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Dated: July 1, 2002 By: /s/ Georgean M. Wardzinski
-----------------------------------
Georgean M. Wardzinski,
Plan Administrator
iii
EXHIBIT INDEX
Exhibit
23 Consent of KPMG LLP
iv
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Financial Statements and Schedule
December 31, 2001 and 2000
(With Independent Auditors' Report Thereon)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Table of Contents
Page
Independent Auditors' Report 1
Statements of Net Assets Available for Plan Benefits - December 31, 2001 and 2000 2
Statement of Changes in Net Assets Available for Plan Benefits - Year ended December 31, 2001 3
Notes to Financial Statements 4 - 9
Schedule
Schedule H, Line 4i - Schedule of Assets (Held at End of Year) 10
Independent Auditors' Report
To the Administrative Committee of the
Highlands Insurance Group
Employees' Retirement and Savings Plan:
We have audited the accompanying statements of net assets available for plan
benefits of Highlands Insurance Group Employees' Retirement and Savings Plan
(the Plan) as of December 31, 2001 and 2000 and the related statement of changes
in net assets available for plan benefits for the year ended December 31, 2001.
These financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Highlands
Insurance Group Employees' Retirement and Savings Plan as of December 31, 2001
and 2000 and the changes in net assets available for plan benefits for the year
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule H, Line 4i -
Schedule of Assets (Held at End of Year) as of December 31, 2001 is presented
for the purpose of additional analysis and is not a required part of the basic
financial statements but is supplementary information required by the Department
of Labor Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. This supplemental schedule is the
responsibility of the Plan's management. The supplemental schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated, in all material
respects, in relation to the basic financial statements taken as a whole.
KPMG LLP
June 21, 2002
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statements of Net Assets Available for Plan Benefits
December 31, 2001 and 2000
2001 2000
----------- ----------
Assets:
Investments at fair value (note 2):
Common/Collective trust $53,791,455 66,599,367
Common stock 106,377 1,651,757
Participant loans 920,541 1,373,798
----------- ----------
Total investments at fair value 54,818,373 69,624,922
----------- ----------
Employee contribution receivable 85,034 --
Cash 267,989 27,874
----------- ----------
Total assets 55,171,396 69,652,796
----------- ----------
Net assets available for plan benefits $55,171,396 69,652,796
=========== ==========
See accompanying notes to financial statements.
2
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Statement of Changes in Net Assets Available for Plan Benefits
Year ended December 31, 2001
Additions to net assets:
Contributions:
Employer $ 208,992
Employee 2,687,506
Rollover 44,176
------------
Total contributions 2,940,674
Investment income:
Interest and dividend income 1,402,618
Net depreciation in fair value of investments (4,494,502)
Net realized losses (2,286,938)
------------
Net unrealized and realized depreciation in fair value of investments (6,781,440)
------------
Total investment income (loss) (5,378,822)
Total additions (reductions) (2,438,148)
Deductions from net assets:
Benefits paid on behalf of participants 12,039,502
Administrative expenses 3,750
------------
Total deductions 12,043,252
------------
Net decrease in net assets available for plan benefits (14,481,400)
Net assets available for plan benefits - beginning of year 69,652,796
------------
Net assets available for plan benefits - end of year $ 55,171,396
============
See accompanying notes to financial statements.
3
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
(1) Summary of the Plan
The following brief description of the Highlands Insurance Group Employees'
Retirement and Savings Plan (the Plan) is provided for general information
purposes only. Participants should refer to the Plan document for more
complete information.
The Plan is a defined contribution plan covering eligible employees of
Highlands Insurance Group, Inc., a Delaware corporation, and its
subsidiaries (the Company). CitiStreet, a State Street and Citigroup
Company, serves as the Plan's Trustee and recordkeeper. The Plan is
sponsored and advised by a committee (i.e., Administrative Committee) whose
members are appointed by the board of directors of the Company. One member
of the Committee is designated as Plan Administrator.
Effective July 31, 2000, as approved by the board of directors of the
Company, the NNIG Profit Sharing and Retirement Savings Plan was merged
into the Plan, as amended. Assets of $18,257,032 consisting of $18,252,665
in cash and $4,367 in loans were transferred to the Plan.
Effective December 7, 2001, the Company announced its intention to cease
writing new and renewal business and to run off existing operations. The
Administrative Committee of the board of directors amended the Plan to
provide that participants whose employment with the Company terminates
after December 7, 2001 shall have a 100% vested interest in the employer's
contributions account.
(a) Participation
Since January 1, 1997, an employee is eligible for participation in
the Plan on the first day of employment.
(b) Contributions
The Plan allows the participant to contribute between 1% and 15% of
the participant's calendar year compensation up to an annual maximum
pre-tax income of $10,500 for both 2001 and 2000. The total pre-tax
contribution in any year is subject to certain limitations set forth
in the Internal Revenue Code (the Code). The Company's matching
contributions are equal to the percent declared for the year, if any,
by the Company's board of directors, up to 6% of the participant's
eligible compensation contributed to the Plan. For 2001, the Company
provided a match of 3% on the first 6% of the participant's eligible
compensation contributed to the Plan. The Company may also make a
discretionary annual profit sharing contribution at the Plan's year
end as determined by the board of directors. There was no
discretionary profit sharing contribution for the 2001 or 2000 Plan
years.
In order to be eligible for the discretionary annual profit sharing
contribution, the participant must have completed one year of service
and be actively employed by the employer on December 31 of the Plan
year for which the contribution applies unless the participant meets
certain other conditions specified by the Plan.
4 (Continued)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
Participants may elect to make after-tax contributions to the Plan, in
addition to their pre-tax contribution, not to exceed 15% in total for
2001 and 2000, respectively, of their eligible earnings during the
Plan year. After-tax contributions are not subject to Company match
and/or profit sharing contributions.
(c) Investment Options
Effective July 1, 1998, the following investment options were
available under the Plan:
. Stable Value Income Fund - Amounts invested in this fund are
invested with a view toward preserving principal and provide a
rate of return competitive with other fixed-income investments by
investing primarily in investment contracts.
. Life Solutions Growth Fund - Amounts invested in this fund are
invested with a view toward providing capital growth by investing
primarily in stocks.
. Franklin Small Cap Growth Fund - This aggressive growth stock
fund seeks maximum capital appreciation by investing in domestic
small companies with market capitalizations generally under $1
billion.
. Highlands Insurance Group Stock Fund - This single stock fund
seeks growth over the long term through appreciation in the value
of Highlands Insurance Group, Inc. common stock. The fund
provides an opportunity to become an owner in the Company and
share directly in its future performance (see note 6).
Effective July 31, 2000, the following investment options were made
available to participants under the Plan:
. U.S. Bond Index Fund - Amounts invested in this fund are invested
with a view toward providing income from corporate bonds, U.S.
Government bonds, mortgage-backed and asset-backed securities.
. S&P 500 Index Fund - Amounts invested in this fund are invested
with a view toward providing income and asset appreciation from
the 500 stocks in the S&P Index in proportion to their weighting
in the Index.
. International Stock Fund - Amounts invested in this fund are
invested for capital appreciation by investing primarily in
companies that tend to be large capitalization, multi-national
stocks that provide growth opportunities.
5 (Continued)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
. Advice Account - This account is designed for participants
desiring personalized savings and investment advice relative to
their 401(k) plan investments. The Advice Account is an
additional investment option within the Plan, which includes an
exclusive selection of funds, personalized investment advice, and
retirement planning through ongoing guidance from a trained and
licensed Financial Advisor. The funds cover all major asset
classes and are designed to work together to effectively
diversify the participant's portfolio. The five Advice Account
funds are as follows:
- SSgA Advice Money Market Fund - Amounts invested in this
fund are invested in high-quality money market securities
and other short-term debt instruments.
- SSgA Advice Bond Index Fund - Amounts invested in this fund
are invested in a diversified portfolio representative of
the broad domestic bond market.
- SSgA Advice Large Company Stock Index Fund - Amounts
invested in this fund are invested in Standard & Poor's 500
Index stocks in proportion to their weighting in the Index.
- SSgA Advice Small Company Stock Index Fund - Amounts
invested in this fund are invested in all 2,000 stocks in
the Russell 2000 Index in proportion to their weighting in
the Index.
- SSgA Advice International Stock Index Fund - Amounts
invested in this fund are invested in investments in the
MSCI EAFE Index in proportion to their weighting in the
Index.
(d) Benefits Paid to Participants
Upon application and approval by the Administrative Committee, a
participant may withdraw, during active employment, all or part of the
participant's after-tax employee contribution account balance and,
under certain conditions, such as hardship withdrawals, the vested
portion of the participant's employer contribution account balance.
Participants have a vested interest in the employer contribution
account based on their years of service as follows:
Vested
Years of service percentage
-------------------------------- ----------------
Less than 3 0%
At least 3 but less than 4 33-1/3
At least 4 but less than 5 66-2/3
5 or more 100
6 (Continued)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
The right to benefits under the Plan is nonforfeitable upon the
attainment of normal retirement age (age 65 and 5 years of service
effective July 1, 1998), permanent disability, or death. A retired or
disabled participant or the beneficiary of a deceased participant is
entitled to receive the total amounts in the participant and employer
contribution accounts as of the date of retirement, permanent
disability, or death, whether the participant's interest in such
accounts is vested or not. A participant who has terminated employment
is entitled to receive the total amounts in the participant
contribution accounts and the participant's vested interest in the
amounts in the employer contribution account. Effective December 7,
2001, active nonterminated employees became 100% vested in the
employer contributions account.
(e) Forfeitures
Forfeitures represent the nonvested portion of a terminated
participant's employer contribution account. Forfeited employer
tax-deferred contributions are used to reduce future Company
contributions. Forfeited nonvested accounts totaled $214,461 and
$229,479 at December 31, 2001 and 2000, respectively.
(f) Participant Loans
The Plan allows for loans to be made to participants subject to ERISA
and Company guidelines. A participant may request a loan for up to 50%
of the participant's vested interest up to a maximum of $50,000. No
more than two loans may be outstanding at any time with $1,000 as a
minimum loan amount. The term of the loan cannot exceed five years and
requires level amortization with payments not less frequently than
quarterly. The loan interest rate for 2001 and 2000 is the prime rate
plus 1%. All loans are due and payable from the participant's account
upon termination of employment.
(g) Participant Accounts
Each participant's account is credited with the participant's
contribution and an allocation of the Company's matching contribution,
Plan earnings, and administrative expenses.
(h) Fees and Expenses
For 2001, the Company paid certain administrative expenses for the
Plan related to compliance and operational activities as defined by
the Department of Labor. Such expenses were $53,353 and $115,706 in
2001 and 2000, respectively.
(i) Plan Amendment, Modification, and Termination
The board of directors of the Company may amend, modify, or terminate
the Plan at any time. Effective December 7, 2001, the Administrative
Committee of the board of directors declared a partial plan
termination. All participants whose employment with the Company
terminates after December 7, 2001 shall have a 100% vested interest in
the employer's contributions account.
7 (Continued)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
(2) Summary of Significant Accounting Policies
(a) Investment Valuation
The Plan's investments are stated at fair value. Quoted market prices
are used to value investments. Shares of Common/Collective trusts are
valued at the net asset value of shares held by the Plan at year end.
Purchases and sales of securities are recorded on a trade-date basis.
Dividends are recorded on the ex-dividend date. Participant loans are
stated at cost which approximates their fair value.
(b) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133). SFAS No. 133 requires that an entity recognize all
derivatives and measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. Pursuant to SFAS No. 137, the Plan was required to adopt SFAS
No. 133 effective January 1, 2001. There was no impact to the Plan's
financial statements upon adoption.
(c) Accrued Liabilities
Accrued liabilities represent amounts owed for Plan expenses,
including investment expenses, as of the end of the year.
(3) Investments
Individual investments in excess of 5% of net assets available for plan
benefits are as follows:
2001 2000
--------------- --------------
Franklin Small Cap Growth Fund $ 3,861,192 6,573,130
Life Solutions Growth Fund 11,086,422 15,530,227
Stable Value Income Fund 22,871,731 25,266,062
S&P 500 Index Fund 10,140,246 14,883,771
U.S. Bond Index Fund 3,551,267 --
During 2001, the Plan's investments (including gains and losses on
investments bought and sold, as well as held during the year) depreciated
in value by $6,781,440, as follows:
Common/Collective trust $ (4,454,431)
Common stock (2,327,009)
-------------
$ (6,781,440)
=============
8 (Continued)
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Notes to Financial Statements
December 31, 2001 and 2000
(4) Nonparticipant-directed Investments
Information about the net assets and the significant components of the
changes in net assets relating to the nonparticipant-directed investments
is as follows:
December 31
------------------------------
2001 2000
------------- -------------
Net assets:
Common $ 106,377 1,651,757
Year ended
December 31,
2001
-------------
Changes in net assets:
Contributions $ 965,197
Investment income 2,547
Net depreciation, in fair value (2,329,562)
Benefits paid on behalf of participants (79,938)
Transfers to participant-directed investments (103,518)
Administrative expenses (106)
-------------
$ (1,545,380)
=============
Effective December 7, 2001, the Plan, as amended, changes the employer's
matching contribution from company stock to cash.
(5) Federal Income Tax Matters
The Plan obtained its latest determination letter on August 14, 1996, in
which the Internal Revenue Service stated that the Plan, as then designed,
was in compliance with the applicable requirements of the Code. The Plan
has been amended since receiving the determination letter. However, the
Plan Administrator and the Plan's tax counsel believe that the Plan is
designed and is currently being operated in compliance with the applicable
provisions of the Code.
(6) Subsequent Events
The Administrative Committee of the board of directors amended the plan to
prohibit contributions or transfers from other investment funds to the
Highlands Stock Fund after January 9, 2002.
On April 17, 2002, the Plan Sponsor was changed from Highlands Insurance
Group, Inc., a Delaware corporation, to Highlands Insurance Company, a
Texas corporation.
9
Schedule
HIGHLANDS INSURANCE GROUP
EMPLOYEES' RETIREMENT AND SAVINGS PLAN
Schedule H, Line 4i - Schedule of Assets (Held at End of
Year) December 31, 2001
Identity of issuer, borrower, Fair
lessor, or similar party Description of investment Cost value
- ------------------------------- ---------------------------------- ------------- -------------
* State Street Bank and Trust Stable Value Income Fund $ 19,735,253 22,871,731
* State Street Bank and Trust Life Solutions Growth Fund 11,826,727 11,086,422
* State Street Bank and Trust S&P 500 Index Fund 11,197,190 10,140,246
* State Street Bank and Trust Franklin Small Cap Growth Fund 4,213,373 3,861,192
* State Street Bank and Trust U.S. Bond Index Fund 3,214,155 3,551,267
* State Street Bank and Trust Highlands Insurance Group Stock
Fund 1,986,718 106,377
* State Street Bank and Trust International Stock Fund 1,128,762 938,978
* State Street Bank and Trust SSgA Advice Large Company
Stock Index Fund 389,895 397,906
* State Street Bank and Trust SSgA Advice Small Company
Stock Index Fund 200,247 219,810
* State Street Bank and Trust SSgA Advice Money Market Fund 90,457 93,231
* State Street Bank and Trust SSgA Advice International
Stock Index Fund 124,425 121,151
* State Street Bank and Trust SSgA Advice Bond Index Fund 498,374 509,521
* Participant loans (Bearing interest at rates between
7% and 10.5% maturing
in years 2002 through 2005) 920,541 920,541
------------- -------------
$ 55,526,117 54,818,373
============= =============
* Represents party-in-interest transactions.
See accompanying independent auditors' report.
10