<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
- - -------------
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- - ------------- THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From_______________To______________
Commission File Number 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
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
-------- -------
As of August 1, 1994, 113,106,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
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<TABLE>
<CAPTION>
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Statement of Income for the Quarters and Six-Month
Periods Ended June 30, 1994 and 1993 (Unaudited)................... 2
Consolidated Balance Sheet at June 30, 1994 (Unaudited) and
December 31, 1993.................................................. 3
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 1994 (Unaudited)................... 4
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 1994 and 1993 (Unaudited)................... 5
Notes to Consolidated Financial Statements (Unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
PART II. OTHER INFORMATION, AS APPLICABLE.....................................15
SIGNATURES....................................................................17
</TABLE>
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
- - -----------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned................................................ $734,588 $634,405 $1,420,473 $1,184,433
Net investment income.......................................... 64,603 61,300 127,253 124,033
Gain on sales of investments................................... 1,821 35,195 3,858 70,777
Other.......................................................... 38,357 31,363 70,747 60,360
-------- -------- ---------- ----------
839,369 762,263 1,622,331 1,439,603
-------- -------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses.......................... 360,735 338,648 729,309 636,504
Policy acquisition costs and other insurance expenses.......... 384,462 317,158 743,266 612,680
Interest....................................................... 21,940 27,055 43,761 54,608
Other operating expenses....................................... 49,205 43,700 92,748 83,023
-------- -------- ---------- ----------
816,342 726,561 1,609,084 1,386,815
-------- -------- ---------- ----------
Income before income taxes, minority interests
and equity in investee company............................. 23,027 35,702 13,247 52,788
Provision for income taxes..................................... (6,400) (10,000) (3,700) (15,300)
Minority interests............................................. (734) (992) (1,588) (1,922)
Equity in investee company..................................... 2,505 4,972 4,790 6,472
-------- -------- ---------- ----------
Income before cumulative effect of change in
accounting for income taxes............................. 18,398 29,682 12,749 42,038
Cumulative effect of change in accounting for income taxes..... - - - 15,911
-------- -------- ---------- ----------
Net income..................................................... $ 18,398 $ 29,682 $ 12,749 $ 57,949
======== ======== ========== ==========
Per-share information:
Income before cumulative effect of change in
accounting for income taxes............................. $ .16 $ .33 $ .11 $ .47
Cumulative effect of change in accounting for income taxes..... - - - .18
-------- -------- ---------- ----------
Net income..................................................... $ .16 $ .33 $ .11 $ .65
======== ======== ========== ==========
Average number of common and common equivalent
shares outstanding....................................... 115,075 89,604 115,009 89,287
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1994 1993
- - ----------------------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,019,492 and $973,113)................ $1,099,685 $ 933,536
Fixed maturities available for sale - at quoted market
(cost $1,910,498 and $1,856,969)....................... 1,847,203 1,944,099
Equity securities - at quoted market (cost $465,202
and $458,217).......................................... 518,741 547,173
Short-term investments.................................... 185,350 372,507
Cash........................................................... 57,637 94,114
Premiums and other receivables................................. 1,272,636 1,089,772
Reinsurance recoverables....................................... 2,798,512 2,573,688
Federal and foreign income taxes, principally deferred taxes... 110,591 63,391
Investments in real estate - at cost, less accumulated
depreciation.............................................. 289,108 284,796
Investment in investee company................................. 155,530 158,279
Deferred policy acquisition costs.............................. 184,294 178,129
Excess of cost over fair value of net assets acquired, less
accumulated amortization................................. 274,414 279,404
Other assets................................................... 325,023 337,445
---------- ----------
$9,118,724 $8,856,333
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------------------------------
Unearned premiums.............................................. $1,299,990 $1,276,331
Unpaid claims and related expenses............................. 5,562,709 5,253,137
Accounts payable and accrued expenses.......................... 677,045 690,795
Reinsurance ceded premiums payable............................. 304,020 206,373
Term loans and short-term debt................................. 111,685 137,373
Debentures and notes........................................... 749,873 749,863
Minority interests - redeemable preferred stock of a
subsidiary................................................ 20,404 23,835
---------- ----------
8,725,726 8,337,707
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 113,091 and 111,517 shares
issued and outstanding.................................. 11,309 11,152
Additional paid-in capital................................ 533,487 525,289
Retained earnings (deficit)............................... (123,455) (118,143)
Net unrealized gain (loss) on investments................. (12,051) 115,023
Net unrealized loss on foreign currency translation....... (16,292) (14,695)
---------- ----------
392,998 518,626
---------- ----------
$9,118,724 $8,856,333
========== ==========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- - ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... $11,152 $525,289 $(118,143) $ 115,023 $(14,695) $ 518,626
Issuance of common stock.............. 157 8,616 8,773
Transactions of investee
company and other .............. (418) (2,863) (3,281)
Net income .......................... 12,749 12,749
Dividends ($.16 per share)........... (18,061) (18,061)
Depreciation after deferred
income taxes.................... (124,211) (124,211)
Foreign currency translation......... (1,597) (1,597)
------- -------- --------- --------- -------- ---------
Balance, June 30, 1994............... $11,309 $533,487 $(123,455) $ (12,051) $(16,292) $ 392,998
======= ======== ========= ========= ======== =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 1994 1993
- - ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES................... $ 39,625 $ (14,339)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for sale........... 211,368 216,077
Sales of fixed maturities held for investment.......... 15,111 -
Redemptions of fixed maturities available for sale..... 34,929 64,544
Redemptions of fixed maturities held for investment.... 12,870 88,476
Sales of equity securities............................. 138,735 394,659
Sales of short-term investments - net.................. 192,585 301,532
Purchases of fixed maturities available for sale....... (312,912) (378,975)
Purchases of fixed maturities held for investment...... (201,984) (283,316)
Purchases of equity securities......................... (107,576) (333,502)
Other - net............................................ (19,303) (27,577)
--------- ---------
(36,177) 41,918
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans................................. 5,133 25,000
Increase in short-term debt - net...................... 143 1,476
Repayments of term loans............................... (30,964) (71,564)
Issuance of common stock............................... 7,184 977
Repurchases of debentures and notes.................... - (1,000)
Collection of receivable pertaining to the issuance
of common stock................................... - 10,625
Dividends.............................................. (18,061) (13,801)
Redemption of redeemable preferred stock
of a subsidiary................................... (3,360) (3,360)
--------- ---------
(39,925) (51,647)
--------- ---------
Decrease in cash....................................... (36,477) (24,068)
Cash, beginning of period.............................. 94,114 63,575
--------- ---------
Cash, end of period.................................... $ 57,637 $ 39,507
========= =========
Supplemental disclosures of cash flow information:
Interest paid.......................................... $ 38,200 $ 47,700
========= =========
Income taxes refunded (paid)........................... $ 10,000 $ (63,300)
========= =========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at June 30,
1994, and the results of operations, changes in shareholders' equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1993) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.5 million and $4.8
million for the second quarter and first six months of 1994 compared to equity
income of $5.0 million and $6.5 million in the corresponding 1993 periods.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30 1994 1993
- - -------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per-share amounts)
Revenues.................................. $289,577 $292,790
Income before income taxes................ 28,751 35,462
Net income................................ 19,100 27,700
Net income per share...................... 1.00 1.44
</TABLE>
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------------------------------
1994 1993
---------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Direct.............. $1,360,423 $1,337,567 $1,286,035 $1,275,997
Assumed............. 178,592 180,076 157,926 154,570
Ceded............... (568,787) (579,413) (557,345) (654,667)
---------- ---------- ---------- ----------
Net Premiums........ $ 970,228 $ 938,230 $ 886,616 $ 775,900
========== ========== ========== ==========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Gross...................................... $1,104,732 $1,243,308
Reinsurance recoveries..................... (418,363) (642,991)
---------- ----------
Net policy claims and settlement expenses.. $ 686,369 $ 600,317
========== ==========
</TABLE>
4. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits". The
adoption of this Statement had no material effect on the Company's consolidated
financial statements.
5. INCOME TAXES
On June 27, 1994, the Internal Revenue Service ("IRS") issued a Notice of
Deficiency for tax years 1980 and 1981 in connection with its examination of the
Company's federal income tax returns for 1980 through 1985. The IRS seeks to
disallow an investment tax credit of approximately $36,500,000 plus interest
with respect to intermodal cargo containers leased to others by a former
subsidiary of the Company. The Company intends to litigate the Notice in Tax
Court. While the outcome of any litigation is uncertain, the Company believes,
after consultation with counsel, that the additional tax liability, if any,
including interest, will not have a material adverse effect on its consolidated
financial statements.
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
Net income in the second quarter and first six months of 1994 was $18.4 million
($.16 per share) and $12.7 million ($.11 per share) compared to $29.7 million
($.33 per share) and $57.9 million ($.65 per share) in the corresponding 1993
periods. Net income for the first six months of 1993 included income of $15.9
million ($.18 per share) resulting from the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The decline in net
income in 1994 also reflects substantially lower realized gains from sales of
investments, which were $1.8 million and $3.9 million in the second quarter and
first six months of 1994 compared to $35.2 million and $70.8 million in the
corresponding 1993 periods. The lower levels of realized gains were partially
offset by improved underwriting results in property and casualty insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written, net premiums earned and underwriting results were as
follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30
-----------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Standard Commercial $328,615 $321,374 $(18,450) $301,655 $290,815 $(40,190)
Specialty Commercial 145,255 156,202 1,800 124,419 121,578 5,687
--------------------------------- -----------------------------------
$473,870 $477,576 $(16,650) $426,074 $412,393 $(34,503)
================================= ===================================
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Standard Commercial $682,334 $642,892 $(61,458) $630,215 $528,793 $(90,774)
Specialty Commercial 287,894 295,338 445 256,401 247,107 12,459
--------------------------------- -----------------------------------
$970,228 $938,230 $(61,013) $886,616 $775,900 $(78,315)
================================= ===================================
</TABLE>
Net premiums written in the second quarter and first six months of 1993 were
reduced by $17.7 million and $57.5 million, and net premiums earned were reduced
by $63.0 million
-8-
<PAGE>
and $148.5 million, for premiums ceded under quota share treaties which were not
renewed in 1993. These ceded premiums were primarily classified in standard
commercial lines. The increase in specialty commercial net premiums written
during 1994 resulted from higher general liability premiums, including
financial coverages, and growth in surety premiums.
Underwriting results during 1994 for standard commercial lines have benefitted
from improved loss experience particularly in commercial automobile and
commercial multiple peril lines of business, partially offset by higher
catastrophe losses. The improved underwriting results also reflect continued
lower losses from involuntary pools which declined to $3.3 million and $9.2
million in the second quarter and first six months of 1994 compared to $7.4
million and $18.2 million in the corresponding 1993 periods. The underwriting
results in specialty commercial lines remain strong. The decline in specialty
commercial underwriting profits during 1994 reflects higher loss experience in
certain general liability lines and higher catastrophe losses in assumed
reinsurance, partially offset by improved results in surety lines. The cost of
catastrophes for both standard commercial and specialty commercial lines in the
second quarter and first six months of 1994 were $6.7 million and $35.4 million,
arising primarily from the January 1994 California earthquake and severe winter
storms. Catastrophe losses in the corresponding 1993 periods were $2.1 million
and $19.6 million. Gross catastrophe losses, before reinsurance, were $95.0
million during the first six months of 1994 compared to $61.0 million in the
corresponding 1993 period. The combined ratio (calculated on a GAAP basis),
after policyholders' dividends, was 103.0% and 106.1% for the second quarter and
first six months of 1994 compared to 108.1% and 110.0% in the corresponding 1993
periods. Excluding the effects of catastrophes, the combined ratios were 101.6%
and 102.3% in the second quarter and first six months of 1994 compared to 107.6%
and 107.5% in the corresponding 1993 periods.
In 1989, the California Department of Insurance notified United Pacific
Insurance Company, one of the Company's California subsidiaries, which writes
business in California, that under Proposition 103, profits generated by current
rates exceeded the Department's rates for a fair and reasonable return by
approximately $10.0 million. Since then, there have been several administrative
hearings on rate rollback and several different regulations issued. In
February 1993, a Los Angeles Superior Court declared several sections of the
regulations invalid and enjoined the enforcement of the regulations. In June
1993, the California Supreme Court agreed to hear the appeal from this decision.
The regulations, if ultimately adopted and upheld, could result in the Company
having to make a refund to policyholders possibly in excess of the amount
specified in the Department's 1989 notice. The Company believes that even after
considering investment income, total returns in California have been less than
what would be considered "fair." The Company will contest vigorously any
unreasonable premium rollback determination by the California Insurance
Department. Accordingly, the Company believes that it is probable that its
premium revenues will not be subject to a refund which would have a material
effect on the consolidated financial statements of the Company.
From time to time, other states have considered adopting legislation or
regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
No assurance can be given as to what effect the adoption of any such legislation
or regulation would have on the ability of
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<PAGE>
the Company to raise its rates. However, since the Company is transferring or
running off its personal lines business and, as a result, has substantially
withdrawn from personal lines, the Company believes that these initiatives will
not have a material effect on its on-going business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $58.1 million and $114.1 million in the second quarter and first
half of 1994 from $55.4 million and $112.3 million in the corresponding 1993
periods. These increases resulted from growth in the size of the average fixed
maturity investment portfolio reflecting the reinvestment of proceeds from sales
of equity securities. The increases in net investment income were partially
offset by lower yields in the fixed maturity investment portfolio.
Gains on sales of investments were $1.7 million and $4.8 million in the second
quarter and first six months of 1994 compared to $33.1 million and $67.4 million
in the corresponding 1993 periods. Gains on sales of investments during the
1993 periods primarily resulted from sales of convertible preferred and common
stocks.
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the second quarter and first six months of 1994
to $257.0 million and $482.2 million from $222.0 million and $408.5 million in
the corresponding 1993 periods. The growth in premiums and fees resulted from
an increase in lower margin agency premiums. The growth in agency premiums
during 1994 was partially offset by a decline in premiums from direct operations
in the second quarter of 1994 reflecting lower levels of residential refinancing
activity. As a result of increased mortgage interest rates, the Company does
not foresee residential refinancing activity increasing in the near future.
Accordingly, the Company expects its premiums from direct operations in 1994 to
be lower than those of the prior year. The increase in premiums from agency
operations during the second quarter of 1994 resulted from the typical reporting
lag of 60-90 days and reflect the strong first quarter market conditions, prior
to the increase in mortgage interest rates.
Agency commissions represent the portion of premiums retained by agents pursuant
to the terms of their agency contracts and are the title insurance operations'
single largest expense. Agency commissions were $142.0 million and $253.8
million in the second quarter and first six months of 1994 compared to $102.7
million and $199.2 million in the corresponding 1993 periods. Agency
commissions increased during 1994 reflecting the higher level of premiums from
agency operations. Other expenses of the title insurance operations include
personnel costs relating to marketing activities, title searches, information
gathering on specific properties and preparation of insurance policies, as well
as costs associated with the maintenance of title plants. Other expenses
increased to $88.1 million and $180.0 million in the second quarter and first
six months of 1994 from $87.2 million and $161.7 million in the corresponding
1993 periods. In order to reduce title insurance operating expenses, the
Company has instituted various cost control measures, including staff
reductions. The expense ratio of the title insurance operations (which
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<PAGE>
includes agency commissions) increased to 89.5% and 89.9% in the second quarter
and first six months of 1994 from 85.5% and 88.3% in the corresponding 1993
periods resulting from increased agency commissions and the decline in premiums
from direct operations. The provision for claim losses increased to $22.7
million and $42.9 million in the second quarter and first six months of 1994
from $19.6 million and $36.2 million in the corresponding 1993 periods,
reflecting premium growth.
INVESTMENT PORTFOLIO
At June 30, 1994, the Company's investment portfolio aggregated $3.66 billion
(at cost), of which 13% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. At June 30, 1994, no one
issuer comprised more than 2.5% of the fixed maturity and short-term investment
portfolio. Furthermore, the Company holds virtually no investments in
commercial real estate mortgages in its investment portfolio. Purchases of
fixed maturity securities are researched individually based on in-depth analysis
and objective predetermined investment criteria and the portfolio is managed to
achieve a proper balance of safety, liquidity and investment yields.
The Company invests primarily in investment grade securities (those rated "BBB"
or better by Standard & Poor's) and, to a lesser extent, non-investment grade
and non-rated securities. The risk of default is generally considered to be
greater for non-investment grade securities, when compared to investment grade
securities, since these issues may be more susceptible to severe economic
downturns. At June 30, 1994, the carrying values of non-investment grade
securities and securities not rated by Standard & Poor's were $388.4 million
(12% of the fixed income portfolio) and $136.0 million (4% of the fixed income
portfolio), respectively. Substantially all of the Company's non-investment
grade securities are classified as "available for sale" and, accordingly, are
carried at quoted market value.
OTHER OPERATIONS
The Company's consulting and technical services operations provide services in
the information technology and energy and environmental fields. Revenues for
these operations were $37.1 million and $68.6 million in the three-month and
six-month periods ended June 30, 1994, compared to $29.7 million and $56.8
million in the corresponding 1993 periods. The increase in revenues during 1994
reflects growth in the information technology business. Operating expenses
incurred by these operations were $35.4 million and $66.1 million in the three-
month and six-month periods ended June 30, 1994, compared to $28.4 million and
$54.6 million in the corresponding 1993 periods. Revenues and expenses of these
operations are included in other revenues and other operating expenses in the
accompanying statement of income.
At June 30, 1994, the Company's real estate holdings had a carrying value of
$289.1 million, which includes 11 shopping centers with an aggregate carrying
value of $127.0
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<PAGE>
million, office buildings and other commercial properties, with an aggregate
carrying value of $101.5 million, and undeveloped land with a carrying value of
$60.6 million.
INTEREST EXPENSE
Interest expense declined to $21.9 million and $43.8 million in the three-month
and six-month periods ended June 30, 1994 from $27.1 million, and $54.6 million
in the corresponding 1993 periods. These declines resulted from the refinancing
completed on November 15, 1993, which decreased the amount of debt outstanding
and the interest rates on such debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These net payments aggregated $58.1 million
for the six months ended June 30, 1994. The Company's ability to receive cash
dividends has depended upon and continues to depend upon the dividend paying
ability of its insurance subsidiaries. The Insurance Law of Pennsylvania, where
Reliance Insurance Company (the Company's principal property and casualty
insurance subsidiary) is domiciled, was amended in February 1994 (effective
immediately) to establish a new test limiting the maximum amount of dividends
which may be paid without approval by the Pennsylvania Insurance Department.
Under such test, Reliance Insurance Company may pay dividends during the year
equal to the greater of (a) 10% of the preceding year-end policyholders' surplus
or (b) the preceding year's statutory net income, but in no event to exceed the
amount of unassigned funds, which are defined as "undistributed, accumulated
surplus including net income and unrealized gains since the organization of the
insurer". In addition, the Pennsylvania law specifies factors to be considered
by the Pennsylvania Insurance Department to allow it to determine that statutory
surplus after the payment of dividends is reasonable in relation to an insurance
company's outstanding liabilities and adequate for its financial needs. Such
factors include the size of the company, the extent to which its business is
diversified among several lines of insurance, the number and size of risks
insured, the nature and extent of the company's reinsurance and the adequacy of
the company's reserves. The maximum dividend permitted by law is not indicative
of an insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations, such as the impact of dividends on
surplus, which could affect an insurer's ratings, competitive position, the
amount of premiums that can be written and the ability to pay future dividends.
Furthermore, the Pennsylvania Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
In the first quarter of 1994, Reliance Insurance Company determined that it has
become subject to the dividend payment laws of California because it has become
a "commercially domiciled" California insurer. California law provides that an
insurer is commercially domiciled if during the three preceding years (taken
together) the insurer has written more premium in California than it has written
in its state of domicile and the amount of premium written in California is in
excess of 20% of the insurer's countrywide written premium. For the three
preceding years, Reliance Insurance Company's written premium in California
represents 20.4% of its countrywide written premium. By writing California
business in its
-12-
<PAGE>
California domestic subsidiary, the Company anticipates the percentage of
Reliance Insurance Company's countrywide premium written in California will
decrease in the future. The California laws that limit the maximum amount of
dividends which may be paid without approval by the California Insurance
Department and specify the factors to be considered by the California Insurance
Department to determine if the payment of the dividend is reasonable in relation
to an insurance company's outstanding liabilities and financial needs are
substantially the same as the laws of Pennsylvania. As in Pennsylvania, the
California Insurance Department has broad discretion to limit the payment of
dividends by insurance companies.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania or California law for the payment of
dividends without prior Insurance Department approvals or that any requested
approvals will be obtained. However, Reliance Insurance Company has been advised
by the California Insurance Department that any required prior approval will be
based on the financial stability of the Company. Reliance Insurance Company has
also been advised by the Pennsylvania Insurance Department that any required
prior approval will be based upon a solvency standard and will not be
unreasonably withheld. Any significant limitation of Reliance Insurance
Company's dividends would adversely affect the Company's ability to service its
debt and to pay dividends on its common stock.
Total common and preferred stock dividends paid by Reliance Insurance Company
during the first six months of 1994 were $57.1 million ($55.7 million for common
stock). During 1994, $126.8 million would be available for dividend payments by
Reliance Insurance Company based upon the new dividend test under Pennsylvania
Law. The Company believes such amount will be sufficient to meet its cash
needs.
For the six months ended June 30, 1994, the Company generated $39.6 million of
cash flow from operating activities compared to an operating cash flow
deficiency of $14.3 million in the corresponding 1993 period. The improvement in
operating cash flow reflects an increase in reinsurance ceded premiums payable
and $11.9 million of state and local tax refunds received in the first six
months of 1994. In the corresponding 1993 period, the Company made state and
local tax payments of $30.0 million related to the sale of Frank B. Hall & Co.
Inc. Cash flow from operating activities is traditionally lower during the
first half of the year, reflecting payments of certain expenses, such as premium
taxes and contingent commissions, which are accrued in the previous year.
The Company utilized $36.2 million of cash flow from investing activities for
the six months ended June 30, 1994. For the six months ended June 30, 1993, the
Company generated
$41.9 million of cash flow from investing activities. Net purchases of
marketable securities utilized cash flow of $16.9 million in the six-month
period ended June 30, 1994 while net sales of marketable securities generated
$69.5 million of cash flow in the corresponding 1993 period. During the first
six months of 1994, the Company sold $15.1 million of fixed maturity
investments classified as held for investment. These sales were in response to
a significant deterioration in the issuers' creditworthiness.
The Company utilized $39.9 million and $51.6 million of cash flow from financing
activities for the six months ended June 30, 1994 and 1993, respectively. Cash
was utilized
-13-
<PAGE>
principally for the reduction of debt and payment of dividends. Partially
offsetting the utilization of cash flow from financing activities in the 1994
period was the issuance of $7.2 million of common stock.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million through December 31,
1998. At June 30, 1994, borrowings aggregating $10 million were outstanding
under this facility. The Company had $861.6 million of debt outstanding at June
30, 1994 with approximately $9 million maturing on or before December 31, 1994,
and an additional $119 million maturing on or before December 31, 1998. The
Company expects to either generate sufficient cash flow from operations to repay
these amounts at their existing maturities or refinance a portion of these
obligations.
The National Association of Insurance Commissioners has adopted a risk-based
capital requirement for the property and casualty insurance industry which
becomes effective in 1995 (based on 1994 financial results). Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business would be used to determine the minimum statutory
capital requirement for the insurer. An insurer having less statutory capital
than the formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. Although the
regulations governing risk-based capital are not effective until 1995 (based on
1994 financial results), the Company has calculated that its capital exceeds the
risk-based capital that would be required if the formula was currently in effect
(based on 1993 financial results). Management cannot predict the ultimate
impact of risk-based capital requirements on the Company's competitive position
and its resulting capital requirements.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management , state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
-14-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
On May 12, 1994, at the annual meeting of stockholders of the Company, the
stockholders elected the fifteen directors set forth below and were asked to
vote upon and authorize the adoption by the Company of (1) the 1994 Stock
Option Plan for Non-Employee Directors, (2) the Reliance Group Holdings, Inc.
1994 Stock Option Plan, (3) the Reliance Group Holdings, Inc. Executive Bonus
Plan and (4) the Executive Bonus Plan for James E. Yacobucci, Senior Vice
President-Investments, of the Company.
The number of votes cast for, against (where applicable) or withheld, as
well as the number of abstentions and broker non-votes, where applicable,
were as follows:
<TABLE>
<CAPTION>
Proposal - Election of Directors
--------------------------------
FOR WITHHELD
---------- --------
<S> <C> <C>
Saul P. Steinberg 91,512,615 307,228
Robert M. Steinberg 91,512,697 307,146
George R. Baker 91,517,943 301,900
George E. Bello 91,514,071 305,772
Carter Burden 91,518,986 300,857
Dennis A. Busti 91,498,986 320,857
Dean W. Case 91,518,986 300,857
Lowell C. Freiberg 91,515,386 304,457
Dr. Thomas P. Gerrity 91,518,986 300,857
Jewell Jackson McCabe 91,516,024 303,819
Irving Schneider 91,515,642 304,201
Bernard L. Schwartz 91,498,386 321,457
Richard E. Snyder 91,518,484 301,359
Thomas J. Stanton, Jr. 91,515,143 304,700
James E. Yacobucci 91,513,440 306,403
Broker Non-Votes: None
<CAPTION>
Proposal 1 - 1994 Stock Option Plan for Non-Employee Directors
--------------------------------------------------------------
<C> <C>
For: 83,595,942
Against: 4,611,051
Abstain: 3,328,098
Broker Non-Votes: 284,752
</TABLE>
-15-
<PAGE>
Proposal 2 - Reliance Group Holdings, Inc. 1994 Stock Option Plan
-----------------------------------------------------------------
<TABLE>
<S> <C>
For: 81,559,270
Against: 6,931,286
Abstain: 3,049,851
Broker Non-Votes: 279,436
</TABLE>
Proposal 3 - Reliance Group Holdings, Inc. Executive Bonus Plan
---------------------------------------------------------------
<TABLE>
<S> <C>
For: 83,594,809
Against: 3,335,511
Abstain: 4,707,329
Broker Non-Votes: 182,194
</TABLE>
Proposal 4 - Executive Bonus Plan for James E. Yacobucci
--------------------------------------------------------
<TABLE>
<S> <C>
For: 82,823,794
Against: 4,029,185
Abstain: 4,773,660
Broker Non-Votes: 193,204
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
10.1 The 1994 Stock Option Plan for Non-Employee Directors.
10.2 The Reliance Group Holdings, Inc. 1994 Stock Option
Plan.
10.3 The Reliance Group Holdings, Inc. Executive Bonus
Plan.
10.4 The Executive Bonus Plan for James E. Yacobucci,
Senior Vice President-Investments, of the Company.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter ended
June 30, 1994.
-16-
<PAGE>
SIGNATURES
----------
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.
RELIANCE GROUP HOLDINGS, INC.
------------------------------------------
(Registrant)
Date: August 12, 1994 /s/ George E. Bello
--------------- ------------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-17-
<PAGE>
EXHIBIT 10.1
1994 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
SECTION 1. INTRODUCTION
1.1 Establishment. Reliance Group Holdings, Inc., a Delaware corporation
(the "Company"), hereby establishes the 1994 Stock Option Plan for Non-Employee
Directors for those directors of the Company who are neither officers nor
employees of the Company or any subsidiary of the Company.
1.2 Purposes. The purposes of the Plan are to encourage the non-employee
directors to own shares of the Company's stock and thereby to align their
interests more closely with the interests of the other stockholders of the
Company, to encourage the highest level of non-employee director performance by
providing the non-employee directors with a direct interest in the Company's
attainment of its financial goals, and to provide a financial incentive that
will help attract and retain the most qualified non-employee directors.
1.3 Effective Date. This Plan shall be effective upon approval of the
Plan by a vote of a majority of shares of Stock (as defined below) present, or
represented and entitled to vote at an annual meeting of stockholders.
SECTION 2. DEFINITIONS
2.1 Definitions. The following terms shall have the meanings set forth
below:
(a) "Board" means the Board of Directors of the Company.
(b) "Committee" means the Stock Option Committee appointed by the Board to
administer the Plan pursuant to Section 3 hereof.
(c) "Company" has the meaning assigned to it in Section 1.1 hereof.
(d) "Date of Grant" means the date on which an Option is granted pursuant
to Section 5 hereof.
(e) "Director" means a member of the Board who is neither an officer nor
an employee of the Company or any Subsidiary.
(f) "ERISA" means the Employee Retirement Income Security
<PAGE>
Act of 1974 and the rules and regulations promulgated thereunder, as amended
from time to time.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
(h) "Fair Market Value" means the closing price at which the Stock shall
have been sold regular way on the New York Stock Exchange on the date as of
which such value is being determined or, if no sales occurred on such day, then
on the next preceding day on which there were such sales, or, if at any time the
Stock shall not be listed on the New York Stock Exchange, the fair market value
as determined by the Committee on the basis of available prices for such Stock
or in such manner as may be authorized by applicable regulations under the
Internal Revenue Code.
(i) "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(j) "Option" means a stock option granted under the Plan.
(k) "Optionee" means a person to whom an Option has been granted, which
Option has not expired under the Plan.
(l) "Option Price" means the price at which each share of Stock subject to
an Option may be purchased, determined in accordance with Section 5.2 hereof.
(m) "Plan" means this 1994 Non-employee Director Stock Option Plan.
(n) "Stock" means the common stock, par value $0.10 per share, of the
Company.
(o) "Stock Option Agreement" has the meaning assigned to it in Section 5.3
hereof.
(p) "Subsidiary" means any corporation of which an aggregate of more than
50% of the outstanding stock having ordinary voting power to elect a majority of
the board of directors of such corporation is directly or indirectly owned by
the Company.
2.2 Gender and Number. Except when otherwise indicated by context, the
masculine gender shall also include the feminine gender, and the definition of
any term herein in the singular shall also include the plural.
SECTION 3. PLAN ADMINISTRATION
3.1 Committee. The Plan shall be administered by the
2
<PAGE>
Committee. The members of the Committee shall be members of the Board appointed
by the Board, and any vacancy on the Committee shall be filled by the Board.
Members of the Committee may be Optionees under the Plan. A majority of the
Committee shall constitute a quorum, and the acts of a majority of the members
present at any meeting at which a quorum is present shall be the acts of the
Committee. Any action that may be taken at a meeting of the Committee may be
taken without a meeting if a consent or consents in writing setting forth the
action so taken shall be signed by all of the members of the Committee. The
Committee shall make appropriate reports to the Board concerning the operations
of the Plan. The Committee shall not be liable for any action or determination
made in good faith with respect to the Plan, any Option or any Stock Option
Agreement entered into hereunder.
3.2 Authority. Subject to the limitations of the Plan, the Committee
shall have the sole and complete authority to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the details
and provisions of each Stock Option Agreement, and to make all the
determinations necessary or advisable in the administration of the Plan.
Notwithstanding the foregoing, the Committee shall have no authority, discretion
or power to select the Directors who will receive awards pursuant to the Plan or
to determine the number of shares of Stock to be issued thereunder, the Option
Price or the Date of Grant. The Committee's determinations on matters within
its authority shall be conclusive and binding upon the Company and all other
persons. The Plan shall be interpreted and implemented in a manner so that
Directors will not fail, by reason of the Plan or its implementation, to be
"disinterested persons" within the meaning of Rule 16b-3 under Section 16 of the
Exchange Act, as such rule may be amended.
3.3 Plan Sponsors; Expenses. The Committee shall act on behalf of the
Company as sponsor of the Plan. All expenses associated with the Plan shall be
borne by the Company.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. 350,000 shares of Stock are authorized for issuance
under the Plan in accordance with the provisions of the Plan. Shares of Stock
issued and sold under the Plan may be either authorized but unissued shares or
shares held in the treasury of the Company. Shares of Stock covered by an
Option that shall have been exercised shall not again be available for an Option
grant.
4.2 Other Shares of Stock. Any shares of Stock that are subject to an
Option and which are forfeited and any shares of Stock that for any other reason
are not issued to a Director
3
<PAGE>
shall automatically become available again for use under the Plan if Rule 16b-3
under the Exchange Act and interpretations of the Securities and Exchange
Commission or its Staff thereunder permit such share replenishment.
4.3 Adjustments Upon Changes in Stock. In the event of any change
(through recapitalization, merger, consolidation, stock dividend, split-up,
combination or exchanges of shares or otherwise) in the character or amount of
the Stock (or any other transaction described in Section 424(a) of the Internal
Revenue Code) after any Option is granted hereunder and prior to the exercise
thereof, the Option, to the extent that it has not been exercised, shall entitle
the holder to such number and kind of securities as such holder would have been
entitled to had such holder actually owned the Stock subject to the Option at
the time of the occurrence of such change. If any such event should occur, the
number of shares subject to Options which are authorized to be issued hereunder,
but which have not been issued, shall be similarly adjusted. If any other event
shall occur, prior to the exercise of an Option granted to a Director hereunder,
which shall increase or decrease the amount of Stock outstanding and which the
Committee, in its sole discretion, shall determine equitably requires an
adjustment in the number of shares which the holder should be permitted to
acquire, such adjustment as the Committee shall determine may be made, and when
so made shall be effective and binding for all purposes of the Plan.
SECTION 5. OPTION GRANTS
5.1 Amount. Subject to the approval of the Plan by a vote of a majority of
shares of Stock present, or represented and entitled to vote at the Company's
1994 Annual Meeting of Stockholders, as of March 10, 1994, an Option to purchase
25,000 shares of Stock is granted to each person who on that date is an
incumbent Director. With respect to each person who first becomes a Director
after March 10, 1994 and subject to approval of the Plan as set forth in the
first sentence of this Section 5.1, an Option to purchase 25,000 shares of Stock
is granted as of the date such person first becomes a Director.
5.2 Option Price. The Option Price of each share of Stock subject to an
Option shall be the Fair Market Value per share of such Stock determined on the
Date of Grant.
5.3 Stock Option Agreement. The Company shall execute a Stock Option
Agreement which shall set forth such terms and conditions of the Option as may
be determined by the Committee to be consistent with the Plan, and which may
include additional provisions and restrictions that are not inconsistent with
the Plan (each, a "Stock Option Agreement").
4
<PAGE>
5.4 Options Non-transferable. An Option granted under this Plan shall by
its terms be non-transferable by the Director otherwise than by will or the laws
of descent and distribution and, during the lifetime of the Director, shall be
exercisable only by such Director except that, in the case of an Optionee who is
legally incapacitated, the Option shall be exercisable by his/her guardian or
legal representative. No transfer of an Option by a Director by will or by the
laws of descent and distribution shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and a copy of
the will and/or such other evidence as the Committee may determine necessary to
establish the validity of the transfer.
5.5 Term of Options; Vesting. The term of each Option shall be ten (10)
years from the Date of Grant. Each Option shall vest and become exercisable on
the first anniversary of the grant of the Option, if the Optionee is a Director
on such anniversary.
5.6 Option Exercise. An Option may be exercised in whole or in part at
any time, with respect to whole shares only, within the time period permitted
for the exercise thereof, and shall be exercised by written notice of intent to
exercise the Option with respect to a specified number of shares delivered to
the Company at its principal office, and payment in full to the Company at said
office of the amount of the Option Price for the number of shares of the Stock
with respect to which the Option is then being exercised. Payment of the Option
Price shall be made in cash. No Director shall have any rights as a stockholder
with respect to any share of Stock covered by an Option unless and until such
Director shall have become the holder of record of such share, and, except as
otherwise permitted in Section 4.3 hereof, no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property or distributions or other rights) in respect of such share for which
the record date is prior to the date on which such Director shall have become
the holder of record thereof.
SECTION 6. TERMINATION OF SERVICE AND DEATH
6.1 Termination of Service. If an Optionee's service as a member of the
Board shall be terminated for any reason other than death or removal for cause,
the Optionee shall have the right, during the 90 day period ending after such
termination (subject to Section 5.5 hereof concerning the maximum term of an
Option), to exercise such Option to the extent that it was exercisable at the
date of such termination of service and shall not have been previously
exercised.
5
<PAGE>
6.2 Death. If an Optionee shall die at any time after the Date of Grant
and while he/she is a member of the Board, the executor or administrator of the
estate of the decedent, or the person or persons to whom an Option shall have
been validly transferred in accordance with Section 5.4 hereof pursuant to will
or the laws of descent and distribution, shall have the right, during the period
ending one year after the date of the Optionee's death (subject to Section 5.5
hereof concerning the maximum term of an Option), to exercise such Option to the
extent that it was exercisable at the date of such Optionee's death and shall
not have been previously exercised.
6.3 Removal for cause. If an Optionee shall be removed from the Board
for cause, the Optionee's right to exercise any unexercised portion of his/her
Option shall immediately terminate and all rights thereunder shall cease. An
Optionee shall be considered to have been removed for "cause" for purposes of
this Section 6.3 when he/she shall have been removed from the Board by the
stockholders of the Company for cause in accordance with applicable state law
and the Certificate of Incorporation and By-laws of the Company, if applicable.
SECTION 7. STOCK CERTIFICATES
7.1 Issuance of Certificates. Subject to Section 7.2 hereof, the Company
shall issue a stock certificate in the name of the Optionee (or other person
exercising the Option in accordance with the provisions of the Plan) for the
shares of Stock purchased by exercise of an Option as soon as practicable after
due exercise and payment of the aggregate Option Price for such shares.
7.2 Conditions. The Company shall not be required to issue or deliver any
certificate for shares of Stock purchased upon the exercise of any Option
granted hereunder or any portion thereof prior to fulfillment of all of the
following conditions:
(a) The completion of any registration or other qualification of such
shares, under any federal or state law or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body, that the Committee shall in its sole discretion deem necessary or
advisable;
(b) The obtaining of any approval or other clearance from any federal or
state governmental agency that the Committee shall in its sole discretion
determine to be necessary or advisable;
(c) The passing of such reasonable period of time following the exercise
of the Options as the Committee from time to time may establish for reasons of
administrative convenience;
6
<PAGE>
(d) Satisfaction by the Optionee of any applicable withholding taxes or
other withholding liabilities; and
(e) If required by the Committee, in its sole discretion, the receipt by
the Company from an Optionee of (i) a representation in writing that the shares
of Stock received upon exercise of an Option are being acquired for investment
and not with a view of distribution and (ii) such other representations and
warranties as are deemed necessary by counsel to the Company.
7.3 Legends. The Company reserves the right to legend any certificate for
shares of Stock, conditioning sales of such shares upon compliance with
applicable federal and state securities laws and regulations.
SECTION 8. PLAN AMENDMENT, MODIFICATION AND TERMINATION
8.1 Plan Amendment and Modification. The Committee may at any time and
from time to time amend or modify the Plan, provided, however, that no amendment
or modification may become effective without approval of the stockholders if
stockholders' approval is required to enable the Plan to satisfy the
requirements for exemption from Section 16 of the Exchange Act set forth in Rule
16b-3(or any successor provision) promulgated thereunder and, provided, further,
that no amendment or modification shall be made more than once every six months
that would change the maximum number of shares of Stock subject to Options, the
Option Price or the Date of Grant of the Options, other than to comport with
changes in the Internal Revenue Code or ERISA. To the extent required to
qualify for the exemption from Section 16 of the Exchange Act, the approval of
the Company's stockholders will be required for, among others, any amendment to
the Plan that (a) changes the class of persons eligible for the grant of
Options, (b) increases (other than as described in Section 4.3 hereof) the
maximum number of shares of Stock subject to Options granted under the Plan, as
specified in Section 4.1 hereof, or (c) materially increases the benefits
accruing to Optionees under the Plan, within the meaning of Rule 16b-3 under the
Exchange Act. Any such approval shall be by the affirmative votes of the
stockholders of the Company present, or represented, and entitled to vote at a
meeting duly held in accordance with applicable state law and the Certificate of
Incorporation and By-laws of the Company. Notwithstanding the foregoing, no
amendment or modification of the Plan shall in any manner affect any Option
theretofore granted without the consent of the Optionee or the permitted
transferee of the Option.
8.2 Termination. The Plan shall terminate on the tenth anniversary of the
date the Plan is approved by the stockholders of the Company. The Committee
may, in its sole discretion and at any earlier date, terminate the Plan.
Notwithstanding the
7
<PAGE>
foregoing, no termination of the Plan shall in any matter affect any Option
theretofore granted without the consent of the Optionee or the permitted
transferee of the Option.
SECTION 9. REQUIREMENTS OF LAW
9.1 Federal Securities Law Requirements. Transactions pursuant to the
Plan shall be subject to all conditions required under Rule 16b-3 to qualify
such transactions for any exemption from the provisions of Section 16(b) of the
Exchange Act available under that rule.
9.2 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Delaware.
SECTION 10. MISCELLANEOUS
10.1 Service on Board. Nothing in the Plan, in the grant of any Option or
in any Stock Option Agreement shall confer upon any Director the right to
continue service as a member of the Board.
10.2 Plan Binding on Successors. The Plan shall be binding upon the
Company, its successors and assigns, and the Optionee, his/her executor,
administrator and permitted transferees.
10.3 Severability. If any provision of the Plan or any Stock Option
Agreement shall be determined to be illegal or unenforceable by any court of law
in any jurisdiction, the remaining provisions hereof and thereof shall be
severable and enforceable in accordance with their terms, and all provisions
shall remain enforceable in any other jurisdiction.
10.4 Headings. Section headings are inserted for convenience and
reference and constitute no part of the Plan.
8
<PAGE>
EXHIBIT 10.2
RELIANCE GROUP HOLDINGS, INC.
1994 STOCK OPTION PLAN
---------------------------
PART I
PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL;
RESERVATION OF SHARES; PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this Reliance Group Holdings, Inc.
-----------------
1994 Stock Option Plan (this "Plan") is to provide incentives to selected key
employees of the Company and/or its Affiliates who contribute, and are expected
to contribute, materially to the success of the Company and its Affiliates; to
provide a means of rewarding outstanding performance; and to enhance the
interest of such key employees in the Company's continued success and progress
by providing them a proprietary interest in the Company. Further, this Plan is
designed to enhance the Company's ability to maintain a competitive position in
attracting and retaining qualified key personnel necessary for the continued
success and progress of the Company.
ARTICLE II
Definitions
Certain terms used herein shall have the meaning below stated, subject to
the provisions of Section 7.1.
"Affiliate" means a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, the Company, except that when
used in connection with an Incentive Stock Option, "Affiliate" means a
Subsidiary.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
"Chairman" means the Chairman of the Board of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means, except as set forth in Article X, the Stock Option
Committee appointed by the Board to administer this Plan
<PAGE>
pursuant to Article VII.
"Common Stock" means, subject to the provisions of Section 9.3, the
presently authorized common stock of the Company, par value $.10 per share.
"Company" means Reliance Group Holdings, Inc.
"Disability" means (subject to Section 6.2) a physical or mental impairment
of sufficient severity such that an Employee is both eligible for and in receipt
of benefits under the long-term disability provisions of the Company's benefit
plans.
"Employee" means an employee (including an officer) of the Company or of an
Affiliate of the Company, except that, when used in connection with an Incentive
Stock Option, "Employee" means an employee (including an officer) of the Company
or of a Subsidiary of the Company.
"Fair Market Value" means the closing price at which the Common Stock of
the Company shall have been sold regular way on the New York Stock Exchange on
the date as of which such value is being determined or, if no sales occurred on
such day, then on the next preceding day on which there were such sales, or, if
at any time the Common Stock shall not be listed on the New York Stock Exchange,
the fair market value as determined by the Committee on the basis of available
prices for such Common Stock or in such manner as may be authorized by
applicable regulations under the Code.
"Incentive Stock Option" means an option to purchase Common Stock, granted
by the Company to a Key Employee pursuant to Section 5.1, which is intended to
meet the requirements of Section 422 of the Code and which is labeled an
Incentive Stock Option.
"Key Employee" means an Employee selected to participate in this Plan
pursuant to the terms hereof.
"Non-Qualified Option" means an option to purchase Common Stock, granted by
the Company to a Key Employee pursuant to Section 5.1, which is not an Incentive
Stock Option.
"Option" means an Incentive Stock Option or a Non-Qualified Option.
"Plan" means the Reliance Group Holdings, Inc. 1994 Stock Option Plan, as
set forth herein and as from time to time amended.
"Special Compensation Committee" means the Special Compensation Committee
of the Board.
"Subsidiary" means a subsidiary or parent corporation, as
2
<PAGE>
defined in Section 424(e) and (f) of the Code, with respect to the Company.
ARTICLE III
Shareholder Approval; Reservation of Shares
3.1 Shareholder Approval. This Plan shall be effective upon approval of
---------------------
the Plan by a vote of a majority of shares of Common Stock present, or
represented and entitled to vote, at an annual meeting of shareholders.
3.2 Shares Reserved Under Plan. Subject to adjustment under the
---------------------------
provisions of Section 9.3 hereof, the maximum number of shares of Common Stock
which may be issued and sold under this Plan is 2,500,000 shares. Such shares
may be either authorized and unissued shares or shares issued and thereafter
acquired by the Company. Shares issued pursuant to this Plan shall be subject
to all applicable provisions of the Certificate of Incorporation and By-Laws of
the Company in existence at the time of issuance of such shares and at all times
thereafter. If Options granted under this Plan shall terminate or cease to be
exercisable by reason of expiration, surrender for cancellation or otherwise
without having been wholly exercised, new Options may be granted under this
Plan covering the number of shares to which such termination or cessation
relates. At no time may the sum of the maximum number of shares issuable under
outstanding Options granted under this Plan and the number of shares previously
issued under Options granted under this Plan exceed the maximum number of shares
that may be issued and sold under this Plan, as above stated.
ARTICLE IV
Participation in Plan
4.1 Eligibility to Receive Options. Options under this Plan may be granted
-------------------------------
only to officers and other Key Employees of the Company or an Affiliate of the
Company on the date the Option is granted. A member of the Board of Directors
who is not also an Employee of the Company or of an Affiliate of the Company
shall not be eligible to receive an Option.
4.2 Participation Not Guarantee of Employment. Nothing in this Plan or in
------------------------------------------
the instrument evidencing the grant of an Option shall in any manner be
construed to limit in any way the right of the Company or an Affiliate to
terminate a Key Employee's employment at any time, without regard to the effect
of such termination on any rights such Key Employee would otherwise have under
this Plan, or give any right to such a Key Employee to remain employed by the
Company or an Affiliate thereof in any particular position or at any particular
rate of compensation.
3
<PAGE>
PART II
OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
------------------
(a) Grant. The Committee or the Special Compensation Committee, as the
------
case may be, may grant Incentive Stock Options and/or Non-Qualified Options to
Key Employees. All Options under this Plan shall be granted within ten years of
the date on which this Plan is adopted or the date this Plan is approved by the
shareholders of the Company, whichever is earlier. No more than 500,000 shares
issuable under Options granted under this Plan may be granted to any employee,
subject to adjustment in accordance with Section 9.3 hereof.
(b) Option Price. Subject to the requirements of Section 5.3(b) hereof,
-------------
the purchase price per share of Common Stock under each Incentive Stock Option
shall be not less than 100 percent of the Fair Market Value per share of such
Common Stock on the date the Option is granted, and the purchase price per share
of Common Stock under each Non-Qualified Option shall be determined by the
Committee but shall be not less than 90 percent of the Fair Market Value per
share of such Common Stock on the date such Non-Qualified Option is granted.
The Option price may be subject to adjustment in accordance with the provisions
of Section 9.3 hereof.
(c) Option Agreements. Options shall be evidenced by Option Agreements in
------------------
such form and containing such terms and conditions as the Committee shall
approve, which terms and conditions need not be the same for all Options.
(d) Options Nontransferable. An Option granted under this Plan shall by
------------------------
its terms be nontransferable by the Key Employee otherwise than by will or the
laws of descent and distribution, and, during the lifetime of the Key Employee,
shall be exercisable only by such Employee. No transfer of an Option by a Key
Employee by will or by the laws of descent and distribution shall be effective
to bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of the will and/or such other evidence as the
Committee may determine necessary to establish the validity of the transfer.
4
<PAGE>
(e) Substitution and Cancellation. The Committee, in its sole discretion,
------------------------------
may grant to an Employee who has been granted an Option under this Plan, in
exchange for the surrender and cancellation of such Option, a new Option having
a purchase price lower (or higher) than the purchase price provided in the
Option so surrendered and cancelled and containing such other terms as the
Committee may deem appropriate, subject to such limitations or restrictions with
respect to an Incentive Stock Option as may be imposed by the Code.
5.2 Exercise of Options.
--------------------
(a) Term of Options; Vesting. Subject to the requirements of Section
-------------------------
5.3(b) hereof, the term of each Option granted under this Plan shall be ten
(10) years from the date of grant, except that a Non-Qualified Option with a
per share Option price that equals or exceeds Fair Market Value per share on the
date of grant shall have a term of ten (10) years and ten (10) days from the
date of grant. An Option granted under this Plan shall become 100% vested at
the earliest of the following times if the Optionee is an Employee at such time:
(i) the Employee's normal retirement date (age 65 or later), (ii) the Employee's
death or Disability, or (iii) five years from the date of grant. Each Option
shall vest and become exercisable in cumulative installments to the extent of
25% of the number of shares originally covered thereby on and after the second,
third, fourth and fifth anniversaries of the grant of the Option, if the
Optionee is an Employee on such anniversary. In its sole discretion, the
Committee or the Special Compensation Committee, as the case may be, may
prescribe shorter installments or accelerate the exercisability of any Option at
any time.
(b) Payment on Exercise. No shares of Common Stock shall be issued on the
--------------------
exercise of an Option unless paid for in full at the time of purchase. Payment
for shares of Common Stock purchased upon the exercise of an Option shall be
made in cash or, with the consent of the Committee, in whole or in part in
shares of Common Stock valued at the then Fair Market Value thereof. Stock
certificates for the shares of Common Stock so paid for will be issued and
delivered to the person entitled thereto only at the Company's office in New
York, New York. No Key Employee shall have any rights as a shareholder with
respect to any share of Common Stock covered by an Option unless and until such
Employee shall have become the holder of record of such share, and, except as
otherwise permitted in Section 9.3 hereof, no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property or distributions or other rights) in respect of such share for which
the record date is prior to the date on which such Employee shall have become
the holder of record thereof.
(c) Exercise upon Dissolution, Liquidation or Winding Up. If at any time
-----------------------------------------------------
after an Option has become exercisable and prior to its
5
<PAGE>
exercise and expiration, a voluntary dissolution, liquidation (other than a
liquidation into another corporation which agrees to continue this Plan) or
winding up of the affairs of the Company shall be proposed, the Company shall
cause notice in writing to be mailed to each person holding an Option under
this Plan, which notice shall be mailed not less than twenty days prior to the
closing of the transfer books of the Company or the record date for
determination of the holders of Common Stock of the Company entitled to
participate in such dissolution, liquidation or winding up, as the case may be,
to the end that during such notice period the holder of any Option, to the
extent that the same is then exercisable by such holder, may, subject to the
terms of Article V hereof, purchase Common Stock in accordance with the terms
of the Option and be entitled, in respect of the number of shares so purchased,
to all the rights of the other holders of Common Stock of the Company with
respect to such proposed dissolution, liquidation or winding up of the affairs
of the Company. Each Option at the time outstanding shall terminate at the
close of business on the twentieth day after mailing of such notice to the
holder of such Option or on the record date for determination of holders of
Common Stock entitled to participate in such dissolution, liquidation or winding
up, whichever date is later.
5.3 Incentive Stock Options.
------------------------
(a) Annual Limitation. Any other provision of this Plan notwithstanding,
------------------
but subject to the limitation of Section 3.2 relating to the aggregate number of
shares subject to this Plan, the aggregate fair market value (determined as of
the time the Option is granted) of the stock with respect to which incentive
stock options are exercisable for the first time by any Employee during any
calendar year (under this Plan and any other plans of the Company and its
Subsidiaries) shall not exceed $100,000. For purposes hereof, an "incentive
stock option" means an option described in Section 422(b) of the Code. The
limitation set forth herein shall apply as and to the extent required to enable
Incentive Stock Options to qualify under Section 422 of the Code and, if such
Section 422 is amended, the Committee shall have the power to make corresponding
changes in the limitation set forth herein.
(b) Incentive Stock Options Granted to Ten Percent Shareholders. No
------------------------------------------------------------
Incentive Stock Option shall be granted to any Key Employee who owns, directly
or indirectly pursuant to Section 424(d) of the Code, stock possessing more than
ten (10) percent of the total combined voting power of all classes of stock of
the Company or any Subsidiary, unless at the time such Incentive Stock Option is
granted, the price of the Incentive Stock Option is at least 110 percent of the
Fair Market Value of the Common Stock subject to the Incentive Stock Option and
such Incentive Stock Option, by its terms, is not exercisable after the
expiration of five (5) years from the date such Incentive Stock Option is
6
<PAGE>
granted.
(c) Notice. Each Key Employee shall give prompt notice to the Company of
-------
any disposition of shares acquired upon exercise of an Incentive Stock Option if
such disposition occurs within either two years after the date of grant or one
year after the date of transfer of such shares to the Key Employee upon the
exercise of such Incentive Stock Option.
(d) Consent. To the extent appropriate to avoid a "modification" or other
--------
event described in Section 424(h) of the Code, a Key Employee's rights under an
Incentive Stock Option (including the rights to pay the exercise price in Common
Stock) shall be set forth in the Option Agreement at the date of grant, so as to
preclude any requirement that further Committee consent be given after the date
of grant.
ARTICLE VI
Termination of Employment and Death
6.1 Termination of Employment. Unless earlier terminated in accordance
--------------------------
with its terms, an Option shall terminate after 90 days after any of the
following:
(a) voluntary termination of employment by the Key Employee, with or
without consent of the Company,
(b) termination of employment of the Key Employee by the Company or any of
its Affiliates, with or without cause, or
(c) termination of employment of the Key Employee for any other reason,
including retirement under a retirement plan maintained by the Company, or
because the Affiliate employing such Key Employee ceases to be an Affiliate
of the Company and such Employee does not, prior thereto or
contemporaneously therewith, become a Key Employee of the Company or of
another Affiliate.
6.2 Death or Disability of Optionee. If a Key Employee's employment is
--------------------------------
terminated as a result of Disability or death, such Employee, or such Employee's
legal representatives, shall be entitled to exercise the Option in whole or in
part at any time within one year following the Disability (defined in accordance
with Section 422(c) of the Code in the case of an Incentive Stock Option) or
death of such Key Employee.
6.3 Employment. For all purposes of this Plan, and any Option granted
-----------
hereunder, "employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations).
7
<PAGE>
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Committee. This Plan shall be administered by a Committee of
--------------
three or more persons, all of whom shall be members of the Board and shall be
appointed by, and serve at the pleasure of, the Board. No person shall serve as
a member of the Committee if such person is eligible, or had been eligible at
any time within one year prior to appointment as a member, for selection as a
person to whom stock may be allocated or to whom stock options may be granted
under this Plan or any other plan of the Company or any of its affiliates
entitling the participants therein to acquire stock, stock options or stock
appreciation rights of the issuer or any of its affiliates. A majority of the
Committee shall constitute a quorum thereof and the actions of a majority of the
Committee at a meeting at which a quorum is present, or actions unanimously
approved in writing by all members of the Committee, shall be the actions of the
Committee. Vacancies occurring on the Committee shall be filled by the Board.
The Committee shall have full and final authority to interpret this Plan and the
agreements evidencing Options granted hereunder (which agreements need not be
identical), to prescribe, amend and rescind rules and regulations, if any,
relating to this Plan and to make all determinations necessary or advisable for
the administration of this Plan. The Committee's determination in all matters
referred to herein shall be conclusive and binding for all purposes and upon all
persons including, but without limitation, the Company, the shareholders of the
Company, the Committee and each of the members thereof, and Employees of the
Company, and their respective successors in interest.
7.2 Liability of Committee. No member of the Committee shall be liable
-----------------------
for anything done or omitted to be done by such member or by any other member of
the Committee in connection with this Plan, except for the willful misconduct or
gross negligence of such member. The Committee shall have power to engage
outside consultants, auditors or other professional help to assist in the
fulfillment of the Committee's duties under this Plan at the Company's expense.
7.3 Determinations of the Committee. In making its determinations
--------------------------------
concerning the Key Employees who shall receive
8
<PAGE>
Options, as well as the number of shares to be covered thereby and time or times
at which they shall be granted, the Committee shall take into account the nature
of the services rendered by the respective Key Employees, their past, present
and potential contribution to the Company's success and such other factors as
the Committee may deem relevant. The Committee shall also determine the form of
Option Agreements to be issued under this Plan and the terms and conditions to
be included therein, provided such terms and conditions are not inconsistent
with the terms of this Plan. The Committee may, in its discretion or in
accordance with a direction from the Board, waive any provisions of any Option
Agreement, provided such waiver is not inconsistent with the terms of this Plan
as then in effect.
7.4 Plan Sponsors; Expenses. The Committee shall act on behalf of the
------------------------
Company as sponsor of the Plan. All expenses associated with the Plan shall be
borne by the Company.
ARTICLE VIII
Amendment and Termination of Plan
8.1 Amendment of Plan.
------------------
(a) Generally. This Plan may be amended at any time and from time to time
----------
by the Board of Directors of the Company but to the extent necessary for this
Plan to continue to meet the requirements for exemption under Section 16 of the
Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3 promulgated
thereunder (or any successor provision), no amendment which (1) increases the
aggregate number of shares of Common Stock which may be issued and sold under
this Plan, (2) decreases the minimum Option price provided in this Plan, (3)
extends the period during which Options may be granted under this Plan, or (4)
changes the class of Key Employees eligible to receive Options shall be
effective unless and until the same is approved by the affirmative vote, in
person or by proxy, of the holders of a majority of the shares of Common Stock
of the Company present and entitled to vote at a meeting held to take such
action at which a quorum is present. No termination or amendment of this Plan,
without the consent of the holder of any Option then existing, may terminate
such holder's Option or materially and adversely affect such holder's rights
thereunder.
(b) Amendments Relating to Incentive Stock Options. To the extent
-----------------------------------------------
applicable, this Plan is intended to permit the issuance of Incentive Stock
Options in accordance with the provisions of Section 422 of the Code. The Plan
may be modified or amended at any time, both prospectively and retroactively,
and in such manner as to affect Incentive Stock Options previously granted
(after taking into account Section 424(h) of the Code, relating to
"modifications", etc.), if such amendment or modification is
9
<PAGE>
necessary for this Plan and the Incentive Stock Options granted hereunder to
qualify under said provisions of the Code.
8.2 Termination. The Board of Directors of the Company may at any time
------------
terminate this Plan as of any date specified in a resolution adopted by the
Board. If not earlier terminated, this Plan shall terminate on the tenth
anniversary of the effective date of the Plan. No Options may be granted after
this Plan has terminated. After this Plan shall terminate, the function of the
Committee will be limited to supervising the administration of Options
previously granted.
ARTICLE IX
Miscellaneous Provisions
9.1 Restrictions Upon Grant of Options. The listing upon the New York
-----------------------------------
Stock Exchange or the registration or qualification under any Federal or State
law of any shares of Common Stock to be granted pursuant to this Plan (whether
to permit the grant of Options or the resale or other disposition of any such
shares of Common Stock by or on behalf of the Employees receiving such shares)
may be necessary or desirable and, in any such event, delivery of the
certificates for such shares of Common Stock shall, if the Board of Directors,
in its sole discretion, shall determine, not be made until such listing,
registration or qualification shall have been completed. In such connection,
the Company agrees that it will use its best efforts to effect any such listing,
registration or qualification, provided, however, that the Company shall not be
required to use its best efforts to effect such registration under the
Securities Act of 1933, as amended ("1933 Act"), other than on Form S-8, as
presently in effect, or such other forms as may be in effect from time to time
calling for information comparable to that presently required to be furnished
under Form S-8.
9.2 Restrictions upon Resale of Unregistered Stock. If the shares of
-----------------------------------------------
Common Stock that have been transferred to a Key Employee pursuant to the terms
of this Plan are not registered under the 1933 Act, pursuant to an effective
registration statement, such Key Employee, if the Committee shall deem it
advisable, may be required to represent and agree in writing (i) that any shares
of Common Stock acquired by such Key Employee pursuant to this Plan will not be
sold except pursuant to an effective registration statement under the 1933 Act,
or pursuant to an exemption from registration under the 1933 Act and (ii) that
such Key Employee is acquiring such shares of Common Stock for such Employee's
own account and not with a view to the distribution thereof.
9.3 Adjustments. In the event of any change (through recapitalization,
------------
merger, consolidation, stock dividend, split-up, combination or exchanges of
shares or otherwise) in the character
10
<PAGE>
or amount of the Company's capital stock (or any other transaction described in
Section 424(a) of the Code) after any Option is granted hereunder and prior to
the exercise thereof, the Option, to the extent that it has not been exercised,
shall entitle the holder to such number and kind of securities as such holder
would have been entitled to had such holder actually owned the stock subject to
the Option at the time of the occurrence of such change. If any such event
should occur, the number of shares subject to Options which are authorized to be
issued hereunder, but which have not been issued, shall be similarly adjusted.
If any other event shall occur, prior to the exercise of an Option granted to a
Key Employee hereunder, which shall increase or decrease the amount of capital
stock outstanding and which the Committee, in its sole discretion, shall
determine equitably requires an adjustment in the number of shares which the
holder should be permitted to acquire, such adjustment as the Committee shall
determine may be made, and when so made shall be effective and binding for all
purposes of this Plan.
9.4 Withholding of Taxes. Each Key Employee who exercises an Option to
---------------------
purchase Common Stock shall agree to pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any taxes of any kind
required by law to be withheld with respect to the transfer to such Employee of
such shares of Common Stock.
9.5 Use of Proceeds. The proceeds from the sale of Common Stock pursuant
----------------
to Options granted under this Plan shall constitute general funds of the Company
and may be used for such corporate purposes as the Company may determine.
9.6 Other Grants. Options may be granted under this Plan from time to
-------------
time in substitution for stock options and/or stock appreciation rights held by
employees of other corporations who are or are about to become employees of the
Company as the result of a merger or consolidation of the employing corporation
with the Company, or the acquisition by the Company of the assets of the
employing corporation, or the acquisition by the Company of stock of the
employing corporation as the result of which it becomes an Affiliate of the
Company. The terms and conditions of the substituted Options so granted may
vary from the terms and conditions set forth in Part II to such extent as the
Committee may deem appropriate to conform, in whole or in part, to the
provisions of the substituted stock incentives.
9.7 Other Benefits. Nothing contained herein shall prevent the Company
---------------
from establishing other incentive plans in which Key Employees in the Plan may
also participate. No award under this Plan shall be considered as compensation
in calculating any insurance, pension or other benefit for which the recipient
is eligible unless any such insurance, pension or other benefit is granted under
a plan which expressly provides that compensation
11
<PAGE>
under this Plan (and specifying the type of such compensation) shall be
considered as compensation under such plan.
PART IV
PROVISIONS RELATING TO CERTAIN KEY EMPLOYEES
ARTICLE X
---------
Limitation on Grants; Applicability of Other Provisions
10.1 Limitations With Respect To Executive Officers. Notwithstanding
-----------------------------------------------
any other provision contained in the Plan, the Special Compensation Committee
shall have the exclusive right to grant Incentive Stock Options and/or Non-
Qualified Options to the executive officers of the Company. Any Options so
granted in any year, shall be granted, in the case of the persons who are the
Chairman and the four other most highly compensated executive officers, at not
less than Fair Market Value.
10.2 Applicability of Other Provisions. Section 5.1(e) shall not be
----------------------------------
applicable to grants made under this Article X. The provisions of Article VII
shall be incorporated herein as if included herein, except that "Special
Compensation Committee" shall replace "Committee" whenever it appears therein.
12
<PAGE>
EXHIBIT 10.3
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
EXECUTIVE BONUS PLAN
--------------------
ARTICLE I
Purpose
-------
1.1 The purpose of this Plan is to provide performance-based compensation
to Covered Employees. This Plan, which is intended to comply with the
requirements of (S)162(m) of the Code and of proposed Regulation (S)1.162-27, is
designed to enhance the Company's ability to retain and reward key executives
who contribute materially to the success of the Company by providing them the
opportunity to earn meaningful compensation tied to the Company's performance
under the predetermined criteria set forth herein.
ARTICLE II
Definitions
-----------
2.1 Capitalized terms used in this Plan shall have the meanings set forth
below.
"Base Salary" means the annual base salary of a Covered Employee as in
effect on January 1, 1994 (increased by 10% each year, on a compound basis,
but in no event more, as to any year, than the Covered Employee's actual
annual base salary for such year as so increased) paid by the Company and
any Subsidiary.
"Code" means the Internal Revenue Code of 1986, as amended.
"CLTIC" means the title insurance operations of the Company.
"Company" means Reliance Group Holdings, Inc.
"Compensation Committee" means the Special Compensation Committee of the
Board of Directors of the Company, comprised solely of two or
<PAGE>
more outside directors as defined in (S)162(m) of the Code and the
regulations promulgated thereunder.
"Covered Employee" is as defined under (S)162(m)(3) of the Code.
"GAAP" means generally accepted accounting principles.
"Industry" means those U.S. property and casualty stock insurance companies
for which aggregate statistical data are reported by a recognized insurance
industry rating or reporting service.
"Plan" means this Executive Bonus Plan.
"Reliance Insurance Group" means the property and casualty operations of
the Company.
"SAP" means the statutory accounting practices utilized by property and
casualty insurance companies.
"Subsidiary" means a company 50% or more of whose voting capital stock is
held, directly or through one or more Subsidiaries, by the Company.
ARTICLE III
Shareholder Approval
--------------------
3.1 The material terms of the performance goals under this Plan, including
the bonuses to be paid upon the attainment of the goals, shall be disclosed to
the shareholders of the Company and shall be submitted to the shareholders for
their approval, by affirmative votes of a majority of the votes cast in a
separate vote, at the annual meeting next following the date of adoption of this
Plan by the Compensation Committee. Subsequent disclosure to, and approvals by,
the shareholders of the Company shall be made and obtained, respectively, to the
extent required by the relevant provisions of (S)162(m) of the Code and the
regulations promulgated thereunder. No amounts shall be paid under this Plan
unless the requisite shareholder approval of such payments under (S)162(m) of
the Code shall have been obtained.
2
<PAGE>
ARTICLE IV
Participants; Preestablished Performance Goals
----------------------------------------------
4.1 This Plan shall apply as to any year only to persons who are Covered
Employees for such year.
4.2 The performance goals applicable to all Covered Employees, other than
any Covered Employee with a separate performance-based bonus plan with the
Company, shall be established in accordance with paragraph 4.3 hereof and shall
be related to the following criteria:
(a) average return on shareholders' equity of the Company for the 12
months ending December 31 of the year to which performance-based
compensation is applicable, calculated in accordance with GAAP;
(b) combined ratio of the Reliance Insurance Group for the 12
months ending December 31 of the year to which performance-based
compensation is applicable, calculated in accordance with SAP,
compared to the combined ratio of the Reliance Insurance Group for
the preceding 12 month period, calculated in accordance with SAP;
(c) combined ratio of the Reliance Insurance Group for the 12
months ending December 31 of the year to which performance-based
compensation is applicable, calculated in accordance with SAP,
compared to the combined ratio of the Industry (as reported on an
estimated basis) for the comparable period, calculated in accordance
with SAP;
3
<PAGE>
(d) total return on the combined investment portfolio of the Reliance
Insurance Group and CLTIC for any calendar year to which performance-
based compensation is applicable;
(e) amount of pre-tax net realized capital gains, calculated in accordance
with GAAP, of the combined investment portfolio of the Reliance
Insurance Group and CLTIC during any calendar year to which
performance-based compensation is applicable;
(f) pre-tax operating income (exclusive of capital gains), calculated in
accordance with GAAP, of the Reliance Insurance Group for any calendar
year to which performance-based compensation is applicable;
(g) shareholders' equity of the Company, calculated in accordance with
GAAP, as of the end of any calendar year to which performance-based
compensation is applicable;
(h) net premiums written, calculated in accordance with GAAP, of the
Reliance Insurance Group for any calendar year to which performance-
based compensation is applicable;
(i) pre-tax operating income (exclusive of realized capital gains),
calculated in accordance with GAAP, of CLTIC for any calendar year to
which performance-based compensation is applicable;
4
<PAGE>
(j) net premiums earned, calculated in accordance with GAAP, of CLTIC for
any calendar year to which performance-based compensation is
applicable;
(k) the Company's debt to total capitalization ratio, calculated in
accordance with GAAP, as of the end of any calendar year to which
performance-based compensation is applicable;
(l) the price of the Company's common stock;
(m) pre-tax operating earnings per share (exclusive of realized capital
gains of the combined portfolio of the Reliance Insurance Group and
CLTIC), calculated in accordance with GAAP, of the Company for any
calendar year to which performance-based compensation is applicable;
and
(n) net investment income, calculated in accordance with GAAP, of the
combined investment portfolio of the Reliance Insurance Group and
CLTIC for any calendar year to which performance-based compensation is
applicable.
4.3 The specific targets for the performance goals set forth in paragraph
4.2 above shall be as determined by the Compensation Committee at the time of
adoption of this Plan by the Compensation Committee. For any year commencing on
or after January 1, 1995, the Compensation Committee shall have the discretion
(but not be required) to modify such specific targets for the performance goals
set forth in paragraph 4.2 above. Any such modification shall be made in
writing (which may be through
5
<PAGE>
approved minutes) by the Compensation Committee prior to the commencement of the
year to which it is applicable.
ARTICLE V
Calculation and Payment of Bonus
--------------------------------
5.1 All Covered Employees, other than any Covered Employee with a separate
performance-based bonus plan, shall be eligible to receive a maximum bonus under
this Plan of 115% of their respective Base Salaries.
5.2 The Compensation Committee shall certify in writing (which may be
through approved minutes), prior to payment of any bonus under this Plan, the
extent to which the performance goals set forth in paragraph 4.2 hereof have
been met.
5.3 Subject to paragraph 5.4 hereof, all Covered Employees, other than any
Covered Employee with a separate performance-based bonus plan, shall be entitled
to receive, and shall be paid not later than 60 days after the end of any
calendar year to which performance-based compensation is applicable, cash
bonuses equal to 115% of their respective Base Salaries if at least eight of the
performance goals set forth in paragraph 4.2 hereof have been met. If fewer
than eight of such goals have been met, then the bonuses to be paid to such
Covered Employees shall be reduced by 5% of their respective Base Salaries
multiplied by the difference between the number of goals achieved and the number
"eight," provided, however, that if fewer than two goals are achieved, no
-------- -------
bonuses shall be paid hereunder. Responsibilities for any bonuses payable under
this Plan shall be allocated between the Company and any Subsidiary in
proportion to the amount of Base Salary paid to a Covered Employee by the
Company and such Subsidiary.
5.4 The Compensation Committee shall have the discretion to reduce or
eliminate amounts payable under this Plan to any Covered Employee who the
6
<PAGE>
Compensation Committee determines has breached a duty to the Company which has
or will result in material harm to the Company.
ARTICLE VI
Non-Exclusivity
---------------
6.1 Nothing in this Plan shall prevent the Company from establishing other
incentive plans in which Covered Employees may participate, or from making
additional incentive payments to Covered Employees.
ARTICLE VII
Authority and Administration
----------------------------
7.1 Subject to the limitations of this Plan, the Compensation Committee
shall have the sole and complete authority to interpret this Plan and to make
all the determinations necessary or advisable in the administration of this Plan
(including without limitation the determination to amend or terminate this
Plan). The Compensation Committee shall be entitled to rely on representations
and certifications of appropriate officers of the Company with respect to the
financial and statistical data set forth in paragraph 4.2 hereof. The
Compensation Committee's determinations on matters within its authority shall be
conclusive and binding upon the Company and all other persons. The Compensation
Committee shall not be liable for any action or determination made in good faith
with respect to this Plan.
3119.01
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<PAGE>
EXHIBIT 10.4
RELIANCE GROUP HOLDINGS, INC.
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EXECUTIVE BONUS PLAN
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FOR JAMES E. YACOBUCCI
----------------------
ARTICLE I
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Purpose
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1.1 The purpose of this Plan is to provide performance-based compensation
for James E. Yacobucci (the "Employee"). This Plan, which is intended to comply
with the requirements of (S)162(m) of the Code and of proposed Regulation
(S)1.162-27, is designed to enhance the Company's ability to retain and reward a
key executive who is expected to contribute materially to the success of the
Company by providing him the opportunity to earn meaningful compensation tied to
the Company's performance under the predetermined criteria set forth herein.
ARTICLE II
Definitions
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2.1 Capitalized terms used in this Plan shall have the meanings set forth
below.
"Base Salary" means $1 million per year paid to the Employee by the
Company and any Subsidiary.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Reliance Group Holdings, Inc.
"Compensation Committee" means the Special Compensation Committee of the
Board of Directors of the Company, comprised solely of two or more outside
directors as defined in (S)162(m) of the Code and the regulations promulgated
thereunder.
"Covered Employee" is as defined under (S)162(m)(3) of the Code.
"GAAP" means generally accepted accounting principles.
"Plan" means this Executive Bonus Plan.
"Subsidiary" means a company 50% or more of whose voting capital stock
is held, directly or through one or more Subsidiaries, by the Company.
ARTICLE III
Shareholder Approval
--------------------
3.1 The material terms of the performance goals under this Plan,
including the bonuses to be paid upon the attainment of the goals, shall be
disclosed to the shareholders of the Company and shall be submitted to the
shareholders for their approval, by affirmative votes of a majority of the votes
cast in a separate vote, at the annual meeting next following the date of
adoption of this Plan by the Compensation Committee. Subsequent disclosure to,
and approvals by, the shareholders of the Company shall be made and obtained,
respectively, to the extent required by the relevant provisions of (S)162(m) of
the Code and the regulations promulgated thereunder. No amounts shall be paid
under this Plan unless the requisite shareholder approval of such payments under
(S)162(m) of the Code shall have been obtained.
2
<PAGE>
ARTICLE IV
Preestablished Performance Goals
--------------------------------
4.1 This Plan shall apply as to any year in which the Employee is a
Covered Employee for such year.
4.2 The performance goal applicable to the Employee shall be
established in accordance with paragraph 4.3 hereof and shall be related to the
following criterion:
- The Actual Portfolio Return for the Measurement Period.
For purposes of calculation of Actual Portfolio Return for a
Measurement Period, the following terms shall have the meanings set
forth below:
3
<PAGE>
Actual Portfolio Return means, with respect to the Measurement Period,
-----------------------
the total pre-tax dollar return (which will be a negative number in the
event of a loss) earned on the Portfolio for such period, as determined
by the Company in accordance with GAAP, including interest and dividend
income, realized gains and losses, and unrealized appreciation and
depreciation.
Equity Securities is as defined in Rule 3a 11-1 under the Securities
-----------------
Exchange Act of 1934, as amended. In addition, it includes foreign
currencies and options on foreign currencies, but specifically excludes
non-convertible fixed-income securities.
Measurement Period means the 12 month period ending December 31 of the
------------------
year to which performance based compensation is applicable.
Portfolio means certain investments, from time to time, of the Company
---------
and its consolidated subsidiaries in Equity Securities and money market
instruments derived from proceeds of sales of Equity Securities provided
that the money market instruments shall be reduced by subsequent
additional investments in Equity Securities included in the Portfolio.
The Portfolio at January 1, 1994 will equal the total value of the
Equity Securities as set forth in the schedule adopted by, and filed
with the minutes of, the Special Compensation Committee. However,
certain securities of the Portfolio as designated in such
4
<PAGE>
schedule are to be sold within the first three months of 1994, with the
effect of reducing the initial Portfolio. The proceeds of such sales
will be considered withdrawn by the Company from the Portfolio. In
addition, purchases of any Equity Securities are to be reviewed by the
Company on a weekly basis and the inclusion of such securities in the
Portfolio will be at the mutual agreement of the Company and the
Employee. The Portfolio may also be increased or reduced at any time at
the discretion of the Company.
For purposes of this Plan, additions to or withdrawals from the
Portfolio in the first fifteen days of any month will be deemed to be
made on the last day of the previous month. Alternatively, any additions
or withdrawals made after the fifteenth day of any month will be deemed
to be made on the last day of such month.
4.3 The specific targets for the performance goal set forth in
paragraph 4.2 above shall be as determined by the Compensation Committee at the
time of adoption of this Plan by the Compensation Committee. For any year
commencing on or after January 1, 1995, the Compensation Committee shall have
the discretion (but not be required) to modify such specific targets for the
performance goal set forth in paragraph 4.2 above. Any such modification shall
be made in writing (which may be through approved minutes) by the Compensation
Committee prior to the commencement of the year to which it is applicable.
5
<PAGE>
ARTICLE V
Calculation and Payment of Bonus
--------------------------------
5.1 The Employee shall be eligible to receive a maximum bonus under
this Plan of 400% of his Base Salary.
5.2 The Compensation Committee shall certify in writing (which may be
through approved minutes), prior to payment of any bonus under this Plan, that
the performance goal set forth in paragraph 4.2 hereof has been met.
5.3 Subject to paragraph 5.4 hereof, the Employee shall be eligible to
receive and be paid not later than 60 days after the end of any calendar year to
which performance-based compensation is applicable, a cash bonus equal to 400%
of his Base Salary if the performance goal set forth in paragraph 4.2 hereof has
been met. Responsibility for any bonus payable under this Plan shall be
allocated between the Company and any Subsidiary in proportion to the amount of
Base Salary paid to the Employee by the Company and such Subsidiary.
5.4 The Compensation Committee shall have the absolute discretion to
reduce or eliminate any amounts payable under this Plan to the Employee.
6
<PAGE>
ARTICLE VI
Non-Exclusivity
---------------
6.1 Nothing in this Plan shall prevent the Company from establishing
other incentive plans in which the Employee may participate, or from making
additional incentive payments to the Employee.
ARTICLE VII
Authority and Administration
----------------------------
7.1 Subject to the limitations of this Plan, the Compensation Committee
shall have the sole and complete authority to interpret this Plan and to make
all the determinations necessary or advisable in the administration of this Plan
(including without limitation the determination to amend or terminate this
Plan). The Compensation Committee shall be entitled to rely on representations
and certifications of appropriate officers of the Company with respect to the
financial and statistical data set forth in paragraph 4.2 hereof. The
Compensation Committee's determinations on matters within its authority shall be
conclusive and binding upon the Company and all other persons. The Compensation
Committee shall not be liable for any action or determination made in good faith
with respect to this Plan.
7
