<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
RLI CORP.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
MERRILL CORPORATION
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
(LOGO)
RLI CORP.
9025 North Lindbergh Drive
Peoria Illinois 61615
_______________________________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 1, 1997
_______________________________________________________
To the Shareholders of RLI Corp.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of RLI
Corp. (the "Company") will be held at 9025 North Lindbergh Drive, Peoria,
Illinois, 61615, on Thursday, May 1, 1997, at 2:00 P.M., Central Daylight Time,
to:
1. Elect four (4) directors for a three-year term expiring in 2000
or until their successors are elected and qualified;
2. Consider and act upon a proposal to amend the Company's Articles of
Incorporation to authorize a new class of Preferred Stock;
3. Consider and act upon a proposal to amend the Company's Articles of
Incorporation (the "Articles") to require the affirmative vote of the
holders of at least a majority of the outstanding shares entitled to vote
on subsequent amendments to the Articles;
4. Consider and act upon a proposal to approve the Market Value Potential
Performance Incentive Plan;
5. Consider and act upon a proposal to approve the Stock Option Plan for
Outside Directors;
6. Consider and act upon a proposal to appoint KPMG Peat Marwick LLP
as independent public accountants of the Company for the current year;
and
7. Transact such other business as may properly be brought before
the meeting.
Only holders of Common Stock of the Company, of record at the close of
business on March 3, 1997, are entitled to notice of and to vote at the
Annual Meeting.
By Order of the Board of Directors
Camille J. Hensey
Corporate Secretary
Peoria, Illinois
March ____, 1997
It is important, regardless of the number of shares you hold, that you
personally be present or be represented by proxy at the Annual Meeting.
Accordingly, whether or not you plan to attend the Annual Meeting, it is
requested you promptly sign and date the enclosed proxy and return it in the
envelope provided that requires no postage if mailed in the United States. If
you attend the Annual Meeting, your proxy may be withdrawn upon request.
<PAGE>
(LOGO)
RLI CORP.
9025 NORTH LINDBERGH DRIVE
PEORIA, ILLINOIS 61615
March , 1997
Dear Shareholder:
Please consider this letter your personal invitation to attend the 1997 RLI
Corp. Annual Shareholders Meeting. It will be held at 9025 North Lindbergh
Drive, Peoria, Illinois, 61615, the Company's principal office, on May 1,
1997 at 2:00 P.M. CST.
Business scheduled to be considered at the meeting includes the election of
Class I directors, approval of KPMG Peat Marwick as independent public
accountants for 1997 and the following proposals: authorize a new class of
preferred stock, require the affirmative vote of the holders of a plurality
of the outstanding shares to vote on future amendments to the Articles,
approve the MVP Performance Incentive Plan, and approve the Director's Stock
Option Plan. Additional information concerning these matters is included in
the Notice of Meeting and Proxy Statement.
In addition, we will review significant events in 1996 and their impact on
you and your Company. Directors, officers and representatives of KPMG Peat
Marwick will be available before and after the meeting to talk with you and
answer any questions you may have.
We were pleased with the response of our shareholders at the 1996 Annual
Meeting at which 91.8% of the Common Stock was represented in person or by
proxy. We hope that participation by our shareholders in the affairs of the
Company will continue to increase and that there will be an even greater
representation at the 1997 meeting.
Even if you do not plan to attend, it is important that you date, sign and
return the enclosed proxy card in the envelope provided for your convenience.
Your vote is vital no matter how many shares you own. If you do attend the
Annual Meeting and desire to vote in person, you may do so, even though you
have previously sent in a proxy.
Thank you for your interest in your Company and confidence and support in our
future.
Sincerely,
Gerald D. Stephens, CPCU
President
<PAGE>
PRELIMINARY
RLI CORP.
9025 NORTH LINDBERGH DRIVE
PEORIA, ILLINOIS 61615
___________________________________
PROXY STATEMENT
___________________________________
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD
MAY 1, 1997
___________________________________
<PAGE>
GENERAL INFORMATION
This Proxy Statement is furnished to the shareholders of RLI Corp. (the
"Company") in connection with the solicitation by the Board of Directors of
the Company, of proxies to be used at the Annual Meeting of its Shareholders
to be held at 2:00 P.M., Central Daylight Time, on Thursday, May 1, 1997, at
9025 North Lindbergh Drive, Peoria, Illinois, 61615, and at any adjournments
of the Meeting.
PROXY SOLICITATION. The Company will bear the cost of solicitation of
proxies. In addition to the use of the mail, proxies may be solicited
personally or by telephone or telefax, by officers or regular employees of
the Company. No additional compensation will be paid to such persons for
their services. The Company will reimburse banks, brokerage firms,
investment advisors and other custodians, nominees, fiduciaries and service
bureaus for their reasonable out-of-pocket expenses for forwarding soliciting
material to the beneficial owners of the stock and obtaining their proxies or
voting instructions.
VOTING. Each proxy will be voted in accordance with the shareholder's
specifications thereon. If there are no such specifications, it will be
voted in favor of the election of directors, and in accordance with the Board
of Directors' recommendations on other proposals. All proxies delivered
pursuant to this solicitation are revocable at any time at the option of the
shareholder either by giving written notice to the Corporate Secretary at
9025 North Lindbergh Drive, Peoria, Illinois, 61615, or delivering a proxy
bearing a later date or by voting in person at the Annual Meeting. All
shares represented by valid, unrevoked proxies will be voted at the Annual
Meeting.
MAILING. This Proxy Statement and enclosed Proxy are first being mailed to
shareholders entitled to notice of and to vote at the Annual Meeting on or
about March ___, 1997.
SHAREHOLDER PROPOSALS. To be included in the Board of Directors' proxy
statement for the 1998 Annual Meeting of the Shareholders, a shareholder
proposal must be received by the Company on or before November 26, 1997.
Proposals should be directed to the attention of the Corporate Secretary at
9025 North Lindbergh Drive, Peoria, Illinois, 61615.
SHAREHOLDERS ENTITLED TO VOTE. At the close of business on March 3, 1997,
the record date for the determination of shareholders entitled to vote at the
Annual Meeting, the Company had 7,625,181 shares of Common Stock outstanding
and entitled to vote. Common share ownership entitles the holder to one vote
per share upon each matter to be voted at the Annual Meeting.
1
<PAGE>
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The only persons known to the Company who beneficially own more than
five percent of the Company's Common Stock as of December 31, 1996, are as
follows:
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- - ------------------------------------------------------------------------------
Franklin Resources, Inc. 708,060 9.0%
777 Mariners Island Boulevard
P.O. Box 7777
San Mateo, California 94403-7777
(1)
Sanford C. Bernstein & Co., Inc. 432,219 5.5%
One State Street Plaza
New York, New York 10004
(2)
Oak Value Capital Management, Inc. 516,775 6.6%
3100 Tower Boulevard
Suite 800
Durham, North Carolina 27007
(3)
RLI Corp. 1,258,335 16.1%
Employee Stock Ownership Plan &
Trust ("ESOP")
c/o Bank One
124 Southwest Adams Street
Peoria, Illinois 61649 (4)
Gerald D. Stephens 645,146 8.2%
493 East High Point Drive
Peoria, Illinois 61614
(5)
(1) The information shown is based solely on a Schedule 13G dated February 12,
1997, filed by Franklin Resources, Inc. ("Franklin"), Charles B. Johnson,
Rupert H. Johnson, Jr., and Franklin Advisory Services, Inc., which filing
indicates that one or more open or closed-end investment companies or other
managed accounts which are advised by direct and indirect investment advisory
subsidiaries of Franklin have sole voting power and sole dispositive power
with respect to 708,060 shares. Messrs. Johnson are the principal
shareholders of Franklin.
(2) The information shown is based solely on a Schedule 13G dated February 7,
1997, filed by Sanford C. Bernstein & Co., Inc., which filing indicates
that Sanford C. Bernstein & Co., Inc. has sole voting power with respect to
354,500 shares, shared voting power with respect to 11,275 shares, no voting
power with respect to 66,444 shares and sole dispositive power with respect
to 432,219 shares.
2
<PAGE>
(3) The information shown is based solely on a Schedule 13G dated February
5, 1997, filed by Oak Value Capital Management, Inc., ("Oak Value"), which
filing indicates that Oak Value has sole voting power with respect to 421,900
shares and sole dispositive power with respect to 516,775 shares.
(4) Each Employee Stock Ownership Plan ("ESOP") participant or beneficiary
may direct the ESOP trustee as to the manner in which the shares allocated to
each under the ESOP are to be voted. The ESOP Administrative Committee
("Committee"), comprised of outside members of the Board of Directors, may
direct the ESOP trustee as to the manner in which unallocated shares are to
be voted. The Committee has sole investment power as to all allocated and
unallocated shares, except as to those shares which are the subject of a
participant's diversification election. During 1996, none of the executive
officers were eligible to elect to diversify any shares owned by the ESOP.
(5) Includes 201,927 shares allocated to Mr. Stephens under the ESOP; 24,790
shares allocated under the RLI Corp. Key Employee Excess Benefit Plan
("Stephens Key Plan") over which Mr. Stephens has no voting or investment
power; 28,143 shares owned by Mr. Stephens' spouse; 7,662 shares held in
custodian accounts for the benefit of Mr. Stephens' grandchildren, over which
he has the sole voting and investment power; and 1,322 shares in the H. O.
Stephens Trust for the benefit of Mr. Stephens' mother, over which Mr.
Stephens, as trustee, has the sole voting and investment power.
SHARE OWNERSHIP OF MANAGEMENT
The following information is furnished as to the beneficial ownership of
the shares of the Company's Common Stock by each current director, nominees for
director, named executive officers, and directors and executive officers of the
Company as a group as of December 31, 1996:
Amount and
Name of Individual or Nature of Percent
Number of Persons in Beneficial of
Group Ownership (1) Class
- - --------------------------------------------------------------
Bernard J. Daenzer (2) 99,849 1.3%
Joseph E. Dondanville (8) 14,025 *
Richard J. Haayen (9) 4,476 *
3
<PAGE>
William R. Keane (3) (9) 71,995 *
Gerald I. Lenrow (4) (9) 7,208 *
John S. McGuinness (5) 3,124 *
Jonathan E. Michael (6) (8) 26,734 *
Edwin S. Overman (9) 19,848 *
Gerald D. Stephens (7) (8) 645,146 8.2%
Edward F. Sutkowski (9) 68,291 *
Gregory J. Tiemeier (8) 24,798 *
Robert O. Viets (9) 5,539 *
Terry L. Younghanz (8) 8,315 *
Directors and executive
officers as a group
(17 persons) (8) 1,040,267 13.30%
*Less than 1% of Class.
(1) Unless otherwise noted, each person has sole voting power and sole
investment power with respect to the shares reported.
(2) Includes 32,668 shares owned by Mr. Daenzer's spouse, and 22,163 shares
held in a trust for the benefit of Mr. Daenzer's adult children and
grandchildren of which a bank and Mr. Daenzer's spouse act as co-trustees, as
to which Mr. Daenzer disclaims any beneficial interest.
(3) Includes 27,428 shares owned by Mr. Keane's spouse, Evelyn Corral, an
honorary Vice President of the Company, as to which Mr. Keane claims
beneficial interest.
(4) Includes 325 shares held by Mr. Lenrow's spouse in a custodian account
for the benefit of their minor daughter, as to which Mr. Lenrow disclaims any
beneficial interest.
(5) Includes 937 shares owned by Dr. McGuinness' spouse and 2,187 shares
owned by Dr. McGuinness' adult children residing with Dr. and
Mrs. McGuinness, as to which Dr. McGuinness disclaims beneficial interest.
(6) Includes 25,656 shares allocated to Mr. Michael under the ESOP and 665
shares allocated under the RLI Corp. Key Employee Excess Benefit Plan
("Michael Key Plan") over which Mr. Michael has no voting or investment power.
4
<PAGE>
(7) Includes 201,927 shares allocated to Mr. Stephens under the ESOP; 24,790
shares allocated under the Stephens Key Plan over which Mr. Stephens has no
voting or investment power; 28,143 shares owned by Mr. Stephens' spouse;
7,662 shares held in custodian accounts for the benefit of Mr. Stephens'
grandchildren, over which Mr. Stephens has the sole voting and investment
power; and, as trustee of 1,322 shares in the H.O. Stephens Trust in which
Mr. Stephens' mother is entitled to the income and principal. Mr. Stephens,
as trustee under the H.O. Stephens Trust, has the sole voting and investment
power of the shares in such Trust.
(8) Includes shares allocated to the executive officers under the ESOP with
respect to which such officers have sole voting power and no investment
power, except during the period which any such executive officer may
diversify a percentage, not to exceed 50%, of such officer's ESOP benefit.
As of December 31, 1996, the following shares were allocated under the ESOP:
Mr. Dondanville 14,007 shares; Mr. Michael 25,656 shares; Mr. Stephens
201,927 shares; Mr. Tiemeier 24,165 shares; and Mr. Younghanz 8,315 shares.
Also includes shares held directly or indirectly by Michael W. Dalton and
Timothy J. Krueger. Mr. Krueger left the employ of the Company on April 15,
1996, to become Vice President, Chief Financial Officer of RLI Vision Corp.,
the Company's then current wholly-owned ophthalmic subsidiary. Pursuant to a
Merger and Plan of Reorganization (the "Merger") effective December 1, 1996,
between Hester Enterprises, Inc., a Hawaii corporation, and RLI Vision Corp.,
an Illinois corporation, Mr. Dalton terminated his employment with the
Company December 2, 1996. Simultaneous with the Merger, RLI Vision Corp.
changed its name to Maui Jim, Inc. ("Maui"). The Company retained a 34%
equity investment in Maui in which Messrs. Krueger and Dalton retain their
respective positions as Vice President, Chief Financial Office and President,
Chief Operating Officer. Effective January 3, 1997, the Company purchased
from Mr. Hester additional shares such that after such purchase the Company
owned a 44% equity investment in Maui.
(9) Includes shares held by a bank trustee under an irrevocable trust
established by the Company pursuant to the RLI Corp. Director Deferred
Compensation Plan ("Director Deferred Plan") for the benefit of the
following: Mr. Haayen 4,226 shares; Mr. Keane 38,875 shares; Mr. Lenrow 6,883
shares; Dr. Overman 19,848 shares; Mr. Sutkowski 21,190 shares; and, Mr.
Viets 4,914 shares. Each participating director has no voting or investment
power with respect to such shares and disclaims beneficial ownership of such
shares for purposes of Section 13(d) of the Securities Exchange Act of 1934.
The information with respect to beneficial ownership of Common Stock of
the Company is based on information furnished to the Company by each
individual included in the table.
5
<PAGE>
PROPOSAL ONE:
ELECTION OF DIRECTORS
NOMINEES. At the Annual Meeting, four(4) directors are to be elected, each
to hold office for a three-year term or until a successor is elected and
qualified. Messrs. Bernard J. Daenzer, Richard J. Haayen, Jonathan E. Michael
and Edward F. Sutkowski are Class I directors. Messrs. Daenzer, Haayen and
Sutkowski were elected by the shareholders in 1994 for three-year terms
expiring in 1997. Mr. Michael was elected at the March 6, 1997 meeting of
the Board of Directors of the Company for a term expiring at the Annual
Meeting to be held May 1, 1997.
VOTING OF PROXIES. Unless otherwise instructed, it is intended the shares
represented by the enclosed Proxy will be voted for the election of the four
nominees named above. The affirmative vote of a plurality of the shares
present in person or represented by Proxy at the Annual Meeting and entitled
to vote is required for the election of directors. Votes will be tabulated
by an Inspector of Election appointed at the Annual Meeting. Abstentions and
broker non-votes have no effect on determinations of majority except to the
extent that they affect the total votes received by any particular candidate.
There is no cumulative voting for the directors under the Company's Articles
of Incorporation.
SUBSTITUTE NOMINEES. The Board of Directors has no reason to believe that
any nominee will be unable to serve if elected. In the event that any
nominee shall become unavailable for election, it is intended that such
shares will be voted for the election of a substitute nominee selected by the
persons named in the enclosed Proxy unless the Board of Directors should
determine to reduce the number of directors pursuant to the Company's
By-Laws.
DIRECTOR AND NOMINEE INFORMATION. The following includes certain information
with respect to the current directors and nominees to the Board of Directors
furnished to the Company by such individuals:
DIRECTOR PRINCIPAL
NAME AGE SINCE OCCUPATION
- - ------------------------------------------------------------------------------
Bernard J. Daenzer 81 1972 Owner of Daenzer Associates, Key
Largo, FL, an insurance
(to be elected for a term of consulting services firm since
three years expiring in 2000) 1980. Formerly President and
Chairman of Wohlreich and
Anderson Insurance Companies
and the Howden Swan
Insurance Agencies until
his retirement in 1980.
PICTURE
Richard J. Haayen (1) 72 1993 Chairman and CEO of Allstate
Insurance Company in Northbrook,
(to be elected for a term of IL until his retirement in 1989.
three years expiring in 2000) Currently Executive-In-Residence
at Southern Methodist University
PICTURE in Dallas, TX.
6
<PAGE>
Jonathan E. Michael 43 1997 Executive Vice President of the
(to be elected for a term of Company; President, Chief
three years expiring in 2000) Operating Officer of RLI
Insurance Company and Mt. Hawley
Insurance Company, the Company's
wholly-owned subsidiaries.
Mr. Michael commenced employment
with the Company as Chief
PICTURE Accountant in 1982.
Edward F. Sutkowski (2) 58 1975 President of the law firm of
Sutkowski & Washkuhn Ltd. in
(to be elected for a term of Peoria, IL since 1965.
three years expiring in 2000)
PICTURE
Certain information concerning the remaining directors, whose terms expire
either in 1998 or 1999, is set forth as follows based upon information
furnished to the Company by such individuals:
William R. Keane 80 1966 Former Vice President, Contacts,
Inc. (contact lens laboratory)
(term expiring in 1999) in Chicago, IL until retirement
in 1983.
PICTURE
Gerald I. Lenrow 69 1993 Consultant to General
(term expiring in 1999) Reinsurance Corporation since
1996. Former partner in the
international accounting firm
of Coopers & Lybrand LLP until
1990, following which he served
as their consultant until joining
General Reinsurance Corporation.
PICTURE
John S. McGuinness 74 1983 President of John S. McGuinness
(term expiring in 1998) Associates in Scotch Plains, NJ,
consultants in actuarial science
7
<PAGE>
and management, since 1964.
PICTURE
Edwin S. Overman 74 1987 President Emeritus of the
(term expiring in 1999) Insurance Institute of America,
a national educational
organization in Malvern, PA,
since his retirement as
President of the Institute in
1987.
PICTURE
Gerald D. Stephens 64 1965 Mr. Stephens founded the Company
(term expiring in 1998) in 1965 and has been President
since 1972.
PICTURE
Robert O. Viets (3) 53 1993 President and CEO since 1988 of
(term expiring in 1998) Cilcorp, Inc., a holding company
in Peoria, IL, whose principal
business subsidiary is Central
Illinois Light Company ("CILCO").
Mr. Viets joined CILCO in 1973
and held various managerial and
officer positions until his
promotion to President and CEO.
PICTURE
(1) Mr. Haayen is a director of Paragon Group, Inc. in Dallas, Texas, whose
securities are registered pursuant to Section 12 or subject to the
requirements of Section 15(d) of the Securities and Exchange Act of 1934.
(2) Mr. Sutkowski is associated with the law firm of Sutkowski & Washkuhn
Ltd. which has provided legal services to the Company prior to and during
1996. It is expected that the Company's relationship with Sutkowski &
Washkuhn Ltd. will continue in the future.
(3) Mr. Viets is a director of Cilcorp Inc. in Peoria, Illinois, whose
securities are registered pursuant to Section 12 or subject to the
requirements of Section 15(d) of the Securities and Exchange Act of 1934.
AUDIT COMMITTEE
The Company's Audit Committee, comprised of outside directors Messrs.
Haayen, Keane, Lenrow, McGuinness, and Viets, met two times in 1996 to
consider an outside audit firm and to discuss the planning of the Company's
annual outside audit and its results. The Audit Committee also monitored the
Company's management of its exposures to risk of financial loss, assessed the
auditors' performance, reviewed the adequacy of the Company's internal
controls, and the extent and scope of audit coverage, monitored selected
financial reports, and made audit and auditor engagement recommendations to
the Board of Directors.
8
<PAGE>
EXECUTIVE RESOURCES COMMITTEE
The Company's Executive Resources Committee, comprised of outside
directors Messrs. Daenzer, Haayen, Lenrow, McGuinness, Overman and Sutkowski,
met one time in 1996 to review and recommend the compensation of the
executive officers and other officers of the Company. The Committee also
evaluated executive performance, executive back-up plans, examined the
officer development program, and was responsible for searching, enlisting and
maintaining a file of prospective new Board members and potential executive
officers. The Committee administers the Incentive Stock Option Plan through
a subcommittee comprised of outside directors Messrs. Haayen, Daenzer, Keane,
McGuinness, Overman and Viets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Sutkowski, a member of the Executive Resources Committee during
1996, is associated with the law firm of Sutkowski & Washkuhn Ltd. During
1996, the Company and certain of its subsidiaries retained the legal services
of that firm. Subsequent to year end 1996, Mr. Sutkowski resigned from the
Executive Resources Committee.
NOMINATING COMMITTEE
The Company does not have a standing nominating committee.
BOARD MEETINGS AND COMPENSATION
MEETINGS. During the year 1996, five meetings of the Board of Directors were
held. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and Board of Directors committees on which
he served.
DIRECTOR COMPENSATION. During 1996, all directors of the Company (other than
officers of the Company) were compensated at the rate of $11,000 per year,
and paid $925 for each Board of Directors meeting attended, $925 for each
Committee of the Board of Directors attended, and $925 for each Committee of
the Board of Directors chaired. Effective May 1, 1997, retroactive to
January 1, 1997, all directors (other than officers of the Company) will be
compensated at the rate of $15,000 per year and paid $1,100 for each Board of
Directors' meeting attended, $1,100 for each Committee of the Board of the
Directors attended, and $1,100 for each Committee of the Board of Directors
chaired. Directors are also reimbursed for actual travel and related
expenses incurred, and are provided a travel accident policy funded by the
Company.
Effective May 2, 1996, the Board of Directors adopted the Directors'
Stock Option Plan for Outside Directors ("Director Plan"), and initial grants
have been made thereunder, subject to Shareholder approval. See Proposal
Five. If the Company earns more than its cost of capital and the ESOP
contribution as provided under its Market Value Potential Performance
Incentive Plan ("MVP Plan") in respect of a year, each outside director shall
be granted an option to purchase 600 additional shares of the Company's
Common Stock under the Director Plan effective the first business day in
February of the
9
<PAGE>
succeeding year. The Director Plan provides for the grant of an option to
purchase 3,000 shares of the Company's Common Stock to each of the Company's
outside directors at the time of adoption and to each newly elected or
appointed outside director. In addition, the Director Plan replaces a prior
plan which provided for an annual cash bonus to each outside director equal
to $1,250 for each percent, or fraction thereof, of the excess of the
Company's return on the Company's beginning Shareholders' Equity over the
average industry return on such equity, but not to exceed $12,500.
DIRECTOR DEFERRED COMPENSATION. Prior to the beginning of each year, an
outside director may elect to defer the compensation otherwise payable to the
director during the succeeding year pursuant to the Director Deferred Plan.
Under the Director Deferred Plan, the Company must transfer to a bank trustee
under an irrevocable trust established by the Company, such number of shares
as are equal to the compensation deferred at the close of the referent year.
Dividends on these shares are reinvested quarterly under the Company's
Dividend Reinvestment Plan. In general, Director Deferred Plan benefits are
distributable beginning when the director's status terminates.
EXECUTIVE RESOURCES COMMITTEE REPORT
The following report by the Executive Resources Committee is required by
the rules of the Securities and Exchange Commission to be included in this
Proxy Statement and shall not be considered incorporated by reference in
other filings by the Company with the Securities and Exchange Commission.
GENERAL. The Executive Resources Committee determines the base and incentive
compensation of the executive officers. The incentive compensation is
designed to attract, retain and motivate high quality executives and reward
the executive officers for Company profitability and the enhancement of
shareholder values. It is influenced heavily by the Company's profitability
and return on its equity in excess of its cost of capital and the ESOP
contribution, if any. The Committee is of the opinion that the total
compensation payable is comparable to that provided by the Company's
competitors.
An executive officer's base compensation is computed by reference to
industry compensation studies; it relates to both annual and long-term
performance objectives established by the Committee. A significant portion
of an executive officer's compensation is at risk. For example, in the case
of Mr. Stephens, his bonus, if any, is computed with reference to the
Company's MVP Plan. See Proposal Four.
10
<PAGE>
COMPENSATION POLICIES FOR OTHER EXECUTIVE OFFICERS. The compensation
programs for the other executive officers are the same as those available for
the President except for the Company's Key Employee Excess Benefit Plan in
favor of Messrs. Stephens and Michael. See Footnote (3) under Summary
Compensation Table. Executive officer compensation is based on officer
responsibility, the profitability of the officer's segment of the Company,
productivity, budgetary compliance, and an in depth individual officer
evaluation.
MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE
Edwin S. Overman, Chairman
Bernard J. Daenzer
Richard J. Haayen
Gerald I. Lenrow
John S. McGuinness
EXECUTIVE OFFICERS
The following information is provided as to each current executive
officer of the Company:
Executive
Position Officer
Name and Age with Company Since
- - --------------------------------------------------------------------
Gerald D. Stephens President 1965
Age 64 and Director
Jonathan E. Michael Executive Vice 1985
Age 43 President; President,
Chief Operating Officer
of RLI Insurance
Company and Mt. Hawley
Insurance Company, the
Company's wholly-owned
insurance subsidiaries
Joseph E. Dondanville Vice President, 1992
Age 40 Chief Financial
Officer
Mary Beth Nebel Vice President 1994
Age 40 (1) and General
Counsel
Camille J. Hensey Vice President and 1987
Age 55 Corporate Secretary
Gregory J. Tiemeier Assistant Secretary; 1992
Age 39 (2) Senior Vice President,
Operations and Technology
and Assistant Secretary
of RLI Insurance Company
and Mt. Hawley Insurance
Company, the Company's
wholly-owned insurance
subsidiaries
Terry L. Younghanz Senior Vice President 1996
Age 50 (3) of Underwriting of RLI
Insurance Company and
Mt. Hawley Insurance
Company, the Company's
wholly-owned insurance
subsidiaries
(1) Ms. Nebel was promoted to Vice President and General Counsel in 1994.
Ms. Nebel joined the Company in 1988 as Assistant General Counsel.
(2) Mr. Tiemeier was promoted to Senior Vice President of the Company's
wholly-owned insurance subsidiaries, RLI Insurance Company and Mt. Hawley
Insurance Company, in 1994 and was appointed Assistant Secretary in 1995.
Prior to his promotion to Senior Vice President, Mr. Tiemeier had been Vice
President of Management Information Services since 1992 and previously held
various managerial positions since he joined the Company in 1979.
(3) Mr. Younghanz was promoted to Senior Vice President of Underwriting May
28, 1996. He joined the Company in 1987 as Regional Vice President of the
Company's Heartland Branch Office in Overland Park, Kansas.
11
<PAGE>
EXECUTIVE COMPENSATION
The aggregate cash compensation earned from the Company and its
subsidiaries during the 1996 fiscal year is expressed below for the Company's
President and four most highly-compensated executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation ------------
---------------------------------- SECURITIES
NAME and PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($)(1) OPTIONS (#)(2) COMPENSATION ($)(3)
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald D. Stephens 1996 438,208 477,178 21,700 69,743
President 1995 405,744 0 27,375 67,334
1994 376,640 0 - 3,837
Jonathan E. Michael 1996 257,056 334,025 2,900 40,064
Executive Vice President 1995 239,719 0 5,375 39,780
1994 216,250 0 - 1,187
Terry L. Younghanz 1996 165,588 258,193 4,000 23,275
Senior Vice President 1995 133,646 211,827 3,125 24,130
of Underwriting, RLI 1994 124,416 133,695 1,128
Insurance Company
and Mt. Hawley
Insurance Company
Joseph E. Dondanville 1996 132,760 214,730 1,800 20,600
Vice President, Chief 1995 124,271 0 2,250 19,991
Financial Officer 1994 111,163 0 - 1,093
Gregory J. Tiemeier 1996 135,317 155,083 1,200 20,997
Senior Vice President, 1995 127,667 0 2,625 20,537
Operations and Technology, 1994 117,448 0 - 1,172
RLI Insurance Company
and Mt. Hawley Insurance
Company
</TABLE>
(1) 1996 amounts represent compensation accrued during fiscal year 1996 and
paid in 1997 pursuant to the Company's MVP Plan, exclusive of the following
additional amounts which may be payable to such individuals in future years
under the MVP Plan: Gerald D. Stephens, $318,119; Jonathan E. Michael,
$222,683; Terry L. Younghanz, $64,949; Joseph E. Dondanville, $143,153; and
Gregory J. Tiemeier, $103,389. See Proposal Four: Market Value Potential
Performance Incentive Plan. In the case of Mr. Younghanz, the 1994 and
1995 amounts and $160,769 of the 1996 amount represent underwriting
bonuses earned in such year, based upon a percentage of earned premiums,
less developed losses and expenses, for his area of responsibility for the
seven years preceding the year in which the bonus was earned. The
remaining $97,424 for 1996 was paid to Mr. Younghanz pursuant to the MVP
Plan.
(2) Twenty percent of each option grant becomes exercisable one year after the
date of the grant and each year thereafter in 20% increments. Such options
lapse at the end of the ten (10) year period beginning on the grant date.
Amounts shown have been adjusted to reflect the 5-for-4 stock split which
was paid in the form of a stock dividend in June, 1995.
(3) Represents the value of Company contributions to the ESOP on behalf of the
named executive officers. In December of 1994, the Board of Directors
determined not to cause the Company to make a contribution to the ESOP in
respect of 1994 given the financial results of the Company. The amounts
represent the value of participant forfeitures allocated to such executive
officer under the ESOP. In the case of Messrs. Stephens and Michael, the
amounts include shares allocated to them under their respective Key
Employee Excess Benefit Plans as follows: MR. STEPHENS 2,180 SHARES IN
RESPECT TO 1996; 600 SHARES IN RESPECT OF 1995; AND 1,914 SHARES IN RESPECT
OF 1994; MR. MICHAEL 665 SHARES IN RESPECT OF 1996, THE YEAR IN WHICH
MR. MICHAEL BECAME A PARTICIPANT IN THE KEY PLAN. In general, benefits are
distributable to Messrs. Stephens and Michael when their employment
terminates. Under the Key Plan, the Company must transfer to the trustee
under an irrevocable trust maintained by the Company for the benefit of
Messrs. Stephens and Michael, such number of shares as are equal in value
to the excess of (a) the contribution allocable to them under the ESOP
determined without regard to any limitation on compensation imposed by the
Internal Revenue Code, over (b) the contribution actually allocable to them
under the ESOP determined with regard to any limitation on compensation
imposed by the Internal Revenue Code. The value of each share transferred
is equal to the per share closing price as of the close of the last
business day of the referent year. The total value of their Key Plan
benefits as of December 31, 1996 was: Mr. Stephens $884,345 and Mr. Michael
$39,099.
12
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information regarding grants of stock options
made to the named executive officers under RLI's Incentive Stock Option Plan
during the fiscal year ended December 31, 1996. The amounts shown for each
of the named executive officers as potential realizable values are based on
arbitrarily assumed annualized rates of stock price appreciation of five
percent and ten percent over the full ten-year term of the options, which
would result in stock prices of approximately $37.26 and $59.33,
respectively. The amounts shown as potential realizable values for all
shareholders represents the corresponding increases in the market value of
7,821,730 outstanding shares of the Company's Common Stock held by all
shareholders as of December 31, 1996, which would total approximately
$291,445,205 and $464,077,780, respectively. No gain to the optionees is
possible without an increase in stock price which will benefit all
shareholders proportionately. These potential realizable values are based
solely on arbitrarily assumed rates of appreciation required by applicable
Securities and Exchange Commission regulations. Actual gains, if any, on
option exercises and common stockholdings are dependent on the future
performance of the Company's Common Stock. There can be no assurance that
the potential realizable values shown in this table will be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM
- - -----------------------------------------------------------------------------------------------------------------------
IF STOCK AT IF STOCK AT
$37.26 $59.33
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#)(1) YEAR(2) ($/SH) DATE 5%(3) 10%(3)
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALL SHAREHOLDERS' $291,445,205 $464,077,780
STOCK APPRECIATION
Gerald D. Stephens 21,700 36.38% $22.8750 05/02/06 $ 312,173 $ 791,112
Jonathan E. Michael 2,900 4.86% $22.8750 05/02/06 $ 41,719 $ 105,724
Terry L. Younghanz(4) 2,500 4.19% $22.8750 05/02/06 $ 35,964 $ 91,142
1,500 2.51% $23.2500 05/28/06 $ 21,932 $ 55,581
Joseph E. Dondanville 1,800 3.02% $22.8750 05/02/06 $ 25,894 $ 65,622
Gregory J. Tiemeier 1,200 2.01% $22.8750 05/02/06 $ 17,263 $ 43,748
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each option grant becomes exercisable in 20% increments on the first five
anniversaries of the grant date. Such options lapse on the tenth
anniversary of the grant date.
(2) The Company granted options to purchase an aggregate of 59,650 shares to
all employees during 1996.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates dictated by the Securities and Exchange Commission
when the "Potential Realizable Value" alternative is used. These are not
intended to be a forecast of the Company's stock price.
(4) Mr. Younghanz received an additional grant on May 28, 1996 upon his
promotion to Senior Vice President, Underwriting.
13
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during the last fiscal
year and unexercised options held December 31, 1996. Value realized upon
exercise is the excess of the fair market value of the underlying stock on the
exercise date over the exercise price under the option. Value of unexercised,
in-the-money options at fiscal year-end is the difference between its exercise
price and the fair market value of the underlying stock on December 31, 1996,
which was $33.375 per share. These values, unlike the amounts set forth in the
column headed "Value Realized," have not been, and may never be, realized. The
underlying options have not been, and may never be, exercised; and actual gains,
if any, on exercise will depend on the value of the Company's Common Stock on
the date of exercise. There can be no assurance that these values will be
realized.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF IN-THE-MONEY OPTIONS
- - ------------------------------------------------------------------------------------------------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald D. Stephens 0 $0.00 5,475 43,600 $69,942 $507,622
Jonathan E. Michael 0 $0.00 1,075 7,200 $13,733 $ 85,382
Terry L. Younghanz 0 $0.00 625 6,500 $ 7,984 $ 73,374
Joseph E. Dondanville 0 $0.00 450 3,600 $ 5,748 $ 41,895
Gregory J. Tiemeier 0 $0.00 525 3,300 $ 6,706 $ 39,427
</TABLE>
(1) The share numbers and market and exercise prices have been adjusted,
as necessary, for the 5-for-4 stock split that occurred on June 21,
1995.
LONG TERM INCENTIVE PLAN
No long term incentive plan awards were made during 1996.
14
<PAGE>
PENSION PLAN
The following table illustrates the estimated annual benefits (based on
a straight life annuity payable beginning at age 65, but in no event less
than 120 monthly payments) under the Company's pension plan for specified
compensation and service levels assuming a participant retired on July 1,
1997 at age 65 after selected years of service:
AVERAGE ANNUAL ESTIMATED ANNUAL PENSION BENEFIT UPON RETIREMENT AT
COMPENSATION JULY 1, 1997 WITH YEARS OF SERVICE INDICATED
- - -----------------------------------------------------------------------------
15 YRS. 20 YRS. 25 YRS. 30 YRS. 35 YRS.
--------------------------------------------------------
$100,000 $ 20,188 $ 26,918 $ 33,647 $ 40,377 $ 47,106
125,000 25,851 34,468 43,085 51,702 60,319
150,000* 31,513 42,018 52,522 63,027 73,531
*Generally, a participant's annual benefit payable beginning at his social
security retirement age (determined on the basis of his year of birth) must
not exceed the lesser of $90,000 (as adjusted for cost-of-living
increases--$120,000 for 1996) or 100% of his average compensation for his
high three years. In addition, effective beginning in 1994, the Internal
Revenue Code reduced the level of a participant's compensation which may be
considered in determining benefits under all types of tax qualified plans
from the 1993 level of $235,840 to $150,000. In applying the $150,000
limit, the Plan must freeze benefits for any participant whose benefit is
based on compensation in excess of $150,000 as of December 31, 1993. The
frozen benefit may be adjusted for increases in compensation after 1993, but
adjustments are not permitted unless the participant's updated compensation
exceeds the compensation that determined the participant's frozen benefit.
Based upon the foregoing, a participant's annual benefit is limited to
$74,453 unless such participant's earned benefit was greater than $74,453
as of December 31, 1993.
Mr. Stephens' current compensation covered by the Plan is $150,000 with
30 years of plan participation; Mr. Michael's current covered compensation is
$150,000 with 13 years of plan participation; Mr. Younghanz's current
covered compensation is $150,000 with 9 years of plan participation; Mr.
Dondanville's current covered compensation is $132,761 with 12 years of plan
participation; and Mr. Tiemeier's current covered compensation is $135,317
with 15 years of plan participation.
COMMON STOCK PERFORMANCE CHART
A line graph comparing the percentage change in the cumulative total
shareholder return, including the reinvestment of dividends, on the Company's
Common Stock with a cumulative total return of the S & P Composite 500 Stock
Index and the S & P Property and Casualty Index for the period beginning
December 31, 1991 through December 31, 1996 has been omitted from this
electronic filing. The table below contains the data used to create the
omitted line graph:
TOTAL RETURN
COMPARISON OF FIVE YEAR CUMULATIVE
RLI, S&P 500, S&P P/C INS INDEX
Compounded Total Return
RLI - 23.2%
S&P 500 - 16.0%
S&P P/C Ins - 13.5%
15
<PAGE>
Assumes $100 invested on December 31, 1991
RLI, S&P 500 Index, and S&P P/C Ins Index
Total Return assumes reinvestment of dividends
Measurement Period S&P 500 S&P P/C Ins
(Fiscal Year Covered) RLI Corp. Index Index
________________________________________________________________
Measurement Pt - 12/31/91 $100 $100 $100
FYE 12/31/92 154 108 121
FYE 12/31/93 168 118 115
FYE 12/31/94 133 120 119
FYE 12/31/95 208 164 158
FYE 12/31/96 284 210 188
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends. The Company will
neither make nor endorse any predictions as to future stock performance.
The foregoing Stock Price Performance Graph shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
PROPOSAL TWO:
TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO AUTHORIZE A NEW CLASS OF
PREFERRED STOCK
The Board of Directors has approved, and submits for authorization and
approval of shareholders, a proposal to amend the Company's Articles of
Incorporation to include a new class of Preferred Stock (the "Amendment"). The
text of the proposed Amendment of paragraph 1 of Article Four is as follows:
"The Aggregate number of shares of Preferred Stock which the
Corporation is authorized to issue is Five Million (5,000,000) shares with
a par value of one cent ($.01) per share."
The text of the proposed Amendment of paragraph 2 of Article Four is as
follows:
"The Common Stock shall rank junior to the Preferred Stock in right of
payment of dividends and upon liquidation and shall be subject to all of
the rights, powers, privileges and preferences of the Preferred Stock in
any resolution or resolutions adopted by the Board of Directors pursuant to
authority vested in it by the provisions of this Article Four.
16
<PAGE>
The Preferred Stock may be issued from time to time in one or more
series. All shares of Preferred Stock shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed by the
Company's Directors as hereinafter provided, and each share of each series
shall be identical with all other shares of such series, except that in the
case of series on which dividends are cumulative the dates from which
dividends are cumulative may vary to reflect differences in the date of
issue. Subject to the provisions of this resolution, which provisions
shall apply to all Preferred Stock, the Directors hereby are authorized to
cause such shares to be issued in one or more series and with respect to
each such series prior to the issuance thereof to fix:
a) The designation of the series which may be by distinguishing
number, letter and/or title.
b) The number of shares of the series, which number the Directors may
(except where otherwise provided in the creation of the series) increase or
decrease (but not below the number of shares thereof then outstanding).
c) The dividend rate of the series.
d) The dates at which dividends, if declared, shall be payable,
whether such dividends shall be cumulative or non-cumulative, and, if
cumulative, the dates from which dividends shall be cumulative.
e) The redemption rights and price or prices, if any, for shares of
the series.
f) The terms and amount of any sinking fund provided for the purchase
or redemption of shares of the series.
g) The amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation.
h) Whether the shares of the series shall be convertible into shares
of any other class or series of the Corporation, and, if so, the
specification of such other class or series, the conversion price or
prices, any adjustments thereof, the date or dates as of which such shares
shall be convertible, and other terms and conditions upon which such
conversion may be made.
i) Restrictions on the issuance of shares of the same series or of any
other class or series.
j) The limitation or denial of voting rights, or the grant of special
voting rights, if any.
The Company's directors are authorized to adopt from time to time
resolutions pursuant to these Amended Articles of Incorporation fixing,
with respect to each such series, the matters described in clauses (a) to
(j), inclusive, of this section."
The Company currently has only one authorized class of capital stock,
its Common Stock ($1.00 par value per share). The Board of Directors
believes that it is advisable to increase the Company's authorized capital to
include a class of Preferred Stock in order to increase the Company's
flexibility to engage in Preferred Stock financing that the Board of
Directors believes are favorable to the Company or to enter into reinsurance
arrangements that provide for the potential issuance of Preferred Stock in
the future. Section 6.10 of the Illinois Business Corporation Act permits
the authorization of a class of preferred stock, such as that described
above, pursuant to which the Board of Directors can designate and issue
shares in one or more series and can specify, subject to certain limitations,
the relative rights and preferences of any series so designated. Many
publicly traded companies have such a class of authorized capital stock.
17
<PAGE>
In the event that Proposal Two is approved at the Annual Meeting of
Shareholders, the Company intends to designate a series of the Preferred
Stock that would be issuable upon exercise by the Company of its option to
sell Preferred Stock with an aggregate purchase price not exceeding $50
million to Centre Reinsurance pursuant to the Catastrophe Equity Put Option
Agreement. Such option is only exercisable, and the related stock issuable,
upon the occurrence of a qualifying catastrophic event (as defined in such
agreement) with respect to the Company. Such Preferred Stock, if issued,
would be convertible into Common Stock of the Company beginning three years
after its issuance at the option of the holder thereof. The conversion rate
will be based on the market price of the Company's Common Stock at such time.
The new class of Preferred Stock, if approved, will be issuable in one
or more series with such relative rights and preferences (including voting
rights, if any) as are specified by the Board of Directors at the time of
designation or issuance, without further action on the part of the Company's
shareholders. Future issuances of the shares of the Preferred Stock could
have the effect of making it more difficult for a person to acquire control
of the Company and remove management. Except as described above, the Board
of Directors has no current intention to designate or issue any series of the
new class of Preferred Stock.
The affirmative vote of the holders of at least two-thirds (2/3) of the
outstanding shares of Common Stock of the Company is required for adoption of
this Amendment. If this proposed Amendment is adopted by the shareholders,
the Company intends to promptly effect the Amendment by filing an appropriate
amendment to its Articles of Incorporation with the State of Illinois.
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE "FOR" THE PROPOSED
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION authorizing the new
class of Preferred Stock.
PROPOSAL THREE:
TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO REQUIRE THE AFFIRMATIVE
VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES
ENTITLED TO VOTE ON SUBSEQUENT AMENDMENTS TO THE ARTICLES.
The Board of Directors has approved, and submits for authorization and
approval of shareholders, a proposal to amend the Company's Articles of
Incorporation to require the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote on subsequent amendments
to the Articles of Incorporation. Currently, the affirmative vote of
two-thirds of the outstanding shares is required to amend the Company's
Articles of Incorporation. The text of the proposed amendment of Article 7
is as follows:
18
<PAGE>
"In accordance with the provision of Section 10.20(d), AMENDMENT BY
DIRECTORS AND SHAREHOLDERS, of the Business Corporation Act of 1983, any
amendment to the Articles of Incorporation shall be approved upon receiving
the affirmative vote of the holders of at least a majority of the
outstanding shares entitled to vote on the amendment and not less than a
majority of the outstanding shares of each class or series of shares
entitled to vote as a class on the amendment."
The Illinois Business Corporation Act of 1983 provides that amendments
to the Articles of Incorporation of companies domiciled in Illinois shall be
adopted upon receiving the affirmative vote of at least two-thirds of the
votes of the shares entitled to vote on such amendment, unless a company's
Articles of Incorporation supersede the two-thirds vote requirement by
specifying any smaller or larger vote requirement but not less than a
majority of the votes of the shares entitled to vote on the amendment. The
Company's Board of Directors believes that it is appropriate to amend the
Articles of Incorporation as described above so that only majority approval
is required for any subsequent amendment. Absent such a change, one or more
shareholders owning less than a majority of the Company's shares have the
power to block changes to the Articles desired by the holders of a majority
of the outstanding shares of Common Stock. In addition, because these
percentages are based on the outstanding shares, and not on the shares
present and voting at a particular meeting, there is no chance that the
failure of shareholders to be present at a meeting would permit any amendment
to be effected by the holders of less than a majority of the total shares.
The affirmative vote of the holders of at least two-thirds (2/3) of the
outstanding shares of Common Stock of the Company is required for adoption of
this Amendment. If this proposed Amendment is adopted by the shareholders,
the Company intends to promptly effect the Amendment by filing an appropriate
Amendment to its Articles of Incorporation with the State of Illinois.
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE "FOR" THE
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION REQUIRING THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING
SHARES ENTITLED TO VOTE ON SUBSEQUENT AMENDMENTS TO THE ARTICLES.
PROPOSAL FOUR:
TO APPROVE THE MARKET VALUE POTENTIAL PERFORMANCE INCENTIVE PLAN
The Board of Directors has adopted an incentive compensation plan for
key employees including executive officers which ties potential annual cash
incentive payments directly to Company performance. The plan has been
designed, and shareholders approval of the plan is being sought, to qualify
compensation paid under the plan as "qualified performance-based
compensation" within the meaning of Internal Revenue Code Section 162(m) and
thus assure the Company may deduct the amounts payable pursuant to the plan.
Following is a general summary of the Market Value Potential Performance
Incentive Plan ("MVP Plan"). The full text is attached as Exhibit A.
ADMINISTRATION. The MVP Plan is administered by the Plan Administration
Committee ("Committee") comprised of the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer and the Administrative Vice
President of the Company's wholly-owned subsidiary, RLI Insurance Company.
The decisions of the Committee are subject at all times to review or change
prospectively by those Executive Resources Committee members who are outside
directors within the meaning of Code Section 162(m).
19
<PAGE>
PARTICIPANTS. Participation in the MVP Plan is limited to key employees of
the Company selected by the Executive Resources Committee as recommended by
the Chief Executive Officer and Chief Operating Officer. Eleven key officers
including the officers listed in the Proxy Statement participated in the MVP
Plan in 1996. It is anticipated the same employees will participate in 1997.
PURPOSES. In past years the Company has paid annual cash bonuses to officers
based upon achievement of the Company's annual business plan. The MVP Plan
awards officers based upon Company performance resulting in earnings in
excess of the Company's cost of capital. The MVP Plan provides incentive for
officers to allocate Company capital to those products that produce income in
excess of the cost of capital, thus increasing the Company's stock market
value potential.
DESCRIPTION. Under the MVP Plan, for each fiscal year the Company's earnings
(as defined in the MVP Plan) are compared to the sum of the Company's cost of
capital and the Company's discretionary contribution to the ESOP, and a
specified aggregate percentage of the earnings excess or deficit ("MVP Bonus
Pool") is allocated among the participants for such year. The aggregate
percentage for the MVP Bonus Pool (8% for 1996) and portion of such aggregate
allocated to individual participants for the year are each determined by the
Executive Resources Committee. The Executive Resources Committee uses
Wyatt-Watson compensation service relative salary factors modified by
performance and job content considerations as recommended by the Chief
Executive Officer and the Chief Operating Officer. These percentages may
vary from year to year.
A memo account is established for each participant in the MVP Plan and the
participant's allocated percentage of the MVP Bonus Pool for each year
(whether a positive or negative amount) is annually credited to participants'
accounts without limitation. Once a year an interest factor is credited to
positive balances and sixty percent of each participant's positive account
balance is paid out. The remaining positive balance or any negative balance
is rolled into the next year and is subject to subsequent MVP Plan results.
There is no assurance a participant will ever receive a positive balance
which is rolled over as it may be eliminated by subsequent negative
allocations. Under the MVP Plan, rollovers may continue indefinitely and
participants are never required to repay negative balances.
20
<PAGE>
The amounts paid pursuant to the MVP Plan for 1997 are not currently
determinable. The following table describes the amounts which were paid to
each of the named executive officers, executive officers as a group and the
non-executive officer group under the MVP Plan in effect during 1996. Since
the payments under the MVP Plan relate directly to the Company's financial
performance, the actual payments for 1997 may be significantly different than
the amounts shown in the following table:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
_____________________________________________________________________________________
Key Executive Performance Plan
---------------------------------------
Name and Position Dollar Value($)(1) Number of Units
_____________________________________________________________________________________
<S> <C> <C>
Gerald D. Stephens,
President $477,178 N/A
Jonathan E. Michael,
Executive Vice President 334,025 N/A
Terry L. Younghanz,
Senior Vice President of Underwriting,
RLI Insurance Company and Mt. Hawley
Insurance Company 97,424 N/A
Joseph E. Dondanville,
Vice President, Chief Financial Officer 214,730 N/A
Gregory J. Tiemeier,
Senior Vice President, RLI Insurance Company
and Mt. Hawley Insurance Company 155,083 N/A
Executive Officers as a group 1,409,664 N/A
Non-Executive Officer Employee Group 276,366 N/A
</TABLE>
(1) 1996 amounts represent compensation accrued during fiscal year 1996 and
paid in 1997 pursuant to the Company's MVP Plan, exclusive of the following
additional amounts which may be payable to such individuals in future years
under the MVP Plan: Gerald D. Stephens, $318,119; Jonathan E. Michael,
$222,683; Terry L. Younghanz, $64,949; Joseph E. Dondanville, $143,153; and
Gregory J. Tiemeier, $103,389.
A participant who terminates employment will be eligible to receive an
award under the MVP Plan calculated as of the end of the quarter during the
year in which the termination took place and subject to certain limitations
set forth in Exhibit A. A participant who becomes totally disabled or dies
shall be paid the then existing balance calculated to the end of the nearest
quarter.
The affirmative vote of the holders of at least a majority of the shares
of Common Stock of the Company present and entitled to vote at the annual
meeting is required for adoption of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE "FOR" THE MARKET
VALUE POTENTIAL PERFORMANCE INCENTIVE PLAN.
PROPOSAL FIVE:
TO APPROVE THE STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
The following is a summary of the Outside Directors' Stock Option Plan
("Director Plan") adopted by the Board of Directors on May 2, 1996, subject
to shareholder ratification of the adoption of the Plan by the Board of
Directors. This summary is qualified in its entirety by reference to the
complete Director Plan attached as Exhibit B.
21
<PAGE>
Time commitments for service as a director of public companies have
increased in recent years. These increasing demands on directors' time have
greatly increased the competition for potential directors who possess the
talents, skills, judgment, personal attributes and other characteristics of
an outstanding director. This competition is especially keen for individuals
who are not associated with a company which requests their services as a
director.
The Board of Directors adopted the Director Plan to provide compensation
to each director of the Company who is not a current or former employee of
the Company or its subsidiaries in the form of a stock option grant at the
time of such director's election or appointment to the Board of Directors and
potential future stock option grants based on Company performance. The Board
of Directors believes that the Director Plan will enhance the Company's
ability to attract and retain well qualified individuals and will also
enhance the long-term commitment of outside directors to the Company and
further align their interests with the interests of the shareholders.
Effective May 2, 1996, each outside director was granted an option to
purchase 3,000 shares of the Common Stock of the Company at an exercise price
of $22.875 per share, the closing price per share on such date. Upon the
election or appointment of an individual as an outside director, such
individual shall be granted an option to purchase 3,000 shares of the Common
Stock of the Company at the closing price per share on such date. In
addition, if the Company earns more than its cost of capital under the
Company's MVP Plan for any year beginning on or after January 1, 1996, then
as of the first business day of February of the following year, each outside
director shall be granted an option to purchase 600 additional shares of the
Common Stock of the Company at the closing price per share on such date. The
Company did earn more than its cost of capital for 1996. Accordingly, each
outside director was granted an option to purchase 600 additional shares of
the Common Stock of the Company at an exercise price of $34.875 per share,
the closing price per share on February 3, 1997. All grants of stock options
made to date under the Director Plan have been made subject to the receipt of
shareholder approval of the Director Plan at the annual meeting.
Each option granted under the Director Plan must be exercised within the
ten-year period beginning on the date of the grant. Except in the case of
the death, disability or the termination of an individual status as a
director, an Option will vest and become exercisable by the holder in respect
of 1/3 of the underlying shares of Common Stock on each of the first, second
and third anniversaries of the grant date. In the case of the death,
disability or the termination of an individual status as a director, an
option will, to the extent not already vested, immediately vest and become
exercisable in respect of all of the underlying shares of Common Stock.
The Director Plan is administered by the Stock Option Committee
comprised of certain outside directors, namely Messrs. Daenzer, Haayen,
Keane, McGuinness, Overman, and Viets.
22
<PAGE>
Conditional upon shareholder ratification of adoption of the Director
Plan, an aggregate of 200,000 shares of Common Stock of the Company will be
reserved for outside directors' stock options, subject to adjustments for
such matters as stock splits and stock dividends. Shares of Common Stock
covered by options which expire unexercised under the Director Plan may not
be granted to others. The Director Plan permits the Board of Directors to
terminate the Director Plan at any time subject to any shareholder approval
required to amend the Director Plan by either the Securities and Exchange
Commission or any exchange on which the Company's shares are listed. Outside
directors are not prohibited under Illinois law from voting on any such
amendment or termination.
FEDERAL INCOME TAX CONSEQUENCES
A director does not recognize compensation income as a result of the
grant of an option, but does recognize compensation income, taxable at
ordinary income rates, upon the exercise of an option equal in amount to the
excess of the fair market value of the shares acquired upon exercise over the
option exercise price paid. Concurrently, the Company will be allowed a
deduction in the same amount as the outside director recognizes compensation
income.
SHAREHOLDER VOTE
The listing requirements of the New York Stock Exchange require that the
shareholders ratify the adoption of the Director Plan. The affirmative vote
of the holders of at least a majority of the shares of Common Stock of the
Company present and entitled to vote at the annual meeting is required for
adoption of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE "FOR" THE
PROPOSED STOCK OPTION PLAN FOR OUTSIDE DIRECTORS.
PROPOSAL SIX:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee,
has selected KPMG Peat Marwick LLP ("KPMG"), the Company's independent public
accountants since 1983, to serve as the independent public accountants of the
Company for the current fiscal year if their selection is approved by the
shareholders. In view of the difficulty and expense involved in changing
auditors on short notice, if KPMG is not approved by the shareholders, it is
contemplated the appointment for the fiscal year 1997 will be permitted to
stand unless the Board of Directors finds other compelling reasons for making
a change. Disapproval of KPMG by the shareholders will be considered an
indication to the Board of Directors to select other auditors for the
following year.
Representatives of KPMG are expected to be present at the Annual Meeting
with the opportunity to make a statement, if they desire, and their
representatives are expected to be available to respond to appropriate
questions from the shareholders.
23
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE "FOR" THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE
COMPANY FOR THE CURRENT YEAR.
OTHER BUSINESS
The Board of Directors knows of no other business to be presented at the
Annual Meeting; however, if any other matters do come before the Meeting, it
is intended that the persons named in the proxy will vote in accordance with
their best judgment.
It is important that proxies be returned promptly so that the presence
of a quorum may be assured well in advance of the Annual Meeting, thus
avoiding the expense of follow-up solicitations. Accordingly, even if you
expect to attend the Annual Meeting, you are requested to date, execute and
return the enclosed proxy in the stamped, self-addressed envelope provided.
If you attend the meeting in person, your proxy will be returned to you
on request.
By Order of the Board of Directors
Camille J. Hensey
Corporate Secretary
Peoria, Illinois
_______________, 1997
24
<PAGE>
EXHIBIT A
MARKET VALUE POTENTIAL
PERFORMANCE INCENTIVE PLAN
PLAN DESCRIPTION
1. PURPOSE OF PLAN
The purpose of this plan is to provide incentive to select key employees to
effectively utilize company capital thereby maximizing the value of
shareholder investment. This plan aligns participant compensation incentive
with the factors upon which the Company's market value is driven.
2. DEFINITIONS
2.1 "Pay Position Policy" is a statement of salary, bonus formula and
expense allowances prepared for each key employee each year as approved by
the board of directors of RLI Corp. at their annual meeting. This incentive
plan description is part of the pay position policy statement and is not to
be construed as an employment agreement.
2.2 "Company" means RLI Corp.
2.3 "Participant" is a key executive of the Company designated by the
Board of Directors of RLI Corp. to be eligible for the plan.
2.4 "Plan Administration Committee" consists of the RLI Insurance
Company's Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Administrative Vice President. The Committee is authorized to
interpret the plan and may, from time to time, adopt such rules and
regulations necessary for the administration of the plan as it shall
determine. Decisions of the Committee shall be final, subject at all times
to review or change by members of the Executive Resources Committee who are
outside directors within the meaning of Section 162(m) of the Internal
Revenue Code, of the Board of Directors of RLI Corp.
2.5 "Award Year" is the Company's current fiscal year.
2.6 "Invested Capital" is the historic common and preferred stock
investment including retained earnings plus outstanding debt instruments
owned by outside parties as indicated on the year end audited RLI Corp.
financial statement.
2.7 "Blended Cost of Capital" is defined for purpose of this plan as the
thirty year U.S. Treasury bill rate plus 6% modified by the Dow Jones
Property & Casualty Insurance group beta on a five year rolling average
basis at the beginning of the year. This resulting rate is blended prorata
(comparing market capitalization of the Company's stock with outstanding
Company debt at cost or conversion price, whichever is higher) with the
coupon or interest rate actually incurred on the outstanding debt. Should
preferred stock be issued the historic investment after tax will be blended
with the historic common stock investment plus retained earnings.
2.8 "Actual Return" is the RLI Corp. GAAP fiscal year adjusted increase in
shareholders' equity as calculated in Section 3.
25
<PAGE>
2.9 "Required Return" is equal to the beginning of the year Invested
Capital, times the Blended Cost of Capital plus the after tax cost of any
ESOP and excess ESOP contribution for the year in accordance with the plan
provisions. This return is required before executive bonuses are eligible
for payment. Amounts in excess of the Required Return equal MVP for bonus
purposes.
Required Return will be adjusted quarterly on a time weighted basis as
follows:
2.91 Beginning Invested Capital:
2.911 At the end of each quarter the increase (or decrease) in
Invested Capital, net of retained earnings, is divided by four.
The result is multiplied by the number of quarters left in the
fiscal year and added (or subtracted) to beginning capital;
2.912 The result equals adjusted Invested Capital;
2.913 The increase (or decrease) in Invested Capital is
multiplied by the debt or equity component of the December 31
Blended Cost of Capital;
2.914 No adjustment will be made in the fourth quarter of the
fiscal year.
2.10 "Cause" means failure to meet the Company's standards with respect to
performance of duties, excessive absenteeism, unethical behavior, or
violation of a material policy of the Company.
2.11 "Trade Secret" means information that: is used or intended for use in
a trade or business; is included or embodied in a formula, pattern,
compilation, computer software, drawing, device, method, technique or
process; is not publicly known and is not generally known in the trade or
business of the Company; cannot be readily ascertained or derived from
publicly available information; and has significant economic value.
3. BONUS CALCULATION
3.1 For bonus purposes, MVP is quantified as below:
3.11 Company ending GAAP book value:
3.111 Plus outstanding debt instruments at end of period;
3.112 Less additional investments in the Company in the form of
stock issues (including ESOP and Excess ESOP stock purchases from
the Company) or outside debt instruments issued during the year
at issue price. This includes acquisitions using the Company's
stock or debt whether pooled or not;
3.113 Plus any Company stock repurchases;
3.114 Plus any payment of debt principle;
3.115 Plus after tax accrued interest paid on all outside debt
instruments;
26
<PAGE>
3.116 Plus shareholder dividends paid during the year;
3.117 Plus current year after tax accrued executive MVP bonuses;
3.118 Plus current year after tax accrued ESOP contribution.
3.119 Plus current years after tax payment of preferred
dividends.
3.12 Less Company beginning GAAP book value:
3.121 Plus outstanding debt instruments at beginning of period.
3.13 The result is the Actual Return for the Award Year.
3.2 The Actual Return less the Required Return is MVP.
3.3 Each Participant will be assigned a percent of MVP as determined
annually by the Executive Resources Committee of the RLI Corp. Board of
Directors. The assigned percent times MVP will be credited without limit to
a memo bank account for each Participant. If the Required Return is not
achieved, any amount less than the Required Return will be charged to the
Participant's bank account at the same rate without limit.
3.4 The bonus for a Participant newly hired during the Award Year shall be
calculated prorata beginning the first day of the following month of
employment. The new Participant shall not be eligible to participate in the
plan if hired during the fourth quarter.
3.5 Bonus Bank
As MVP bonuses are calculated after tax, the earned bonus will be grossed
up by the Company's marginal state and federal income tax rate and credited
to the Participant's bonus bank account established for that purpose. If
the Required Return is not earned, negative bonus will be grossed up by the
same tax rates and charged to the Participant's bonus bank account. The
grossed up debit or credit to the bank will be made without limit. These
calculations shall be done immediately after the annual audit.
3.6 Interest will be paid in arrears by the Company to each Participant's
bank account once a year on any unpaid positive balance before the current
year's contribution. The interest rate applied will be the three year U.S.
Government Treasury Bill rate in effect at the end of the fiscal year.
3.7 After the Award Year bonus (or charge) and applicable interest are
posted to the Participant's bank account and upon completion of the annual
outside audit, 60% of any positive total bonus bank balance will be paid to
the Participant and the amount of such payment will reduce the bank
balance.
3.8 Positive or negative balances will be carried forward to the next year
as long as the Participant is employed by the Company. The Participant will
not be required to reimburse the Company for a negative balance upon
termination of employment or otherwise.
27
<PAGE>
3.9 Upon termination of employment (including retirement in accordance
with the Company's normal retirement policies) should the Participant's
bank account balance be positive, it will be payable to the terminated
Participant subject to the following limitations:
3.91 The bank account balance of the terminated Participant will be
calculated as of the end of the quarter in which the termination took
place. The Participant's bank account balance will be at risk from a
negative MVP charge only until that time. Twenty percent(20%) of the
eligible positive balance will then be paid. Twenty percent(20%) of
the remaining balance will then be paid twelve(12) months later.
Thirty percent(30%) of the balance will be paid at twenty-four(24)
months and the balance will be paid thirty-six(36) months after the
date of termination. All payments are subject to the following
benefits and restrictions:
3.911 At the Company's fiscal year-end, if the Participant's
bank balance is positive, it will be credited in arrears with
interest at the three-year Treasury Bill rate on that date;
3.912 During the payment period, the Participant must cooperate
with the Company and must not divulge or use in any way, either
directly or indirectly, whether or not for personal gain,
proprietary Company information such as, but not limited to,
customer lists, software, or Company procedures. The Participant
must never disclose any Company Trade Secret;
3.913 The Participant agrees to give depositions and testify in
any court matter effecting the Company without charging a fee.
The Company will reimburse out-of-pocket transportation, meal and
lodging costs;
3.914 The Participant does not directly or indirectly solicit
Company employees to work for another company. In addition the
Participant shall not directly or indirectly solicit any person
who was employed by the Company within six months prior to the
date the Participant's employment terminated;
3.915 The Participant shall not contact any producer of the
Company for the purpose of soliciting business away from the
Company. This restriction shall not apply to producers already
licensed and/or producing with competitors.
4. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors of RLI Corp. may at any time terminate, modify or
amend this plan. Any change shall not adversely affect the then existing
earned bonus bank of each Participant.
5. NON-ASSIGNABLE DEATH AND TOTAL DISABILITY
No right or interest of any Participant in the plan shall be assignable or
transferable or subject to any lien, directly, by operation of law or
otherwise, including execution, levy garnishment, attachment, pledge and
bankruptcy. In the event of a Participant's death or total disability,
payment of the then existing balance calculated to the end of the nearest
quarter shall be made to the Participant together with interest calculated to
the date of termination as
28
<PAGE>
described in Section 3.6. If deceased, payment will be made to the
Participant's designated beneficiary, or in the absence of such designation,
to the Participant's estate. If in the judgment of the Plan Administration
Committee the beneficiary designation is insufficient, or if the designated
beneficiary dies before all payments due have been made, any unpaid earned
bonus amount will be made in the order noted during the lifetime of each
individual beneficiary: the Participant's spouse if living, or if not, the
Participant's then living descendants per stirpes, or if there are none, the
Participant's estate.
6. TAX WITHHOLDING
The Company shall deduct from payments under this plan any applicable
federal, state, local or other taxes including any interest, penalty or
addition, whether disputed or not.
7. HOLD HARMLESS
The Participant must hold the Company harmless from and pay any cost, expense
or fee incurred by the Company in respect to any claim, due or demand
asserted by any person, except the Company, against such Participant's MVP
bonus amount or bank account balance.
8. FUNDING
The MVP bank account balance is contingent upon future events, is unfunded,
is subject to the claims of the general creditors of the Company, may not be
assigned, sold, anticipated, pledged or otherwise transferred and shall not
be subject to the claims of the Participant, the Participant's spouse, or
their assigns. The foregoing sentence shall not relieve the Company of its
obligation to pay the bonus when due under the terms of the plan.
9. EMPLOYMENT OR RELATED AGREEMENTS
This plan shall not constitute an employment agreement between the Company
and any Participant, as consideration for or as an inducement to any
Participant to assume or remain employed by the Company. Nothing expressed
in this Plan shall be deemed to grant to any Participant any right to be
retained in the service of the Company or to interfere with the right of the
Company other than as limited by any written employment agreement between the
Company and the Participant to the contrary. Nothwithstanding any provision
of the Plan to the contrary, no Participant shall earn any benefit under this
Plan unless such Participant satisfies all conditions applicable to such
Participant and such Participant's benefit to the subjective satisfaction of
the Company.
10. EFFECTIVE DATE
The effective date of the plan is January 1, 1996.
11. APPLICABLE LAW
The validity and interpretation of the plan and all matters relating to it
shall be determined under, and construed according to, the laws of the State
of Illinois.
12. INVALID PROVISION
If any term or provision of this plan or its application to any person or
circumstance will to any extent be held invalid or unenforceable, the
remainder of this plan, or the application of such term or provision to such
person or circumstance other than that as to which is invalid or
unenforceable, will not be effected. Each term or provision of this plan is
valid and will be enforced to the fullest extent permitted by law.
29
<PAGE>
13. NOTICES
All notices, requests, communications and demands shall be in writing and
shall be deemed to have been duly given if delivered in person or sent by
registered or certified mail, postage prepaid, to the Company at its
principal place of business, or to such other address as the Company shall
periodically designate by written notice. In the case of the Participant,
notice shall be mailed to the Participant's last known principal place of
residence or to such other address as the Participant shall periodically
designate by written notice.
14. VENUE
As a substantial portion of the duties and obligations of the parties created
by the plan are performable in Peoria, Illinois, it shall be the sole and
exclusive venue for any arbitration, litigation, special proceedings, or
other proceedings between the parties in connection with the plan.
15. WAIVER
The waiver by the Company of any breach of this plan, whether in a single
instance or repeatedly, shall not be construed as a waiver of rights under
the plan. Such breach shall not be construed as a waiver by the Company to
strictly adhere to the terms and conditions of this plan, nor as a waiver of
any claim for damages or other remedy by reason of any such breach.
30
<PAGE>
EXHIBIT B
___________________________________
RLI CORP./NAME OF DIRECTOR
DIRECTOR'S STOCK OPTION
___________________________________
31
<PAGE>
TABLE OF CONTENTS
I. RECITALS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
C. Securities Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. AGREEMENTS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. GRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. EXERCISE PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. EXERCISE SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.1 Transferability. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. EXERCISE PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5.1 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5.2 Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7.3 Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . 3
7.4 Interpretive Guidelines. . . . . . . . . . . . . . . . . . . . . . . 4
7.5 Invalid Provision. . . . . . . . . . . . . . . . . . . . . . . . . . 4
8. GLOSSARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Disabled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Execution Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Grant Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Securities Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Stock Option Committee. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III. EXECUTION:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
i
<PAGE>
THIS RLI CORP./NAME OF DIRECTOR DIRECTOR'S STOCK OPTION ("Option") is issued
to Name of Director ("(Name of Director)") pursuant to the RLI Corp. ("RLI")
Incentive Stock Option Plan ("Plan") at Peoria, Illinois.
I. RECITALS:
A. PURPOSES
The Board of Directors adopted the Directors' Stock Option Plan to provide
compensation in the form of stock options to each director of RLI who is not
an employee of RLI at the time of such director's election or selection to
the Board of Directors in an effort to enhance RLI's ability to attract and
retain well qualified individuals to serve as directors of RLI. The Board of
Directors believes that the Directors' Stock Option Plan will also enhance
the long-term commitment of outside directors to RLI and further align their
interests with the interests of the shareholders.
B. TAX LAW
This Option is granted pursuant to the Plan and is not an "incentive stock
option" as defined in Code Section 422 INCENTIVE STOCK OPTION. Accordingly,
upon the exercise of this option, (Name of Director) must recognize income
equal to the difference between the purchase price for the shares and the
option price for the shares.
C. SECURITIES LAW
The Plan and any Option Share issuable pursuant to this Option comply with
all Securities Laws.
II. AGREEMENTS:
NOW, THEREFORE, (Name of Director) and RLI agree as follows:
1. GRANT
Effective May 2, 1996, subject to shareholder ratification of the adoption of
the Plan by the Board of Directors, RLI hereby grants to (Name of Director)
an option ("Option") to purchase three thousand (3,000) shares of RLI (the
"Option Shares").
If any change in the outstanding shares that occurs by reason of any stock
split, dividend, split-up, split-off, spin-off, recapitalization, merger,
consolidation, rights offering, reorganization, combination or exchange of
shares, a sale by RLI of all of its assets, any distribution to shareholders
other than a normal cash dividend or other extraordinary or unusual event,
the number of Option Shares shall automatically be equitably adjusted by
Stock Option Committee to reflect any such change.
2. PRICE
The price in respect of each Option Share shall be an amount equal to the
Fair Market Value of such Option Share on the Grant Date.
1
<PAGE>
3. EXERCISE PERIOD
(Name of Director) must exercise this Option before the expiration of the ten
(10) year period beginning on the Grant Date.
4. EXERCISE SCHEDULE
Except in the case of (Name of Director)'s death, Disability or termination
of (Name of Director)'s status as a director of RLI, this Option may not be
exercised for more than the percentage of the aggregate number of Option
Shares, determined by the number of full years from the Grant Date to the
date of such exercise, in accordance with the following Option exercise
schedule:
CUMULATIVE PERCENTAGE
COMPLETED YEARS OF OPTION SHARES THAT MAY
FROM GRANT DATE BE EXERCISED
---------------------------------------------------------------
Less than 1 year 0%
1 but less than 2 years up to 33%
2 but less than 3 years up to 66%
3 but less than 4 years up to 100%
In the case of (Name of Director)'s death, Disability or the termination of
(Name of Director)'s status as a director of RLI, the preceding Option
exercise schedule shall not be applicable and (Name of Director) may exercise
this Option with respect to all Option Shares.
4.1 TRANSFERABILITY
This Option may not be Transferred by (Name of Director) otherwise than by
will, the laws of descent and distribution, without the consent of the Stock
Option Committee.
Upon the death of (Name of Director) while a director by RLI, this Option may
be exercised by the estate of (Name of Director) or by a Person who acquired
the right to exercise such Option by bequest or inheritance, or by reason of
the death of (Name of Director).
5. EXERCISE PROCEDURES
(Name of Director) must satisfy the conditions expressed in the following
Sections with respect to the exercise of this Option.
5.1 EXERCISE
This Option must be exercised by written notice from (Name of Director) to
RLI at 9025 North Lindbergh Drive, Peoria, Illinois 61615, or its then
current principal office, Attention: Vice President/Administration. The
notice must express the number of Option Shares for which this Option is
being exercised and must be accompanied by certified funds in the amount of
the Option price. If this Option is exercised other than by (Name of
Director), such Person shall provide such evidence of such Person's authority
to exercise this Option as counsel to RLI may periodically request.
2
<PAGE>
5.2 CERTIFICATE
Subject to the satisfaction of the conditions expressed in the following
paragraphs, a certificate for the Option Shares will be issued as soon as
reasonably practical.
RLI need not issue a certificate until RLI has complied with all requirements
of the Securities Laws, rules of any stock exchange on which RLI's shares may
then be listed and all applicable Federal and state laws in conneciton with
the issuance or sale of such Option Shares or the listing of such Option
Shares on any such exchange. Until the issuance of the certificates for such
Option Shares, (Name of Director) shall have no rights of a shareholder with
respect to the Option Shares or this Option.
If no registration statement under the Securities Laws is in effect covering
the issuance of the Option Shares to (Name of Director), the certificate must
bear a legend to the effect that the Option Shares cannot be Transferred in
the absence of such a registration statement or an opinion of counsel
satisfactory to RLI that such registation is not required, coupled with a
representation from (Name of Director) that the Option Shares are being
acquired by (Name of Director) for investment and not with a view toward the
resale or distribution thereof and that the Option Shares will not be
Transferred in the absence of such registration statement or an opinion of
counsel satisfactory to RLI that such registration is not required.
6. BENEFICIARY
(Name of Director) may designate a beneficiary of this Option. If (Name of
Director) fails to designate a beneficiary, (Name of Director)'s Option will be
distributed to the individuals expressed in the following phrases and in the
order in which each sentence appears. (Name of Director)'s spouse. (Name of
Director)'s then living descendants, per stirpes. The individuals entitled to
inherit (Name of Director)'s property under the law of the State of Illinois and
in the proportions determined under such law.
7. GENERAL
7.1 AMENDMENT
This Option may be periodically amended with the consent of the Parties.
7.2 GOVERNING LAW
The validity, construction, interpretation and effect of this instrument
shall exclusively be governed by and determined in accordance with the law of
the State of Illinois, except to the extent preempted by Federal law, which
shall to the extent govern.
7.3 INCORPORATION BY REFERENCE
The terms and provisions of the Plan are hereby incorporated herein by this
reference.
3
<PAGE>
7.4 INTERPRETIVE GUIDELINES
The Stock Option Committee shall interpret and construe this Option, which
interpretation and constructions shall be conclusive and binding on the
Parties and any other Person claiming an interest in respect of (Name of
Director).
The words and phrases set off by quotation marks in the GLOSSARY have the
meanings therein indicated. Any word or phrase which appears in this Plan in
parenthesis, set off by quotation marks and capitalized has the meaning
denoted by its context. Whenever the words and phrases defined either in the
GLOSSARY or elsewhere in this Plan are intended to have their defined
meanings, the first letter of such word or the first letters of all
substantive words in such phrase will be capitalized. When the context
permits, a word or phrase used in the singular means the plural, and when
used in any gender, its meaning also includes all genders. Captions of
Sections are inserted as a matter of convenience only and do not define,
limit or extend the scope or intent of this Plan or any provision hereof.
7.5 INVALID PROVISION
If any term or provision of this Option or the application thereof to any
Person or circumstance will to any extent be invalid or unenforceable, the
remainder of this Option, or the application of such term or provision to
such Person or circumstance other than that as to which it is invalid or
unenforceable, will not be affected, and each term and provision of this
Option will be valid and will be enforced to the fullest extent permitted by
law.
4
<PAGE>
8. GLOSSARY
"Code" means the Internal Revenue Code of 1986, as may periodically be amended.
"Disabled" means the state of being unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve (12)
months.
"Execution Date" means the date on which the last Party to sign this Option
signs this Option.
"Fair Market Value" means, (a) in respect of any share of RLI, the closing
price on such date or on the next business date, if such date is not a
business day, of a share of RLI reflected in THE WALL STREET JOURNAL or any
other publication selected by the Stock Option Committee; however, if shares
of RLI shall not have been traded on the New York Stock Exchange for more
than ten (10) days immediately preceding such date or if deemed appropriate
by the Stock Option Committee for any other reason, the fair market value of
shares of RLI shall be determined by RLI in such other manner as it may deem
appropriate, and (b) as to any share of any other Eligible Corporation, as
determined by the Stock Option Committee in accordance with the Code
regulations.
"Grant Date" means May 2, 1996.
"Parties" means (Name of Director) and RLI.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, a government or any department or
agency thereof, or any combination of the foregoing.
"Plan" means the RLI Corp. Directors' Stock Option Plan, as periodically amended
or restated.
"RLI" means RLI Corp. or its successor.
"Securities Laws" means collectively (a) the Securities Act of 1993, as
periodically amended, 15 U.S.C. Section 77a, ET SEQ., (b) the Securities
Exchange Act of 1934, as periodically amended, 15 U.S.C. Section 78a, ET
SEQ., including Rule 16(b)-3; (c) any subsequent federal legislation and
(d) any state legislation regulating the sale of any security.
"Stock Option Committee" means a committee comprised of the outside members of
the Board of Directors of RLI.
"Transfer" means any direct or indirect, voluntary or involuntary, for value,
by operation of law or otherwise, assignment, or other disposition of any
direct or indirect, economic or legal interest in, including but not limited
to any security interest in or with respect to either any Option Share or
this Option.
5
<PAGE>
[The balance of this page is intentionally left blank. The next page begins
with Section III. EXECUTION.]
6
<PAGE>
III. EXECUTION:
Executed in duplicate at Peoria, Illinois, on the Execution Date effective
May 2, 1996.
RLI: (Name of Director):
RLI Corp. ________________________________
Name of Director
By:______________________________
Its:________________________ Dated:__________________________
Dated:___________________________
7
<PAGE>
Page 1 of 2
(LOGO) PROXY
RLI CORP.
9025 North Lindbergh Drive
Peoria, Illinois 61615
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gerald D. Stephens, John S. McGuinness
and William R. Keane as Proxies, each with the power to appoint his
substitute, and hereby authorizes them, or any one or more of them, to
represent and to vote, as designated below, the shares of Common Stock of RLI
Corp. held of record by the undersigned on March 3, 1997, at the Annual
Meeting of Shareholders to be held on May 1, 1997 or any adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
1. ELECTION OF CLASS I DIRECTORS
(mark one):
FOR ALL NOMINEES LISTED BELOW / /
(except as marked to the contrary below)
WITHHOLD AUTHORITY / /
to vote for all nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below):
_____________________________________________________________________________
NOMINEES: BERNARD J. DAENZER, RICHARD J. HAAYEN, JONATHAN E. MICHAEL AND
EDWARD F. SUTKOWSKI
2. APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO
AUTHORIZE A NEW CLASS OF PREFERRED STOCK:
/ / / / / /
FOR AGAINST ABSTAIN
3. APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO REQUIRE
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES
ENTITLED TO VOTE ON SUBSEQUENT AMENDMENTS TO THE ARTICLES:
/ / / / / /
FOR AGAINST ABSTAIN
<PAGE>
4. APPROVE THE MARKET VALUE POTENTIAL PERFORMANCE INCENTIVE PLAN:
/ / / / / /
FOR AGAINST ABSTAIN
5. APPROVE THE STOCK OPTION PLAN FOR OUTSIDE DIRECTORS:
/ / / / / /
FOR AGAINST ABSTAIN
6. APPROVE THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT PUBLIC
ACCOUNTANTS OF THE COMPANY:
/ / / / / /
FOR AGAINST ABSTAIN
(PLEASE DO NOT FOLD - DATE AND SIGN REVERSE SIDE)
Page 2
7. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR EACH OF THE
NOMINEES LISTED ABOVE AND FOR EACH OF PROPOSALS 2, 3, 4, 5 and 6.
DATED: ______________________________, 1997
______________________________________
Signature
______________________________________
Signature if held jointly
Please sign exactly as your name
appears hereon. Joint owners
should each sign personally.
Corporate officers, executors,
administrators, trustees, etc.,
should so indicate when signing.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
