<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from................................to.........................
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3199675
(State of Incorporation) (IRS Employer Identification No.)
601 MONTGOMERY STREET,
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES
- -------------- --------- ---- ----------------
Common Stock $0.01 7/31/98 31,290,045
<PAGE>
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
JUNE 30, 1998
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Interim Consolidated Financial Statements and Notes.
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30,
1998 and 1997............................................ 3
Consolidated Balance Sheets as of June 30,
1998 and December 31, 1997................................ 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997....................... 5
Notes to Consolidated Financial Statements................. 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 23
SIGNATURES............................................................ 24
INDEX TO EXHIBITS..................................................... 25
2
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PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
(In thousands except for per share amounts) 1998 1997 1998 1997
------ ------ ------ ------
REVENUES
<S> <C> <C> <C> <C>
Premiums earned $118,327 $109,906 $235,173 $217,997
Investment income, less investment expense 21,139 20,752 42,716 40,747
Realized capital gains, net 2,226 546 10,191 18,814
Other income 5,777 1,705 10,023 2,897
-------- -------- -------- --------
TOTAL REVENUES 147,469 132,909 298,103 280,455
-------- -------- -------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 30,588 34,235 68,675 73,750
Underwriting and other expenses 48,319 35,959 92,496 70,374
Interest expense 1,797 1,687 3,503 3,375
Distributions on redeemable preferred capital
securities 2,078 2,079 4,157 3,464
TOTAL LOSSES AND EXPENSES -------- -------- -------- --------
82,782 73,960 168,831 150,963
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 64,687 58,949 129,272 129,492
INCOME TAX EXPENSE 17,900 16,670 36,717 38,041
-------- -------- -------- --------
NET INCOME $ 46,787 $ 42,279 $ 92,555 $ 91,451
======== ======== ======== ========
BASIC NET INCOME PER SHARE $ 1.47 $ 1.26 $ 2.88 $ 2.70
======== ======== ======== ========
DILUTED NET INCOME PER SHARE $ 1.46 $ 1.25 $ 2.86 $ 2.69
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(Dollars in thousands) 1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Investments
Available for sale, at market
Fixed income securities
(amortized cost $1,239,164 and $1,234,178) $1,316,078 $1,308,768
Equity securities
Common stock (cost $49,722 and $38,221) 86,273 73,596
Preferred stock (cost $22,235 and $12,049) 22,320 12,360
Common stock of affiliates, at underlying book value 43,080 16,987
Short-term investments (at cost, which approximates market) 29,056 78,890
---------- ----------
TOTAL INVESTMENTS 1,496,807 1,490,601
Cash 8,862 11,101
Accrued investment income 19,900 20,794
Reinsurance recoverable and prepaid premiums 35,021 31,676
Premiums receivable 21,105 19,756
Receivable from affiliates 5,966 8,605
Receivable from Allstate 21,600 16,822
Deferred policy acquisition costs 47,966 37,864
Property and equipment, net 34,161 31,393
Other assets 14,443 17,991
---------- ----------
TOTAL ASSETS $1,705,831 $1,686,603
========== ==========
LIABILITIES
Reserve for losses and loss adjustment expenses $ 201,726 $ 202,387
Unearned premiums 81,071 94,150
Long-term debt 99,442 99,409
Reinsurance balances payable 13,432 11,828
Deferred income taxes 80,427 76,395
Other liabilities and accrued expenses 58,485 42,248
---------- ----------
TOTAL LIABILITIES 534,583 526,417
---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURE OF THE COMPANY 99,023 99,006
SHAREHOLDERS' EQUITY
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 125,000,000 shares
authorized; 35,194,275 and 35,145,247 issued 352 351
Additional paid-in capital 264,324 262,448
Unrealized net gains on investments 74,078 71,936
Retained earnings 965,941 876,588
Treasury stock (3,751,600 and 2,684,000 shares at cost) (232,470) (150,143)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,072,225 1,061,180
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,705,831 $1,686,603
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------------
(In thousands) 1998 1997
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92,555 $ 91,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (10,191) (18,814)
Equity in earnings of affiliates (1,119) (659)
Depreciation and amortization 3,093 2,052
Changes in:
Reserve for losses and loss adjustment expenses (661) (1,485)
Unearned premiums (13,079) (17,261)
Deferred policy acquisition costs (10,102) (2,156)
Accrued investment income 894 (1,169)
Reinsurance balances payable 1,604 (3,219)
Reinsurance recoverable and prepaid premiums (3,345) 59,940
Premiums receivable (1,349) (1,842)
Income taxes 2,879 1,653
Receivable from affiliates 2,639 196
Receivable from Allstate (4,778) --
Other 19,803 (7,314)
-------- ---------
Net cash provided by operating activities 78,843 101,373
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of equity securities 25,688 74,665
Investment collections of fixed income securities 17,672 7,500
Proceeds from sales of fixed income securities 58,538 232,113
Investment purchases
Fixed income securities (81,096) (376,785)
Equity securities (37,333) (22,136)
Net (increase) decrease in short-term investments 49,834 (47,828)
Investment in affiliates (24,953) (2,700)
Purchase of property and equipment (5,736) (5,576)
-------- ---------
Net cash provided by (used in) investing activities 2,614 (140,747)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of redeemable preferred capital securities -- 99,000
Proceeds from exercise of stock options 1,875 2,078
Dividends paid to shareholders (3,244) (3,398)
Purchase of The PMI Group, Inc. common stock (82,327) (59,908)
-------- ---------
Net cash provided by (used in) financing activities (83,696) 37,772
-------- ---------
NET DECREASE IN CASH (2,239) (1,602)
CASH AT BEGINNING OF PERIOD 11,101 6,592
-------- ---------
CASH AT END OF PERIOD $ 8,862 $ 4,990
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), its wholly-owned subsidiaries, PMI
Mortgage Insurance Co. ("PMI"), Residential Guaranty Co., American Pioneer Title
Insurance Company ("APTIC"), PMI Mortgage Guaranty Co., Residential Reinsurance
Co., PMI Capital I and TPG Financial Insurance, and PMI's wholly-owned
subsidiaries, PMI Mortgage Services Co. ("MSC") and PMI Securities Co.,
collectively referred to as the "Company." All material intercompany
transactions and balances have been eliminated in consolidation. In addition,
PMI owns 45% of CMG Mortgage Insurance Company ("CMG") and TPG owns 22.3% of RAM
Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as "RAM Re").
These companies are accounted for on the equity method in the Company's
consolidated financial statements.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the requirements of Form 10-Q. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's consolidated
financial condition at June 30, 1998, and its consolidated statements of
operations and cash flows for the periods ended June 30, 1998 and 1997, have
been included. Interim results for the periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 1997 Annual Report to Shareholders.
NOTE 2 - EARNINGS PER SHARE
The weighted average common shares outstanding for computing basic earnings per
share ("EPS") were 31,918,220 for the three months ended June 30, 1998,
33,617,783 for the three months ended June 30, 1997, 32,173,226 for the six
months ended June 30, 1998, and 33,919,981 for the six months ended June 30,
1997. The weighted average common shares outstanding for computing diluted EPS
includes only stock options issued by the Company that have a dilutive impact
and are outstanding for the period, and had the potential effect of increasing
common shares to 32,119,224 for the three months ended June 30, 1998, 33,715,966
for the three months ended June 30, 1997, 32,361,101 for the six months ended
June 30, 1998, and 34,026,349 for the six months ended June 30, 1997. Net
income available to common shareholders does not change for computing diluted
EPS.
NOTE 3 - COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major
component and as a single total, the change in its net assets during the period
from non-owner sources.
The reconciliation of net income to comprehensive income for the three months
and six months ended June 30, 1998 and June 30, 1997 are as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30 ended June 30
---------------------- ----------------------
1998 1997 1998 1997
------ ------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
COMPREHENSIVE INCOME
Net Income $46,787 $42,279 $ 92,555 $ 91,451
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 3,213 22,147 8,766 9,754
Less: reclassification adjustment for gains
included in net income (1,447) (355) (6,624) (12,229)
------- ------- -------- --------
Other comprehensive income (loss), net of tax 1,766 21,792 2,142 (2,475)
------- ------- -------- --------
COMPREHENSIVE INCOME $48,553 $64,071 $ 94,697 $ 88,976
======= ======= ======== ========
</TABLE>
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of SFAS No. 131 will not impact the Company's financial condition,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. The statement is effective for 1998 and is
not required for interim financial statements in the initial year of
application.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated net income in the three months ended June 30, 1998 was $46.8
million, a 10.6% increase over net income of $42.3 million in the corresponding
period of 1997. The increase was primarily due to increases in premiums earned,
other income, and realized capital gains of $8.4 million, $4.1 million, and $1.7
million respectively, and secondarily to a decrease in losses and loss
adjustment expenses of $3.6 million, partially offset by an increase in
underwriting and other expenses of $12.4 million. Diluted earnings per share
were $1.46 in the three months ended June 30, 1998, compared with $1.25 in the
corresponding period of 1997, a 16.8% increase. Excluding capital gains, diluted
earnings per share were $1.41 in the second quarter of 1998 compared with $1.24
in the second quarter of 1997, a 13.7% increase. Revenues in the second quarter
of 1998 were $147.5 million, an 11.0% increase over revenues of $132.9 million
in the second quarter of 1997.
MORTGAGE INSURANCE OPERATIONS
PMI's new insurance written ("NIW") totaled $6.9 billion in the second quarter
of 1998, compared with $3.6 billion in the second quarter of 1997, a 91.7%
increase. The increase in NIW resulted primarily from the number of new mortgage
insurance policies issued increasing to 52,900 policies in the three months
ended June 30, 1998 from 28,400 policies in the corresponding period of 1997, an
86.3% increase, and secondarily from an increase in the average loan size to
$130,800 from $127,200.
The primary factor contributing to the increase in new policies issued was the
growth in the volume of insured loans in the private mortgage insurance industry
in the second quarter of 1998 compared with the corresponding period of 1997.
The private mortgage insurance industry experienced an increase in total new
insurance written of 61.7% to $46.4 billion in the second quarter of 1998 from
$28.7 billion in the corresponding period of 1997. The increase was caused
primarily by the continued high levels of refinancing activity brought on by
lower interest rates, and secondarily to a strong home purchase market.
Refinancing as a percentage of PMI's NIW increased to 31.5% in the three months
ended June 30, 1998 from 10.5% in the corresponding period of 1997.
A secondary factor contributing to the increase in new policies issued was the
growth in PMI's market share in the second quarter of 1998. PMI's market share
of NIW increased to 14.9% in the three months ended June 30, 1998 from 12.6% in
the corresponding period of 1997. On a combined basis with CMG, market share
increased to 16.3% in the second quarter of 1998 compared with 13.7% in the
corresponding period of 1997. The increase in market share was primarily due to
the expansion of value-added products and services, primarily contract
underwriting, offered to mortgage lenders and the offering of a government
sponsored enterprises ("GSE") pool insurance product to selected lenders and
entities sponsoring affordable housing initiatives during the fourth quarter of
1997 and the first half of 1998. New pool risk written was $38 million in the
second quarter of 1998 compared with $14 million in the first quarter of 1998.
Risk in force under risk-share programs with mortgage lenders represented less
than one percent of total risk in force at June 30, 1998. Management expects new
pool risk written and the percent of risk share programs to increase in the
second half of 1998. See Cautionary Statement and Factors That May Affect Future
Results and Market Price of Stock - Changes in Composition of Insurance Risk
Written; Pool Insurance.
PMI's cancellations of insurance in force were $6.7 billion in the second
quarter of 1998 compared to $3.8 billion in the corresponding period of 1997.
The increase in policy cancellations is primarily due to mortgage
8
<PAGE>
prepayments as a result of the continued high levels of refinancing activity
experienced by PMI as discussed above. As a result of the higher cancellation
activity, PMI's persistency rate decreased to 73.9% as of June 30, 1998 compared
with 77.6% as of March 31, 1998, 80.8% as of December 31, 1997, and 83.9% as of
June 30, 1997.
The drop in persistency resulted in a decrease in insurance in force to $77.6
billion at June 30, 1998 compared with $77.8 billion at December 31, 1997.
However, insurance in force increased by $0.2 billion compared with $77.4
billion at March 31, 1998. On a combined basis with CMG, insurance in force
grew to $80.9 billion at June 30, 1998 compared with $80.1 billion at March 31,
1998, and $80.2 billion at December 31, 1997.
As a result of the cancellations of older, lower coverage policies (with lower
premium rates) being replaced by higher coverage loans (with higher premium
rates), risk in force has been experiencing faster growth rates than insurance
in force. Risk in force grew by $0.2 billion to $18.3 billion at June 30, 1998
compared with $18.1 billion at March 31, 1998 and December 31, 1997, and grew by
$0.6 billion compared with $17.7 billion at June 30, 1997. On a combined basis
with CMG, risk in force was $19.1 billion at June 30, 1998 compared with $18.8
billion at March 31, 1998, and $18.7 billion at December 31, 1997.
Mortgage insurance net premiums written were $99.4 million in the second quarter
of 1998 compared with $92.1 million in the corresponding period of 1997, an
increase of 7.9%. The increase is attributable to the growth of risk in force
and higher average premium rates. The increase in premium rates is caused by
two factors: higher coverage percentages, and the continuing shift of PMI's
policies in force to the monthly product with a higher premium rate.
PMI's monthly product represented 64.7% of risk in force at June 30, 1998
compared with 52.3% at June 30, 1997. Mortgages with original loan-to-value
ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance
coverage increased to 31.6% of risk in force as of June 30, 1998 from 25.2% as
of June 30, 1997. Similarly, mortgages with original loan-to-value ratios
greater than 85% and equal to or less than 90% ("90s") with 25% insurance
coverage increased to 26.4% of risk in force as of June 30, 1998 compared with
21.6% as of June 30, 1997.
Mortgage insurance premiums earned increased 4.6% to $100.7 million in the
second quarter of 1998 from $96.3 million in the second quarter of 1997. The
increase is attributable to the increase in premiums written, offset by
increases in refunded and ceded premiums. Refunded premiums increased to $6.1
million in the second quarter of 1998 from $3.8 million in the second quarter of
1997, due primarily to the increase in policy cancellations as discussed above.
Ceded premiums increased to $4.5 million in the second quarter of 1998 from $4.1
million in the second quarter of 1997 due to the continued expansion of
reinsurance arrangements under risk-share programs with affiliates of customers.
Mortgage insurance losses and loss adjustment expenses decreased to $30.7
million in the second quarter of 1998 from $33.9 million in the second quarter
of 1997, a decrease of 9.4%. This decrease was due primarily to the continuing
improvement of the California housing markets and the corresponding decrease in
the number of loans in default and claim payments. Loans in default decreased
to 14,965 loans at June 30, 1998 from 15,368 loans at June 30, 1997. Direct
primary claims paid by PMI decreased to $34.4 million in the second quarter of
1998 from $35.6 million in the second quarter of 1997 due to a decrease in the
average claim size in the second quarter of 1998 compared to the corresponding
period of 1997, partially offset by an increase in the number of claims filed.
The improved claim results are due primarily to a smaller percentage of claims
originating from the California book of business, and also to increased loss
mitigation efforts by PMI.
9
<PAGE>
PMI's default rate has decreased to 2.16% at June 30, 1998 from the June 30,
1997 rate of 2.20%. This decrease was due primarily to the continuing
improvement in the California real estate market. Management believes that
PMI's total default rate could increase in 1998 due to the continued maturation
of its 1994 and 1995 books of business. See Cautionary Statement and Factors
That May Affect Future Results and Market Price of Stock - Regional
Concentration.
Default rates on PMI's California policies continue to improve, decreasing to
3.20% (representing 3,252 loans in default) at June 30, 1998, from 3.65%
(representing 4,041 loans in default) at June 30, 1997. Policies written in
California accounted for approximately 49.1% and 65.5% of the total dollar
amount of claims paid in the second quarters of 1998 and 1997, respectively.
Although management expects that California should continue to account for a
significant portion of total claims paid, management anticipates that with
continued improvement in the California economy, increased benefits of loss
mitigation efforts and improved default reinstatement rates, California claims
paid as a percentage of total claims paid should continue to decline. See
Cautionary Statement and Factors That May Affect Future Results and Market Price
of Stock - Loss Reserves and Regional Concentration.
Mortgage insurance underwriting and other expenses increased 27.1% to $26.3
million in the second quarter of 1998 from $20.7 million in the second quarter
of 1997. This increase was primarily attributable to the growth in mortgage
origination volume which caused increases in policy acquisition costs, including
contract underwriting expenses. New policies processed by contract underwriters
represented 33.6% of PMI's NIW in the second quarter of 1998 compared with 18.2%
in the corresponding period of 1997. Contract underwriting is more expensive on
a per application basis than underwriting a mortgage insurance application in
PMI's field offices, and has become the preferred method among many mortgage
lenders for processing loan applications. Management anticipates that contract
underwriting will continue to generate a significant percentage of PMI's NIW and
that customer demand for contract underwriting services will increase. In
addition, management anticipates that the rate of growth of policy acquisition
costs will exceed the growth rate of premiums, if any, for the remainder of the
year. See Cautionary Statement and Factors That May Affect Future Results and
Market Price of Stock - Contract Underwriting Services; New Products.
The mortgage insurance loss ratio improved to 30.4% in the second quarter of
1998 compared to 35.2% in the second quarter of 1997 due primarily to the growth
in premiums earned coupled with the decrease in losses and loss adjustment
expenses. The expense ratio increased to 26.4% in the second quarter of 1998
from 22.5% in the second quarter of 1997 due primarily to the increase in policy
acquisition costs resulting from the growth in NIW. The combined ratio decreased
to 56.8% in the second quarter of 1998 from 57.7% in the second quarter of 1997.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned increased 29.4% to $17.6 million in the second
quarter of 1998 compared with $13.6 million in the second quarter of 1997. This
increase was primarily attributable to the continuing growth in residential
mortgage originations resulting from the continued high levels of refinancing
activity and a strong new home purchase market in the states where APTIC
operates. Underwriting and other expenses increased 28.9% to $15.6 million in
the second quarter of 1998 compared to $12.1 million in the second quarter of
1997. This increase is directly attributable to an increase in agency fees and
commissions related to the increase in premiums earned. The title insurance
combined ratio decreased to 88.3% in the second quarter of 1998 from 91.9% in
the second quarter of 1997.
OTHER
The Company's net investment income increased by 1.4% to $21.1 million in the
second quarter of 1998 from $20.8 million in the second quarter of 1997. The
increase was primarily attributable to the growth in the average amount of
invested assets, partially offset by a slight decrease in the average investment
yield (pretax) to 6.1% in
10
<PAGE>
the second quarter of 1998 from 6.2% in the second quarter of 1997. Realized
capital gains (net of losses) increased to $2.2 million in the second quarter of
1998 from $0.5 million in the second quarter of 1997.
Other income, primarily contract underwriting revenues generated by MSC,
increased to $5.8 million in the second quarter of 1998 from $1.7 million in the
second quarter of 1997. Other expenses, primarily expenses incurred by MSC,
increased to $6.4 million in the second quarter of 1998 compared with $3.1
million in the second quarter of 1997. These increases are primarily due to
increased contract underwriting services provided to the Company's mortgage
insurance customers, and secondarily to other ancillary services. See
discussions above and Cautionary Statement and Factors That May Affect Future
Results and Market Price of Stock - Contract Underwriting Services; New
Products.
The Company's effective tax rate decreased to 27.7% in the second quarter of
1998 compared to 28.3% in the second quarter of 1997. The year over year
decrease in the effective rate was caused primarily by an increase in the
percentage of tax exempt income included in income before taxes during the
second quarter of 1998, offset by the increase in realized capital gains.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated net income in the six months ended June 30, 1998 was $92.6 million,
a 1.2% increase over net income of $91.5 million in the corresponding period of
1997. The increase was primarily due to increases in premiums earned of $17.2
million and other income of $7.1 million, to a decrease in losses and loss
adjustment expenses of $5.1 million, offset by an increase in underwriting and
other expenses of $22.1 million and a decrease in realized capital gains of $8.6
million. Diluted earnings per share were $2.86 in the six months ended June 30,
1998, compared with $2.69 in the corresponding period of 1997, a 6.3% increase.
Excluding capital gains, diluted earnings per share were $2.66 in the six months
ended June 30, 1998 compared with $2.33 in the six months ended June 30, 1997, a
14.2% increase. Revenues in the six months ended June 30, 1998 were $298.1
million compared with $280.5 million in the corresponding period of 1997, a 6.3%
increase.
MORTGAGE INSURANCE OPERATIONS
PMI's new insurance written ("NIW") totaled $11.7 billion in the six months
ended June 30, 1998 compared with $6.7 billion in the six months ended June 30,
1997, a 74.6% increase. The increase in NIW resulted primarily from the number
of new mortgage insurance policies issued increasing to 89,550 policies in the
six months ended June 30, 1998 from 52,550 policies in the corresponding period
of 1997, a 70.4% increase, and secondarily from an increase in the average loan
size to $131,100 from $127,200.
The primary factor contributing to the increase in new policies issued was the
growth in the volume of insured loans in the private mortgage insurance industry
in the six months ended June 30, 1998 compared with the corresponding period of
1997. The private mortgage insurance industry experienced an increase in total
new insurance written of 51.0% to $81.4 billion in the six months ended June 30,
1998 from $53.9 billion in the corresponding period of 1997. The secondary
factor contributing to the increase in new policies issued was the growth in
PMI's market share in the second quarter of 1998. PMI's market share of NIW
increased to 14.4% in the six months ended June 30, 1998 from 12.4% in the
corresponding period of 1997. On a combined basis with CMG, market share
increased to 15.8% in the six months ended June 30, 1998 compared with 13.4% in
the corresponding period of 1997. These increases in market share were
primarily due to the expansion of value-added products and services, primarily
contract underwriting, offered to mortgage lenders, and the offering of a GSE
pool insurance product to selected lenders and entities sponsoring affordable
housing initiatives during the fourth quarter of 1997 and the first half of
1998. New pool risk written was $52 million in the six months ended June 30,
1998.
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Mortgage insurance net premiums written were $188.4 million in the six months
ended June 30, 1998 compared with $175.5 million in the corresponding period of
1997, an increase of 7.4%. The increase is attributable to the growth of risk in
force and to higher average premium rates. The increase in premium rates is
attributable to higher coverage percentages, and the continuing shift of PMI's
policies in force to the monthly product with a higher premium rate as discussed
under the results of consolidated operations for the second quarter.
Mortgage insurance premiums earned increased 4.6% to $200.8 million in the six
months ended June 30, 1998 from $192.0 million in the corresponding period of
1997. The increase is attributable to the increase in premiums written, offset
by increases in refunded and ceded premiums. Refunded premiums increased to
$11.2 million in the six months ended June 30, 1998 from $7.0 million in the
corresponding period of 1997, due primarily to the increase in mortgage
refinancing volume in the first half of 1998. Ceded premiums increased to $9.3
million in the six months ended June 30, 1998 from $7.2 million in the six
months ended June 30, 1997 due to the continued expansion of reinsurance
arrangements under risk-share programs with affiliates of customers.
Mortgage insurance losses and loss adjustment expenses decreased to $68.5
million in the six months ended June 30, 1998 from $73.1 million in the six
months ended June 30, 1997, a decrease of 6.3%. This decrease was due primarily
to the continuing improvement of the California housing markets and the
corresponding decrease in the inventory of loans in default and claim payments.
Direct primary claims paid by PMI decreased to $67.3 million in the six months
ended June 30, 1998 from $72.8 million in the corresponding period of 1997, a
7.6% decrease. Policies written in California accounted for approximately 52.2%
and 68.4% of the total dollar amount of claims paid in the six months ended June
30, 1998 and 1997, respectively.
Mortgage insurance underwriting and other expenses increased 23.0% to $50.2
million in the six months ended June 30, 1998 from $40.8 million in the six
months ended June 30, 1997. This increase was primarily attributable to the
growth in mortgage origination volume which caused increases in policy
acquisition costs, including contract underwriting expenses, as discussed
under the results of consolidated operations for the second quarter. New
policies processed by contract underwriters represented 32.1% of PMI's NIW in
the six months ended June 30, 1998 compared with 17.3% in the corresponding
period of 1997.
The mortgage insurance loss ratio improved to 34.1% in the six months ended June
30, 1998 compared to 38.1% in the corresponding period of 1997, due primarily to
the growth in premiums earned coupled with the decrease in losses and loss
adjustment expenses. The expense ratio increased to 26.7% in the six months
ended June 30, 1998 from 23.2% in the six months ended June 30, 1997, due
primarily to the increase in policy acquisition costs from the growth in NIW.
The combined ratio decreased to 60.8% in the six months ended June 30, 1998 from
61.3% in the six months ended June 30, 1997.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned increased 32.3% to $34.4 million in the six
months ended June 30, 1998 compared with $26.0 million in the six months ended
June 30, 1997. This increase was primarily attributable to the continuing
growth in residential mortgage originations resulting from the continued high
levels of refinancing activity and a strong new home purchase market in the
states where APTIC operates. Underwriting and other expenses increased 29.8% to
$30.5 million in the six months ended June 30, 1998 compared to $23.5 million in
the six months ended June 30, 1997. This increase is directly attributable to
the increase in agency fees and commissions paid related to the increase in
premiums earned. The title insurance combined ratio decreased to 89.3% in the
six months ended June 30, 1998 from 93.1% in the six months ended June 30, 1997.
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OTHER
The Company's net investment income in the six months ended June 30, 1998 was
$42.7 million compared with $40.7 million in the six months ended June 30, 1997,
an increase of 4.9%. The increase was primarily attributable to the growth in
the average amount of invested assets. The Company's average investment yield
(pretax) was 6.1% in the six months ended June 30, 1998 and 1997. Realized
capital gains (net of losses) decreased to $10.2 million in the six months ended
June 30, 1998 from $18.8 million in the six months ended June 30, 1997.
Other income, primarily revenues generated by MSC, increased to $10.0 million in
the six months ended June 30, 1998 from $2.9 million in the six months ended
June 30, 1997. Other expenses, primarily expenses incurred by MSC, increased to
$11.8 million in the six months ended June 30, 1998 compared with $6.1 million
in the corresponding period of 1997. These increases are primarily due to
increased contract underwriting services provided to the Company's mortgage
insurance customers and secondarily to other ancillary services. See
discussions above and Cautionary Statement and Factors That May Affect Future
Results and Market Price of Stock - Contract Underwriting Services; New
Products.
The Company's effective tax rate decreased to 28.4% in the six months ended June
30, 1998, compared to 29.4% in the six months ended June 30, 1997. The year
over year decrease in the effective rate was caused primarily by an increase in
the percentage of tax exempt income included in income before taxes during the
first half of 1998, and secondarily by the decrease in realized capital gains.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Liquidity and capital resource considerations are different for TPG and PMI, its
principal insurance operating subsidiary, as discussed below.
TPG's principal sources of funds are dividends from PMI and APTIC, investment
income and funds that may be raised from time to time in the capital markets.
During the first quarter of 1998, APTIC declared and paid a cash dividend of
$3.2 million to TPG, substantially the full amount of a dividend that can be
paid by APTIC in 1998 without prior permission from the Florida Department of
Insurance. On March 24, 1998, the Arizona Department of Insurance authorized
PMI to declare and pay an extraordinary dividend of $50 million to TPG, which
was paid in cash on April 3, 1998. In addition, the Arizona Department of
Insurance also authorized an extraordinary dividend of $50 million payable after
the Department has reviewed the operating results of PMI for the six months
ended June 30, 1998. It is not expected that PMI will declare and pay any
dividends in 1998 in addition to those already authorized by the Arizona
Department of Insurance. TPG has two bank credit lines available totaling
$50.0 million. At June 30, 1998, there were no outstanding borrowings under the
credit lines.
TPG's principal uses of funds are common stock repurchases, the payment of
dividends to shareholders, funding of acquisitions, additions to its investment
portfolio, investments in subsidiaries, and the payment of interest. In
November 1997, an additional $150 million stock buy-back program was authorized
by the TPG Board of Directors. As of July 31, 1998, TPG has $57 million
available to repurchase additional shares under the authorization.
As of June 30, 1998, TPG had approximately $101.1 million of available funds.
This amount has decreased from the December 31, 1997 balance of $134 million due
primarily to the investment in RAM Re and the common stock repurchases in the
first half of 1998, offset by dividends received from PMI and APTIC.
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The principal sources of funds for PMI are premiums received on new and renewal
business and amounts earned from the investment of this cash flow. The principal
uses of funds by PMI are the payment of claims and related expenses, policy
acquisition costs and other operating expenses, investment in subsidiaries and
dividends to TPG. PMI generates positive cash flows from operations as a result
of premiums being received in advance of the payment of claims. Cash flows
generated from PMI's operating activities totaled $66.8 million and $102.1
million in the six months ended June 30, 1998 and 1997, respectively. The first
half of 1997 included the collection of $53.6 million as a result of a
termination and commutation of a reinsurance treaty.
PMI has commenced a project to prepare the Company's operating and insurance
systems for the year 2000 (See Factors That May Affect Future Results and Market
Price of Stock - Year 2000 Issues). Management expects to complete this project
in the first quarter of 1999 at a total cost of $3 million, which will be funded
through operating cash flows. These costs are being expensed as they are
incurred.
The Company's invested assets increased to $1,496.8 million at June 30, 1998
from $1,490.6 million at December 31, 1997 primarily due to cash flows from
operations of $78.8 million and an increase of $3.3 million in net unrealized
gains on investments available for sale, offset by stock repurchases of $82.3
million, and dividends paid of $3.2 million.
Consolidated reserve for losses and loss adjustment expenses decreased from
$202.4 million at December 31, 1997, to $201.7 million at June 30, 1998. The
decrease in the consolidated reserve for losses and loss adjustment expense is
due primarily to the decrease in PMI's default inventory from December 31, 1997
which was the result of the improvements in PMI's California book of business.
However, PMI's reserve per default was strengthened to $12,800 at June 30, 1998
from $11,600 at December 31, 1997.
Consolidated shareholders' equity increased from $1,061.2 million at December
31, 1997, to $1,072.2 million at June 30, 1998. The change in shareholders'
equity consisted of increases of $92.6 million from net income, an increase of
$2.1 million in net unrealized gains on investments available for sale (net of
tax), and $1.9 million from stock option activity, offset by common stock
repurchases of $82.3 million, and dividends declared of $3.3 million.
PMI's statutory risk-to-capital ratio at June 30, 1998 was 14.3:1, compared to
14.6:1 at December 31, 1997. See Factors That May Affect Future Results and
Market Price of Stock - Rating Agencies and Risk-to-Capital Ratio.
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CAUTIONARY STATEMENT
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this document, other documents
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise that are not historical facts, and that relate to future plans,
events or performance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include the following: (i) management expects new pool risk written
and the percent of risk share programs to increase in the second half of 1998;
(ii) management believes that PMI's total default rate could increase in 1998
due to the continued maturation of its 1994 and 1995 books of business; (iii)
although management expects that California should continue to account for a
significant portion of total claims paid, management anticipates that with
continued improvement in the California economy, increased benefits of loss
mitigation and improved default reinstatement rates, California claims paid as a
percentage of total claims paid should continue to decline; and (iv) Management
anticipates that contract underwriting will continue to generate a significant
percentage of PMI's NIW and that customer demand for contract underwriting
services will increase. In addition, management anticipates that the rate of
growth of policy acquisition costs will exceed the growth rate of premiums, if
any, for the remainder of the year. The Company's actual results may differ
materially from those expressed in any forward-looking statements made by the
Company. These forward-looking statements involve a number of risks or
uncertainties including, but not limited to, the factors set forth below and in
the Company's periodic filings with the Securities and Exchange Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
GENERAL CONDITIONS
Several factors such as economic recessions, declining housing values, higher
unemployment rates, deteriorating borrower credit, rising interest rates,
increases in refinance activity caused by declining interest rates, legislation
impacting borrowers' rights, or combinations of such factors might affect the
mortgage insurance industry and demand for housing in general and could
materially and adversely affect the Company's financial condition and results of
operations. Such economic events could materially and adversely impact the
demand for mortgage insurance, cause claims on policies issued by PMI to
increase, and/or cause a similar adverse increase in PMI's loss experience.
Other factors that may influence the amount of NIW by PMI include: mortgage
insurance industry volumes of new business; the impact of competitive
underwriting criteria and product offerings and services, including mortgage
pool insurance and contract underwriting services; the ability to recruit and
maintain a sufficient number of qualified underwriters; the effect of risk-
sharing structured transactions; changes in the performance of the financial
markets; PMI's claims-paying ability rating; general economic conditions that
affect the demand for or acceptance of the Company's products; changes in
government housing policy; changes in government regulations or interpretations
regarding the Real Estate Settlement Procedures Act ("RESPA"); changes in the
statutory charters, regulations, powers and coverage requirements of government
sponsored enterprises ("GSEs"), banks and savings institutions; and customer
consolidation.
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MARKET SHARE AND COMPETITION
The Company's financial condition and results of operations could be materially
and adversely affected by a decline in its market share, or a decline in market
share of the private mortgage insurance industry as a whole. Numerous factors
bear on the relative position of the private mortgage insurance industry versus
government and quasi-governmental competition as well as the competition of
lending institutions that choose to remain uninsured, self-insure through
affiliates, or offer residential mortgage products that do not require mortgage
insurance. The impact of competitive underwriting criteria and product
offerings, including mortgage pool insurance and contract underwriting, has a
direct impact on the Company's market share. Further, several of the Company's
competitors have greater direct or indirect capital reserves that provide them
with potentially greater flexibility than the Company in addressing competitive
issues.
PMI competes directly with federal and state governmental and quasi-governmental
agencies, principally the FHA and, to a lesser degree, the VA. Further, the
Office of the Comptroller of the Currency has granted permission to certain
national banks to form reinsurance companies as wholly-owned operating
subsidiaries for the purpose of reinsuring mortgage insurance written on loans
originated or purchased by such banks. In addition, the Federal Reserve Board
and the Office of Thrift Supervision are in the process of considering whether
similar activities are permitted for bank holding companies and savings
institutions, respectively. The reinsurance subsidiaries of national banks,
savings institutions, or bank holding companies could become significant
competitors of the Company in the future. Mortgage lenders, other than banks,
thrifts or their affiliates, are forming reinsurance affiliates that are
typically regulated solely by the insurance authority of their state of
domicile. Management believes that such reinsurance affiliates will increase
competition in the mortgage insurance industry and may materially and adversely
impact PMI's market share.
Certain lenders originate a first mortgage lien with an 80 percent LTV ratio, a
10 percent second mortgage lien, and 10 percent of the purchase price from
borrower's funds ("80/10/10"). This 80/10/10 product competes with mortgage
insurance as an alternative for lenders selling loans in the secondary mortgage
market. If the 80/10/10 product becomes a widely accepted alternative to
mortgage insurance, it could have a material and adverse impact on the Company's
financial condition and results of operations.
Legislation and regulatory changes affecting the FHA and certain commercial
banks that forego insurance have affected demand for private mortgage insurance.
The maximum individual loan amount that the FHA can insure is currently $170,362
and the maximum individual loan amount that the VA can insure is $203,150.
Recently, the Senate passed its Fiscal Year 1999 appropriations bill for the
Department of Housing and Urban Development ("HUD") with provisions that would
increase the maximum individual loan amount that the FHA can insure to $197,620
and simplify the downpayment formula. The streamlined downpayment formula for
FHA loans would eliminate tiered minimum cash investment requirements and
establish four maximum loan-to-values based on loan size and closing costs,
making FHA insurance more competitive with private mortgage insurance in areas
with higher home prices. Although management believes that it is too early to
ascertain the impact of any final FHA provisions included in the Fiscal Year
1999 appropriations bill for HUD, any increase in the FHA loan limit, or other
expansion of eligibility for the FHA and VA would likely have an adverse affect
on the competitive position of PMI and consequently could materially and
adversely affect the Company's financial condition and results of operations.
INSURANCE IN FORCE
A significant percentage of PMI's premiums earned is generated from its existing
insurance in force and not from new insurance written. PMI's policies for
insurance coverage typically have a policy duration of five to seven years.
Insurance coverage may be canceled by the policy owner or servicer of the loan
at any time. PMI has no
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control over the owner's or servicer's decision to cancel insurance coverage and
self-insure or place coverage with another mortgage insurance company. There can
be no assurance that policies for insurance coverage originated in a particular
year or for a particular customer will not be canceled at a later time or that
the Company will be able to regain such insurance coverage at a later time. As a
result, the Company's financial condition and results of operation could be
materially and adversely affected by greater than anticipated policy
cancellations or lower than projected persistency resulting in declines in
insurance in force.
During an environment of falling interest rates, an increasing number of
borrowers refinance their mortgage loans. PMI and other mortgage insurance
companies generally experience an increase in the prepayment rate of insurance
in force, resulting from policy cancellations of older books of business.
Although PMI has a history of expanding business during low interest rate
environments, the resulting increase of NIW may ultimately prove to be
inadequate to compensate for the loss of insurance in force arising from policy
cancellations. Any significant decrease in PMI's insurance in force could
materially and adversely affect the Company's financial condition and results of
operations.
Insurance in force as of June 30, 1998 was $77.6 billion compared with $77.8
billion as of December 31, 1997. The decrease in insurance in force is
primarily due to higher policy cancellations caused by the refinancing activity
in the first half of 1998. The decline in insurance in force will have an
adverse impact on PMI's future renewal premiums.
FANNIE MAE, FREDDIE MAC AND FHA
PMI and other private mortgage insurers are affected by Fannie Mae and Freddie
Mac. These GSEs are permitted by statute to purchase conventional high-LTV
mortgages from lenders who obtain mortgage insurance on those loans. Fannie Mae
and Freddie Mac have the discretion to reduce the amount of private mortgage
insurance they require on loans. Any reduction in the amount of private
mortgage insurance coverage could materially and adversely affect the Company's
financial condition and results of operations.
Fannie Mae and Freddie Mac have guidelines which give borrowers the right to
request cancellation of mortgage insurance when specified conditions are met.
PMI cannot generally cancel its mortgage insurance policies once issued, but
must cancel mortgage insurance for a mortgage loan upon the request of the
insured.
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. Under Fannie
Mae and Freddie Mac regulations, PMI needs to maintain at least an "AA-" or
equivalent claims-paying ability rating in order to provide mortgage insurance
on loans purchased by the GSEs. Failure to maintain such a rating would
effectively cause PMI to be ineligible to provide mortgage insurance. A loss of
PMI's existing eligibility status, either due to a failure to maintain a minimum
claims-paying ability rating from the various rating agencies or non-compliance
with other eligibility requirements, would have a material, adverse effect on
the Company's financial condition and results of operations.
RATING AGENCIES
PMI's claims-paying ability is currently rated "AA+" (Excellent) by Standard and
Poor's Rating Services, "Aa2" (Excellent) by Moody's Investors Service, Inc.,
"AA+" (Very Strong) by Fitch IBCA, and "AA+" (Very High) by Duff & Phelps Credit
Rating Co. These ratings are subject to revisions or withdrawal at any time by
the assigning rating organization. The ratings by the organizations are based
upon factors relevant to PMI's policyholders and are not applicable to the
Company's common stock or outstanding debt.
Certain rating agencies have assessed capital charges on pool insurance policies
based on
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price and structure. The methodology for assessing the capital requirement for
pool insurance is based on the real estate depression which occurred in oil
producing states during the mid-1980's. Management believes the capital charge
that is levied currently on pool insurance risk by the rating agencies is
generally $1.00 of capital for each $1.40 of pool insurance risk. Regulators
specifically limit the amount of insurance risk that may be written by PMI to
a multiple of 25 times PMI's statutory capital (which includes the contingency
reserve). The rating agencies could change their view as to the capital
charges that are assessed on pool insurance products at any time.
In the mortgage guaranty insurance industry, liquidity refers to the ability
of an enterprise to generate adequate amounts of cash from its normal
operations, including premiums received and investment income, in order to
meet its financial commitments, which are principally obligations under the
insurance policies it has written. Liquidity requirements are significantly
influenced by the level and severity of claims. Management believes that a
significant reduction in PMI's liquidity could adversely impact its claims-
paying ratings which could have a material, adverse effect on the Company's
financial condition and results of operations.
CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS
The Company provides contract underwriting services that enable customers to
improve the efficiency and quality of their operations by outsourcing all or
part of their mortgage loan underwriting. Contract underwriting services have
become increasingly important to mortgage lenders as they seek to reduce
costs, including the cost of repurchasing loans from the GSEs and other
investors which are not underwritten to relevant guidelines. As a part of its
contract underwriting services, PMI provides remedies which may include the
assumption of some of the costs of repurchasing insured and uninsured loans
from the GSEs and other investors. Generally, the scope of these remedies
exceed those contained in PMI's master primary insurance policies. Contract
underwriting currently generates a significant percentage of PMI's NIW.
Management anticipates that contract underwriting will continue to generate a
significant percentage of PMI's NIW. Due to the increasing demand of contract
underwriting services, the limited number of underwriting personnel available,
and heavy price competition among mortgage insurance companies, PMI's
inability to recruit and maintain a sufficient number of qualified
underwriters could materially and adversely affect its market share and
materially and adversely affect the Company's financial condition and results
of operations. Based on the factors above, underwriter hourly rates increased
in 1998 over 1997.
TPG and PMI, from time to time, introduce new mortgage insurance products or
programs. The Company's financial condition and results of operations could be
materially and adversely affected if PMI or the Company experiences delays in
introducing competitive new products and programs. In addition, for any
introduced product, there can be no assurance that such products, including any
mortgage pool type products, or programs will be as profitable as the Company's
existing products and programs.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions in all phases of the Company's
operations.
Based on previous assessments, the Company determined that it will be required
to modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed in a timely
manner, the Year 2000 Issue could have a material impact on the operations of
the Company.
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The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with assessing the impact of a
third parties' Year 2000 Issues, and are based on presently available
information. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The Company is utilizing both internal and external resources to reprogram and
test the software for Year 2000 modifications. The Company plans to complete the
Year 2000 project in the first quarter of 1999 at a total cost of $3.0 million,
which will be funded through operating cash flows and is being expensed as
incurred. As of June 30, 1998, the Company has incurred and expensed
approximately $1.3 million related to its Year 2000 project and the development
of a remediation plan.
The Company is currently assessing contingency plans that will address failure
to remediate its Year 2000 Issue in a timely manner. Although it is highly
unlikely given the assessments of the required modifications, PMI might need to
process data manually if the Company's critical systems, such as the mortgage
insurance system's origination or billing process, fail due to the Year 2000
Issue. In this event, PMI would procure clerical personnel from temporary
recruitment firms. Additionally, duplicate records of critical data on
Company maintained computer systems are maintained and stored at an offsite
location as a routine procedure related to the Company's Disaster Recovery
Program. These duplicate records would be available to restore operations
disrupted by earthquake, fire or other natural disasters, and may assist in any
Year 2000 contingency plan recovery operation. The failure of any of PMI's
significant customers or vendors to remediate their Year 2000 Issue, however,
is difficult if not impossible to fully address in any contingency plan.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
NEW YORK DEPARTMENT OF INSURANCE
The Company offers a number of risk-share and structured products and programs
that are designed to encourage quality originations and loss mitigation by its
customers. To date, these products and programs do not represent a significant
portion of the Company's revenues or a significant percent of PMI's NIW. In
March 1997, the New York Department of Insurance stated in a letter addressed to
all private mortgage insurers that certain risk-share and structured products
and programs would be considered to be illegal under New York law.
Representatives of the mortgage insurance industry have been in discussions with
the New York Department of Insurance regarding its March 1997 letter.
Management is unable to predict at this time the results of these discussions.
RISK-TO-CAPITAL RATIO
Regulators specifically limit the amount of insurance risk that may be written
by PMI to a multiple of 25 times PMI's statutory capital (which includes the
contingency reserve). Other factors affecting PMI's risk-to-capital ratio
include: (i) regulatory review and oversight by the State of Arizona, PMI's
state of domicile for insurance regulatory purposes; (ii) limitations under the
Runoff Support Agreement with Allstate, which prohibit PMI from paying any
dividends if, after the payment of any such dividend, PMI's risk-to-capital
ratio would equal or exceed 23 to 1; (iii) TPG's credit agreements; and (iv)
TPG's and PMI's credit or claims-paying ability ratings which require that the
rating agencies' risk-to-capital ratio not exceed 20 to 1.
Significant losses could cause a material reduction in statutory capital,
causing an increase in the risk-to-capital ratio and thereby limit PMI's ability
to write new business. The inability to write new business could materially and
adversely affect the Company's financial condition and results of operations.
CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE
The composition of PMI's NIW has included an increasing percentage of mortgages
with LTVs in excess of 90% and less than or equal to 95% ("95s"). At June 30,
1998, 46.3% of PMI's risk in force consisted of 95s, which, in
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PMI's experience, have had a claims frequency approximately twice that of
mortgages with LTVs equal to or less than 90% and over 85% ("90s"). PMI also
offers coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s").
At June 30, 1998, 2.4% of PMI's risk in force consisted of 97s which have even
higher risk characteristics than 95s and greater uncertainty as to pricing
adequacy. PMI's NIW also includes adjustable rate mortgages ("ARMs"), which,
although priced higher, have risk characteristics that exceed the risk
characteristics associated with PMI's book of business as a whole. Since the
fourth quarter of 1997, PMI has offered a pool insurance product to state
housing finance authorities and certain lenders. Pool insurance is generally
used as an additional credit enhancement for certain secondary market mortgage
transactions and generally covers the loss on a defaulted mortgage loan that
exceeds the claim payment under the primary coverage, if primary insurance is
required on that mortgage loan. Pool insurance also generally covers the total
loss on a defaulted mortgage loan which did not require primary insurance, in
each case up to a stated aggregate loss limit. New pool risk written was $38
million in the second quarter of 1998, and $52 million in the six months ended
June 30, 1998. Management expects new pool risk written to increase
significantly throughout the year and into 1999. Although PMI charges higher
premium rates for loans that have higher risk characteristics, including ARMs,
95s, 97s and pool insurance products, the premiums earned on such products, and
the associated investment income, may ultimately prove to be inadequate to
compensate for future losses from such products. Such losses could materially
and adversely affect the Company's financial condition and results of
operations.
POTENTIAL INCREASE IN CLAIMS
Mortgage insurance coverage generally cannot be canceled by PMI and remains
renewable at the option of the insured for the life of the loan. As a result,
the impact of increased claims from policies originated in a particular year
generally cannot be offset by premium increases on policies in force or
mitigated by nonrenewal of insurance coverage. There can be no assurance,
however, that the premiums charged will be adequate to compensate PMI for the
risks and costs associated with the coverage provided to its customers.
LOSS RESERVES
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amounts, as well as the estimated costs, including legal and other fees,
of settling claims. Such reserves are based on estimates, which are regularly
reviewed and updated. There can be no assurance that PMI's reserves will prove
to be adequate to cover ultimate loss development on incurred defaults. The
Company's financial condition and results of operations could be materially and
adversely affected if PMI's reserve estimates are insufficient to cover the
actual related claims paid and expenses incurred.
REGIONAL CONCENTRATION
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California, Florida, and Texas, where PMI
has 19.3%, 7.2%, and 6.8% of its risk in force concentrated and where the
default rate on all PMI policies in force is 3.20%, 2.59% and 1.97% compared
with 2.16% nationwide as of June 30, 1998.
CONTINUING RELATIONSHIPS WITH ALLSTATE AND AFFILIATE
In December 1993, PMI entered into a Reinsurance Treaty with Forestview Mortgage
Insurance Company ("Forestview") whereby Forestview agreed to reinsure all
liabilities (net of amounts collected from third party reinsurers and
indemnitors) in connection with PMI's mortgage pool insurance business in
exchange for
20
<PAGE>
premiums received. In 1994, Forestview also agreed that as soon as practicable
after November 1, 1994, Forestview and PMI would seek regulatory approval for
the Reinsurance Treaty to be deemed to be an assumption agreement and that, upon
receipt of the requisite approvals, Forestview would assume such liabilities.
The parties are in the process of seeking regulatory approval to complete the
assumption of the mortgage pool insurance policies. Until Forestview has assumed
directly such mortgage pool insurance policies, PMI will remain primarily liable
on the unassumed policies. Forestview's previous claims-paying ability rating of
"AA" (Excellent) was withdrawn by Standard and Poor's Rating Services ("S&P").
Management is uncertain at this time what impact the withdrawal of the claims-
paying ability rating will have on the parties' ability to timely consummate the
assumption transaction. Pursuant to this agreement, PMI ceded $4.9 million of
pool premiums to Forestview and Forestview reimbursed PMI for pool claims on the
covered policies in the amount of $14.6 million in the six months ended June 30,
1998. It is anticipated that additional pool claims significantly in excess of
pool premiums will be paid in 1998 and beyond. As of June 30, 1998, the Company
has a $65.4 million reinsurance recoverable from Forestview, of which $59.7
million is related to estimated claims not yet received. The failure of
Forestview to meet its contractual commitments would materially and adversely
affect the Company's financial condition and results of operations.
On October 28, 1994, TPG entered into a Runoff Support Agreement (the "Runoff
Support Agreement") with Allstate Insurance Company ("Allstate") to replace
various capital support commitments that Allstate had previously provided to
PMI. Allstate agreed to pay claims on certain insurance policies issued by PMI
prior to October 28, 1994, if PMI's financial condition deteriorates below
specified levels, or if a third party brings a claim thereunder. Alternatively,
Allstate may make contributions directly to PMI or TPG. In the event that
Allstate makes payments or contributions under the Runoff Support Agreement
(which possibility management believes is remote), Allstate would receive
subordinated debt or preferred stock of PMI or TPG in return. No payment
obligation arose under the Runoff Support Agreement in the first half of 1998.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
21
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
JUNE 30, 1998
ITEM 1 - LEGAL PROCEEDINGS
In the September 30, 1997 Quarterly Report on Form 10-Q, the Company reported
the filing of a complaint in the Superior Court of Fulton County, State of
Georgia, against The PMI Group, Inc. and PMI Mortgage Insurance Co. On December
18, 1997, The PMI Group, Inc. and PMI Mortgage Insurance Co. filed a
counterclaim against BISYS Creative Solutions, Inc. On July 15, 1998, the
parties executed a confidential settlement agreement and mutual release of the
parties' counterclaims and all claims contained in the complaint captioned BISYS
Creative Solutions, Inc., v. The PMI Group, Inc., and PMI Mortgage Insurance Co.
(case#-62326).
- -------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 21, 1998, the
following individuals were elected to the Board of Directors:
1. Election of Directors
<TABLE>
<CAPTION>
Votes For Votes Withheld
-------- --------------
<S> <C> <C>
James C. Castle 24,971,558 3,441,050
Donald C. Clark 24,971,858 3,440,750
W. Roger Haughton 24,972,017 3,440,591
Wayne E. Hedien 24,971,858 3,440,750
John D. Roach 24,972,133 3,440,475
Kenneth T. Rosen 24,972,133 3,440,475
Richard L. Thomas 24,971,488 3,441,120
Mary Lee Widener 24,974,087 3,438,521
Ronald H. Zech 24,971,758 3,440,850
</TABLE>
The following proposal was approved at the Company's Annual Meeting:
<TABLE>
Votes for Votes against Votes withheld Broker Non-Vote
------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
2. Appointment of Deloitte & Touche LLP
as independent auditors of the Company
for 1998 28,173,306 11,794 6,908 4,234,030
</TABLE>
ITEM 5 - OTHER INFORMATION
In accordance with Rule 14a-4(c)(1) promulgated by the Securities and Exchange
Commission, shareholder proxies obtained by the Company in connection with the
1999 annual meeting of shareholders will confer on proxyholders discretionary
authority to vote on any matter presented at the meeting, unless notice of the
matter to be presented at the meeting is received by the Secretary of TPG not
before February 20, 1999 or after March 22, 1999 in compliance with TPG's
Bylaws. As stated in the 1998 proxy statement, any proposals intended to be
presented at the 1999 annual meeting of shareholders must be received by the
Secretary of the Company on or before December 22, 1998, in order to be
considered for inclusion in the Company's proxy statement and form of proxy
relating to such meeting.
22
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-Q
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 13, 1998.
THE PMI GROUP, INC.
/s/ John M. Lorenzen, Jr.
--------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ William A. Seymore
-----------------------
William A. Seymore
Vice President and Chief
Accounting Officer
24
<PAGE>
INDEX TO EXHIBITS
(PART II, ITEM 6)
<TABLE>
<CAPTION>
Exhibit
Number DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.2* The PMI Group, Inc. Equity Incentive Plan as amended
10.3* The PMI Group, Inc. Stock Plan for Non-Employee Directors as amended
10.20* Supplemental Employee Retirement Plan as amended
10.31* The PMI Group, Inc. Directors' Deferred Compensation Plan as amended
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
* Compensatory or benefit plan in which certain executive officers or Directors
of The PMI Group, Inc. or its subsidiaries are eligible to participate.
25
<PAGE>
EXHIBIT 10.2
THE PMI GROUP, INC.
EQUITY INCENTIVE
PLAN
(AMENDED AND RESTATED. EFFECTIVE AS OF FEBRUARY 12, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Purpose........................................................................ 1
2. Definitions.................................................................... 1
3. Scope of the Plan.............................................................. 6
(a) Number of Shares Available For Delivery Under the Plan.................. 6
(b) Effect of Expiration or Termination..................................... 6
(c) Treasury Stock.......................................................... 7
(d) Committee Discretion to Cancel Options.................................. 7
4. Administration................................................................. 7
(a) Committee Administration................................................ 7
(b) Board Reservation and Delegation........................................ 7
(c) Committee Authority..................................................... 7
(d) Committee Determinations Final.......................................... 8
5. Eligibility.................................................................... 8
6. Conditions to Grants........................................................... 9
(a) General Conditions...................................................... 9
(b) Grant of Replacement Options............................................ 9
(c) Grant of Options and Option Price....................................... 11
(d) Grant of Incentive Stock Options........................................ 11
(e) Grant of Reload Options................................................. 12
(f) Grant of Shares of Restricted Stock..................................... 13
(g) Grant of Unrestricted Stock............................................. 16
(h) Grant of Performance Shares............................................. 16
7. Non-transferability............................................................ 17
8. Exercise....................................................................... 17
(a) Exercise of Options..................................................... 17
(b) Special Rules for Section 16 Grantees................................... 18
(c) Permissible Shares Issued............................................... 18
(d) Vesting Upon Retirement, Death or Disability............................ 19
(e) Vesting Upon Change of Control.......................................... 19
9. Deferral....................................................................... 19
10. Loans and Guarantees........................................................... 20
</TABLE>
I
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11. Notification under Section 83(b)............................................... 21
12. Mandatory Withholding Taxes.................................................... 21
13. Elective Share Withholding..................................................... 21
14. Termination of Employment...................................................... 22
(a) Restricted Stock.......................................................... 22
(b) Other Awards.............................................................. 22
(c) Maximum Extension......................................................... 23
15. Equity Incentive Plans of Foreign Subsidiaries................................. 23
16. Substituted Awards............................................................. 23
17. Securities Law Matters......................................................... 23
18. No Funding Required............................................................ 24
19. No Employment Rights........................................................... 24
20. Rights as a Stockholder........................................................ 24
21. Nature of Payments............................................................. 24
22. Non-Uniform Determinations..................................................... 25
23. Adjustments.................................................................... 25
24. Amendment of the Plan.......................................................... 25
25. Termination of the Plan........................................................ 25
26. No Illegal Transactions........................................................ 25
27. Controlling Law................................................................ 25
28. Severability................................................................... 26
</TABLE>
II
<PAGE>
The Plan. The PMI Group, Inc., having established The PMI Group, Inc.
--------
Equity Incentive Plan, hereby amends and restates the Plan, effective as of
February 12, 1998.
1. Purpose. The primary purpose of the Plan is to provide a means by
-------
which key employees of the Company and its Subsidiaries can acquire and maintain
stock ownership, thereby strengthening their commitment to the success of the
Company and its Subsidiaries and their desire to remain employed by the Company
and its Subsidiaries. Another purpose of the Plan is to provide continuation of
benefits and opportunities provided to former participants in any of the Sears
Plans, or the Allstate Plan, which benefits and opportunities were lost,
terminated, forfeited, canceled (with or without the consent of the granter) or
reduced as a result of the Company's initial public offering ("IPO"), by
providing for the grant of substitute Awards hereunder. The Plan also is
intended to attract and retain key employees and to provide such employees with
additional incentive and reward opportunities designed to encourage them to
enhance the profitable growth of the Company and its Subsidiaries.
2. Definitions.
-----------
As used in the Plan, terms defined parenthetically immediately after
their use shall have the respective meanings provided by such definitions and
the terms set forth below shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
(a) "Allstate Option" means an option granted under the Allstate Plan.
(b) "Allstate Plan" means The Allstate Corporation Equity Incentive
Plan.
(c) "Award" means, individually or collectively, a grant under the
Plan of options, restricted Stock, unrestricted Stock or performance shares.
(d) "Award Agreement" means the written agreement by which an Award is
evidenced.
(e) "Board" means the board of directors of the Company.
(f) "Change of Control" means:
(a). The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the
following shall not
<PAGE>
constitute a Change of Control: (i) any acquisition directly
from the Company, (ii) any acquisition by the Company, (iii)
any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation
controlled by the Company, (iv) any beneficial ownership
maintained by (but not additional acquisitions by), The
Allstate Corporation and its subsidiaries, and their respective
successors ("Allstate"), pending such time that Allstate
distributes or transfers its current ownership interest in the
Outstanding Company Common Stock and Outstanding Company Voting
Securities as contemplated by the Prospectus dated April 10,
1995, relating to the initial public offering of the common
stock of the Company, or (v) any acquisition pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (c) of this Article 2(f). Notwithstanding the
foregoing, in its sole discretion, the Board may increase the
20% threshold set forth above in this subsection (a) prior to
any acquisition of 20% or more beneficial ownership of the
Outstanding Company Common Stock or the Outstanding Company
Voting Securities; provided, that (i) such increased threshold
shall apply only to the acquisition and maintenance of
beneficial ownership by any Person eligible to report such
beneficial ownership at the time of such acquisition on
Schedule 13G under the Exchange Act, and (ii) in the event that
any Person initially eligible to so report on Schedule 13G
thereafter ceases to be eligible to so report on Schedule 13G,
the occurrence of the event causing such Person no longer to be
eligible to so report shall be deemed an acquisition by such
Person of all of the Outstanding Company Common Stock and
Outstanding Company Voting Securities beneficially owned by
such Person immediately prior to such occurrence; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board; or
(c) Consummation by the Company of a reorganization, merger
or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition
of assets of another entity (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or
substantially all of the individuals and entities who
2
<PAGE>
were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively,
the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result
of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or
more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business Combination
of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or
more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business
Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business
Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination;
or
(d) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person acquires beneficial ownership of 20% or
more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock as a result of the acquisition of such securities or stock by
the Company, which acquisition reduces the number of the Outstanding
Company Voting Securities or Outstanding Company Common Stock; provided,
that if after such acquisition by the Company such Person (while such
Person remains the beneficial owner of 20% or more of the Outstanding
Company Voting Securities or Outstanding Company Common Stock) becomes the
beneficial owner of additional shares of such Outstanding Company Voting
Securities or Outstanding Company Common Stock (as the case may be), a
Change of Control shall then occur. Capitalized terms used in this Article
2(f), not otherwise defined, shall have the meaning set forth in the form
of change of control employment agreement approved at the February 12, 1998
meeting of the Board of Directors.
(g) "Committee" means the committee of the Board appointed pursuant to
Article 4.
(h) "Company" means The PMI Group, Inc., a Delaware corporation.
3
<PAGE>
(i) "Disability" means, as relates to the exercise of an incentive
stock option after Termination of Employment, a permanent and total disability
within the meaning of Section 22(e)(3) of the Internal Revenue Code, and for all
other purposes, a mental or physical condition which, in the opinion of the
Committee, renders a Grantee unable or incompetent to carry out the job
responsibilities which such Grantee held or the duties to which such Grantee was
assigned at the time the disability was incurred, and which is expected to be
permanent or for an indefinite duration.
(j) "Effective Date" means the date described in the first paragraph
of the Plan.
(k) "Fair Market Value" of the Stock means, as of any applicable date
(other than the Effective Date) the mean between the high and low prices of the
Stock as reported on the New York Stock Exchange Composite Tape, or if there
were no sales on such date, on the next preceding date on which there was such a
reported sale, provided, however, that if the Stock is acquired and sold in a
simultaneous sale pursuant to the provisions of Article 8(a)(iv), Fair Market
Value means the price received upon such sale. Solely as of the effective date
of the IPO, Fair Market Value of the Stock means the price to the public
pursuant to the form of final prospectus used in connection with the IPO, as
indicated on the cover page of such prospectus or otherwise.
(l) "Fiscal Year" means the fiscal year of the Company.
(m) "Grant Date" means the date of grant of an Award determined in
accordance with Article 6.
(n) "Grantee" means an individual who has been granted an Award.
(o) "Internal Revenue Code" means the Internal Revenue Code of 1986,
as amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(p) "IPO" means such term as defined in the first paragraph of the
Plan.
(q) "Minimum Consideration" means the $.01 par value per share or such
larger amount determined pursuant to resolution of the Board to be capital
within the meaning of Section 154 of the Delaware General Corporation Law.
(r) "Net Operating Income Per Share" means as to any Fiscal Year, (i)
the Company's net income from operations, net of after-tax realized capital
gains and losses, divided by (ii) the weighted average number of shares of Stock
outstanding during the Fiscal Year, plus dilutive common equivalent shares
calculated in accordance with Accounting Principles Board Opinion No. 15. Net
Operating Income Per Share for a multi-Fiscal Year period means the average of
Net Operating Income Per Share calculated separately for each Fiscal Year of
such multi-Fiscal Year period.
(s) "1934 Act" means the Securities Exchange Act of 1934, as amended.
4
<PAGE>
(t) "Option Price" means the per share purchase price of (i) Stock
subject to an option or (ii) restricted Stock subject to an option.
(u) "Parent" means Allstate Insurance Company.
(v) "Performance Goals" means the goal(s) (or combined goal(s))
determined by the Committee (in its discretion) to be applicable to a Grantee
with respect to an Award. As determined by the Committee, the Performance Goals
(if any) applicable to an Award may provide for a targeted level or levels of
achievement using one or more of the following measures: (i) Net Operating
Income per Share, (ii) Return on Equity, and (iii) Total Return. The
Performance Goals may differ from Grantee to Grantee and from Award to Award.
(w) "Plan" means The PMI Group, Inc. Equity Incentive Plan, as set
forth in this instrument and as hereafter amended from time to time.
(x) "PMI Group Grantee" means any individual who is employed on the
Effective Date by The PMI Group, Inc. or any of its Subsidiaries.
(y) "Reload Option" has the meaning specified in Article 6(e).
(z) "Retirement" means a Termination of Employment occurring on or
after an individual attains age 65, or a Termination of Employment approved by
the Company as an early retirement; provided that in the case of a Section 16
Grantee, such early retirement must be approved by the Committee.
(aa) "Return on Equity" means as to any Fiscal Year, the Company's net
income after taxes expressed as a percentage of average stockholders' equity.
For this purpose, average stockholders' equity shall be calculated as the
average of stockholders' equity on the first and last days of the Fiscal Year,
and excluding unrealized gains and losses.
(bb) "Sears" means Sears, Roebuck and Co., a New York corporation.
(cc) "Sears Option" means an option granted under a Sears Plan.
(dd) "Sears Plans" means the following plans of Sears: the 1994
Employees Stock Plan, the 1990 Employees Stock Plan, the 1986 Employees Stock
Plan, the 1982 Employees Stock Plan, the 1978 Employees Stock Plan and the 1979
Incentive Compensation Plan.
(ee) "SEC" means the Securities and Exchange Commission.
(ff) "Section 16 Grantee" means a person subject to potential
liability with respect to equity securities of the Company under Section 16(b)
of the 1934 Act.
(gg) "Stock" means common stock of the Company, par value $.01 per
share.
5
<PAGE>
(hh) "Subsidiary" means a corporation as defined in Section 424(f) of
the Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(ii) "10% Owner" means a person who owns stock (including stock
treated as owned under Section 424(d) of the Internal Revenue Code) possessing
more than 10% of the Voting Power of the Company.
(jj) "Termination of Employment" occurs the first day on which an
individual is for any reason no longer employed by the Company or any of its
Subsidiaries, or by the Parent or any of its subsidiaries, or with respect to an
individual who is an employee of a Subsidiary or a subsidiary of the Parent, the
first day on which the Company (or the Parent, as the case may be) no longer
owns voting securities possessing at least 50% of the Voting Power of such
Subsidiary (or subsidiary of the Parent, as the case may be).
(kk) "Total Return" means as to any Fiscal Year or multi-Fiscal Year
period, the total return (change in share price plus reinvestment of any
dividends) of the Stock, as compared to the total return of an index or indexes
selected by the Committee. For this purpose, the Committee shall choose from
among (i) the Standard & Poor's 500 Composite Index, (ii) the Standard & Poor's
Financial Miscellaneous Index, (iii) the Russell 1000 Index, and (iv) the
Russell 1000 Financial Services Index.
(ll) "Voting Power" means the combined voting power of the then-
outstanding voting securities entitled to vote generally in the election of
directors.
3. Scope of the Plan.
-----------------
(a) Number of Shares Available For Delivery Under the Plan. A maximum
------------------------------------------------------
of 1,400,000 shares of Stock shall be authorized for issuance and delivery on
account of the exercise of Awards, including Awards of Replacement Options. No
more than an aggregate of 300,000 shares of the aforesaid 1,400,000 shares of
Stock may be granted under Article 6(f) and (g). No more than 150,000 shares of
Stock may be granted as stock options to any employee during the duration of the
Plan. During any Fiscal Year, no Grantee shall be granted more than 20,000
performance shares. Shares of Stock issuable under the Plan may be either
authorized but unissued shares of Stock or Treasury Stock.
(b) Effect of Expiration or Termination. If and to the extent an
-----------------------------------
Award shall expire or terminate for any reason without having been exercised in
full (including, without limitation, a cancellation and regrant of an option
pursuant to Article 4(c)(vii)), or shall be forfeited, without, in either case,
the Grantee having enjoyed any of the benefits of stock ownership (other than
voting rights or dividends that are likewise forfeited), the shares of Stock
(including restricted Stock) associated with such Award shall become available
for other Awards. Except in the case of a Reload Option granted to a Section 16
Grantee, the grant of a Reload Option shall not reduce the number of shares of
Stock available for other Awards.
6
<PAGE>
(c) Treasury Stock. The Committee shall have the authority to cause
--------------
the Company to purchase from time to time shares of Stock to be held as treasury
shares and used for or in connection with Awards.
(d) Committee Discretion to Cancel Options. Except with respect to
--------------------------------------
options granted pursuant to Article 6(b), the Committee may, in its discretion,
elect at any time, should it determine it is in the best interest of the
Company's stockholders to cancel any options granted hereunder, to cancel all or
any of the options granted hereunder and pay the holders of any such options an
amount (payable in such proportion as the Committee may determine in cash or in
Stock (valued at the Fair Market Value of a share of Stock on the date of
cancellation of such option)) equal to the number of shares of Stock subject to
such canceled option, multiplied by the amount (if any) by which the Fair Market
Value of Stock on the date of cancellation of the option exceeds the Option
Price; provided that if the Committee should determine that not making payment
of such amount to the holders of such option upon the cancellation would be in
the best interests of stockholders of the Company (ignoring in such
determination the cost of such payment and considering only other matters), the
Committee may void options granted hereunder and declare that no payment shall
be made to the holders of such options.
4. Administration.
--------------
(a) Committee Administration. Subject to Article 4(b), the Plan shall
------------------------
be administered by the Committee, which shall consist of not less than two
persons appointed by the Board, who are directors of the Company and not
employees of the Parent, the Company or any of its Subsidiaries. Membership on
the Committee shall be subject to such limitations (including, if appropriate, a
change in the minimum number of members of the Committee) as the Board deems
appropriate to permit transactions pursuant to the Plan to be exempt from
potential liability under Section 16(b) of the 1934 Act and to comply with
Section 162 (m) of the Internal Revenue Code.
(b) Board Reservation and Delegation. The Board may, in its
--------------------------------
discretion, reserve to itself or delegate to another committee of the Board any
or all of the authority and responsibility of the Committee with respect to
Awards to Grantees who are not Section 16 Grantees at the time any such
delegated authority or responsibility is exercised. Such other committee may
consist of one or more directors who may, but need not be, officers or employees
of the Company or of any of its Subsidiaries. To the extent that the Board has
reserved to itself or delegated the authority and responsibility of the
Committee to such other committee, all references to the Committee in the Plan
shall be to such other committee.
(c) Committee Authority. The Committee shall have full and final
-------------------
authority, in its sole and absolute discretion, but subject to the express
provisions of the Plan, as follows:
(i) to grant Awards,
(ii) to determine (A) when Awards may be granted, and (B) whether
or not specific Awards shall be identified with other specific Awards, and
if so, whether they shall be exercisable cumulatively with, or
alternatively to, such other specific Awards,
7
<PAGE>
(iii) to interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan,
(iv) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including, without limitation, rules with respect to
the exercisability and nonforfeitability of Awards upon the Termination of
Employment of a Grantee,
(v) to determine the terms and provisions of the Award
Agreements, which need not be identical and, with the consent of the
Grantee, to modify any such Award Agreement at any time,
(vi) to cancel options in accordance with the provision of
Section 3(d),
(vii) except as provided in Section 4(c)(vi) hereof, to cancel,
with the consent of the Grantee, outstanding Awards, and to grant new
Awards in substitution thereof,
(viii) to accelerate the exercisability of, and to accelerate or
waive any or all of the restrictions and conditions applicable to, any
Award,
(ix) to authorize foreign Subsidiaries to adopt plans as
provided in Article 15,
(x) to make such adjustments or modifications to Awards to
Grantees working outside the United States as are necessary and advisable
to fulfill the purposes of the Plan,
(xi) to authorize any action of or make any determination by
the Company as the Committee shall deem necessary or advisable for carrying
out the purposes of the Plan,
(xii) to make appropriate adjustments to, cancel or continue
Awards in accordance with Article 23, and
(xiii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Awards as the
Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, requiring simultaneous exercise
of related identified Awards, and limiting the percentage of Awards which
may from time to time be exercised by a Grantee.
(d) Committee Determinations Final. The determination of the
------------------------------
Committee on all matters relating to the Plan or any Award Agreement shall be
conclusive and final. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Award.
5. Eligibility. Awards may be granted to any employee of the Company or
-----------
any of its Subsidiaries. In selecting the individuals to whom Awards may be
granted, as well as in
8
<PAGE>
determining the number of shares of Stock subject to, and the other terms and
conditions applicable to, each Award, the Committee shall take into
consideration such factors as it deems relevant in promoting the purposes of the
Plan.
6. Conditions to Grants.
--------------------
(a) General Conditions.
------------------
(i) In accordance with its powers under the Plan, the
Committee may grant replacement options (including Reload Options) in
accordance with this Article 6 to preserve those opportunities and benefits
of PMI Group Grantees which were terminated, forfeited, canceled, or
reduced in connection with the IPO.
(ii) The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by
the Committee.
(iii) The term of each Award (subject to Article 6(b), with
respect to replacement Awards and Articles 6(d) and 6(e) with respect to
incentive stock options and Reload Options, respectively) shall be a period
of not more than 12 years from the Grant Date, and shall be subject to
earlier termination as herein provided.
(iv) A Grantee may, if otherwise eligible, be granted
additional Awards in any combination.
(v) The Committee may grant Awards with terms and conditions
which differ among the Grantees thereof. To the extent not set forth in the
Plan, the terms and conditions of each Award shall be set forth in an Award
Agreement.
(b) Grant of Replacement Options. Subject to Article 3(a), the
----------------------------
Committee may grant options ("Replacement Options") under the Plan to each PMI
Group Grantee who holds unexercised Sears Options (whether or not
nonforfeitable) and unexercised Allstate Options (whether or not forfeitable) at
the Effective Date; provided that such PMI Group Grantee's right to exercise any
Sears Options and Allstate Options has been forfeited or canceled in connection
with the IPO. The Award Agreement with respect to such Replacement Options shall
provide that the Grantee may exercise a Replacement Option at the same time as
he would have been able to exercise the Sears Option or Allstate Option it
replaces, subject to Article 8(b), if applicable.
(i) Replacement of Sears Options.
----------------------------
(A) The Option Price for a Replacement Option shall be
determined by the following formula; provided that in no event shall
the Option Price be less than the Minimum Consideration:
Option Price = A x B
-----
C
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<PAGE>
Any fraction of a cent shall be rounded down to the next full cent.
(B) The number of shares of Stock for which the Replacement
Option is exercisable shall be determined in accordance with the
following formula:
Number of Shares = C x D
-----
B
Any fractional share shall be rounded up to the next full share.
(C) In the foregoing formulas,
"A" is the option exercise price for a Sears Option being
replaced,
"B" is the Fair Market Value of a share of Stock as of the
effective date of the IPO,
"C" is the Fair Market Value of a Sears common share as of the
effective date of the IPO, and
"D" is the number of Sears common shares for which the Sears
Option being replaced is exercisable.
(D) Each Replacement Option shall have the same terms and
conditions (other than the Option Price and the number of shares of
Stock, but including any provision for Reload Options) as, and not
give the Grantee any benefits he did not have, under the corresponding
Sears Option.
(ii) Replacement of Allstate Options.
-------------------------------
(A) The Option Price for a Replacement Option shall be
determined by the following formula; provided that in no event shall
the Option Price be less than the Minimum Consideration:
Option Price = A x B
-----
C
Any fraction of a cent shall be rounded down to the next full cent.
(B) The number of shares of Stock for which the Replacement
Option is exercisable shall be determined in accordance with the
following formula:
Number of Shares = C x D
-----
B
Any fractional share shall be rounded up to the next full share.
10
<PAGE>
(C) In the foregoing formulas,
"A" is the option exercise price for an Allstate Option being
replaced,
"B" is the Fair Market Value of a share of Stock as of the
effective date of the IPO,
"C" is the Fair Market Value of an Allstate common share as of
the effective date of the IPO, and
"D" is the number of Allstate common shares for which the
Allstate Option being replaced is exercisable.
(D) Each Replacement Option shall have the same terms and
conditions (other than the Option Price and the number of shares of
Stock, but including any provision for Reload Options) as, and not
give the Grantee any benefits he did not have, under the corresponding
Allstate Option.
(c) Grant of Options and Option Price. Other than for purposes of
---------------------------------
Replacement Options as set forth in Article 6(b) above, the Committee may, in
its discretion, grant options (which may be options to acquire unrestricted
Stock or restricted Stock) to any employee eligible under Article 5 to receive
Awards. No later than the Grant Date of any option, the Committee shall
determine the Option Price; provided that the Option Price shall, except as
provided in subsection (d) below and in Article 16, not be less than 100% of the
Fair Market Value of the Stock on the Grant Date.
(d) Grant of Incentive Stock Options. At the time of the grant of any
--------------------------------
option other than a Replacement Option, the Committee may designate that such
option shall be made subject to additional restrictions to permit it to qualify
as an "incentive stock option" under the requirements of Section 422 of the
Internal Revenue Code. Any option designated as an incentive stock option:
(i) shall have an Option Price of (A) not less than 100% of
the Fair Market Value of the Stock on the Grant Date or (B) in the case of
a 10% Owner, not less than 110% of the Fair Market Value of the Stock on
the Grant Date;
(ii) shall have a term of not more than 10 years (five years,
in the case of a 10% Owner) from the Grant Date, and shall be subject to
earlier termination as provided herein or in the applicable Award
Agreement;
(iii) shall not have an aggregate Fair Market Value (determined
for each incentive stock option at its Grant Date) of Stock with respect to
which incentive stock options are exercisable for the first time by such
Grantee during any calendar year (under the Plan and any other employee
stock option plan of the Grantee's employer or any parent (including but
not limited to Allstate Insurance Company and Sears) or subsidiary thereof
("Other Plans")), determined in accordance with the provisions of Section
422 of the Internal Revenue Code, which exceeds $100,000 (the "$100,000
Limit");
11
<PAGE>
(iv) shall, if the aggregate Fair Market Value of Stock
(determined on the Grant Date) with respect to all incentive stock options
previously granted under the Plan and any Other Plans ("Prior Grants") and
any incentive stock options under such grant (the "Current Grant") which
are exercisable for the first time during any calendar year would exceed
the $100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant exercisable for the
first time by the Grantee during any calendar year which would be,
when added to any portions of any Prior Grants exercisable for the
first time by the Grantee during such calendar year with respect to
stock which would have an aggregate Fair Market Value (determined as
of the respective Grant Date for such options) in excess of the
$100,000 Limit shall, notwithstanding the terms of the Current Grant,
be exercisable for the first time by the Grantee in the first
subsequent calendar year or years in which it could be exercisable for
the first time by the Grantee when added to all Prior Grants without
exceeding the $100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the provisions
of the immediately preceding sentence during any calendar year
commencing with the calendar year in which it is first exercisable
through and including the last calendar year in which it may by its
terms be exercised, such portion of the Current Grant shall not be an
incentive stock option, but shall be exercisable as a separate option
at such date or dates as are provided in the Current Grant;
(v) shall be granted within 10 years from the earlier of the
date the Plan is adopted or the date the Plan is approved by the
stockholders of the Company; and
(vi) shall require the Grantee to notify the Committee of any
disposition of any Stock issued pursuant to the exercise of the incentive
stock option under the circumstances described in Section 421(b) of the
Internal Revenue Code (relating to certain disqualifying dispositions),
within 10 days of such disposition.
Notwithstanding the foregoing and Article 4(c)(v), the Committee may take any
action with respect to any option, including but not limited to an incentive
stock option, without the consent of the Grantee, in order to prevent such
option from being treated as an incentive stock option.
(e) Grant of Reload Options. The Committee may provide in an Award
-----------------------
Agreement, including an Award Agreement for the grant of a Replacement Option
when the Replaced Sears Option or Replaced Allstate Option included a reload
option for Sears shares or Allstate shares, respectively, as the case may be,
that a Grantee who exercises all or any portion of an option for shares of Stock
which have a Fair Market Value equal to not less than 100% of the Option Price
for such options ("Exercised Options") and who paid the Option Price with shares
of Stock shall be granted, subject to Article 3, an additional option ("Reload
Option") for a number of shares of stock equal to the sum ("Reload Number") of
the number of shares of Stock tendered to exercise the Exercised Options plus,
if so provided by the Committee, the number of shares of
12
<PAGE>
Stock, if any, retained by the Company in connection with the exercise of the
Exercised options to satisfy any federal, state or local tax withholding
requirements.
Reload Options shall be subject to the following terms and conditions:
(i) the Grant Date for each Reload Option shall be the date of
exercise of the Exercised Option to which it relates;
(ii) subject to Article 6(e)(iii) below, the Reload Option may
be exercised at any time during the unexpired term of the Exercised Option
(subject to earlier termination thereof as provided in the Plan and in the
applicable Award Agreement); and
(iii) the terms of the Reload Option shall be the same as the
terms of the Exercised Option to which it relates, except that (A) the
Option Price shall be the Fair Market Value of the Stock on the Grant Date
of the Reload Option and (B) no Reload Option may be exercised within one
year from the Grant Date thereof.
(f) Grant of Shares of Restricted Stock.
-----------------------------------
(i) The Committee may, in its discretion, grant shares of
restricted Stock to any employee eligible under Article 5 to receive
Awards.
(ii) Before the grant of any shares of restricted Stock, the
Committee shall determine, in its discretion:
(A) whether the certificates for such shares shall be
delivered to the Grantee or held (together with a stock power executed
in blank by the Grantee) in escrow by the Secretary of the Company
until such shares become nonforfeitable or are forfeited,
(B) the per share purchase price of such shares, which
may be zero provided, however, that
(1) the per share purchase price of all such shares
(other than treasury shares) shall not be less than the Minimum
Consideration for each such share; and
(2) if such shares are to be granted to a Section 16
Grantee, the per share purchase price of any such shares shall
also be at least 50% of the Fair Market Value of the Stock on the
Grant Date unless such shares are granted for no monetary
consideration (in which case treasury shares are to be delivered)
or with a purchase price per share equal to the Minimum
Consideration for the Stock, and
(C) the restrictions applicable to such grant;
13
<PAGE>
(iii) Payment of the purchase price (if greater than zero) for
shares of restricted Stock shall be made in full by the Grantee before the
delivery of such shares and, in any event, no later than 10 days after the
Grant Date for such shares. Such payment may, at the election of the
Grantee, be made in any one or any combination of the following:
(A) cash,
(B) Stock valued at its Fair Market Value on the date of
payment or, if the date of payment is not a business day, the next
succeeding business day, or
(C) with the approval of the Committee, shares of
restricted Stock, each valued at the Fair Market Value of a share of
Stock on the date of payment or, if the date of payment is not a
business day, the next succeeding business day
provided, however, that, in the case of payment in Stock or restricted
Stock,
(1) the use of Stock or restricted Stock in payment of
such purchase price by a Section 16 Grantee is subject to the
prior receipt by the Company of either a favorable opinion of
counsel for the Company or a "no action" letter from the staff of
the SEC with respect to the exemption of such use of stock from
potential liability under Section 16(b) of the 1934 Act or the
inapplicability of such Section;
(2) in the discretion of the Committee and to the
extent permitted by law, payment may also be made in accordance
with Article 10; and
(3) if the purchase price for restricted Stock ("New
Restricted Stock") is paid with shares of restricted Stock ("Old
Restricted Stock"), the restrictions applicable to the New
Restricted Stock shall be the same as if the Grantee had paid for
the New Restricted Stock in cash unless, in the judgment of the
Committee, the Old Restricted Stock was subject to a greater risk
of forfeiture, in which case a number of shares of New Restricted
Stock equal to the number of shares of Old Restricted Stock
tendered in payment for New Restricted Stock may in the
discretion of the Committee be subject to the same restrictions
as the Old Restricted Stock, determined immediately before such
payment.
(iv) The Committee may, but need not, provide that all or any
portion of a Grantee's Award of restricted Stock shall be forfeited
14
<PAGE>
(A) except as otherwise specified in the Award Agreement,
upon the Grantee's Termination of Employment within a specified time
period after the Grant Date, or
(B) if the Company or the Grantee does not achieve
specified performance goals within a specified time period after the
Grant Date and before the Grantee's Termination of Employment, or
(C) upon failure to satisfy such other restrictions as the
Committee may specify in the Award Agreement.
(v) If a share of restricted Stock is forfeited, then
(A) the Grantee shall be deemed to have resold such share
of restricted Stock to the Company at the lesser of (1) the purchase
price paid by the Grantee (such purchase price shall be deemed to be
zero dollars ($0) if no purchase price was paid) or (2) the Fair
Market Value of a share of Stock on the date of such forfeiture;
(B) the Company shall pay to the Grantee the amount
determined under clause (A) of this sentence as soon as is
administratively practical; and
(C) such share of restricted Stock shall cease to be
outstanding, and shall no longer confer on the Grantee thereof any
rights as a stockholder of the Company, from and after the date of the
Company's tender of the payment specified in clause (B) of this
sentence, whether or not such tender is accepted by the Grantee.
(vi) Any share of restricted Stock shall bear an appropriate
legend specifying that such share is non-transferable and subject to the
restrictions set forth in the Plan. If any shares of restricted Stock
become nonforfeitable, the Company shall cause certificates for such shares
to be issued or reissued without such legend and delivered to the Grantee
or, at the request of the Grantee, shall cause such shares to be credited
to a brokerage account specified by the Grantee
(vii) Notwithstanding any contrary provision of the Plan, with
respect to all outstanding restricted Stock and restricted Stock granted on
or after May 21, 1998, 100% of any such outstanding restricted Stock shares
shall be 100% vested in the Grantee upon the Grantee's Termination of
Employment on account of Retirement, death or Disability.
(viii) Notwithstanding any contrary provision of the Plan or of
any Award Agreement in respect of any restricted Stock, immediately upon
the occurrence of a Change of Control that occurs prior to a Grantee's
Termination of Employment, 100% of any outstanding restricted Stock shares
shall be 100% vested in the Grantee. Notwithstanding the preceding
provisions of this Article 6(f)(viii), if the Committee
15
<PAGE>
determines that the acceleration of vesting of restricted Stock following a
Change of Control would cause a Change of Control transaction to be
ineligible for pooling of interests accounting under APB No. 16, which
transaction (but for such accelerated vesting) otherwise would have been
eligible for such accounting treatment, the Committee, in its sole
discretion, may determine that no such accelerated vesting shall occur.
(g) Grant of Unrestricted Stock. The Committee may, in its
---------------------------
discretion, grant shares of unrestricted Stock to any employee eligible
under Article 5 to receive Awards.
(h) Grant of Performance Shares.
---------------------------
(i) The Committee may, in its discretion, grant performance
shares to any employee eligible under Article 5 to receive Awards.
(ii) Each performance share shall have an initial value equal
to the Fair Market Value of a share of Stock on the date of grant.
(iii) The Committee shall set performance objectives in its
discretion which, depending on the extent to which they are met, will
determine the number of performance shares that will be paid out to the
Participants. The time period during which the performance objectives must
be met shall be called the "Performance Period".
(iv) The Committee may set performance objectives based upon
the achievement of Company-wide, divisional, or individual goals,
applicable Federal or state securities laws, or any other basis determined
by the Committee in its discretion. For purposes of qualifying grants of
performance shares as "performance-based compensation" under Section 162(m)
of the Internal Revenue Code, the Committee, in its discretion, may
determine that the performance objectives applicable to performance shares
shall be based on the achievement of Performance Goals. The Performance
Goals shall be set by the Committee on or before the latest date
permissible to enable the performance shares to qualify as "performance-
based compensation" under Section 162(m) of the Internal Revenue Code. In
granting performance shares which are intended to qualify under Code
Section 162(m), the Committee shall follow any procedures determined by it
from time to time to be necessary or appropriate to ensure qualification of
the performance shares under Internal Revenue Code Section 162(m) (e.g., in
----
determining the Performance Goals).
(v) After the applicable Performance Period has ended, the
Grantee shall be entitled to receive a payout of the number of performance
shares earned over the Performance Period, to be determined as a function
of the extent to which the corresponding performance objectives have been
achieved. Payment of earned performance shares shall be made as soon as
practicable after the expiration of the applicable Performance Period. The
Committee, in its sole discretion, may pay earned performance shares in the
form of cash, in shares of Stock (which have an aggregate Fair
16
<PAGE>
Market Value equal to the value of the earned performance Shares at the
close of the applicable Performance Period) or in a combination thereof.
(vi) Notwithstanding any contrary provision of the Plan, with
respect to all outstanding performance shares and performance shares
granted on or after May 21, 1998, upon the Grantee's Termination of
Employment on account of Retirement, death or Disability, 100% of any such
outstanding performance shares shall be deemed to be earned and shall be
immediately payable to the Grantee, or, in cases where a Grantee has
received a target award of performance shares, 100% of the target amount
shall vest.
(vii) Notwithstanding any contrary provision of the Plan or of
any Award Agreement in respect of any performance share, immediately upon
the occurrence of a Change of Control that occurs prior to a Grantee's
Termination of Employment, 100% of any outstanding performance shares shall
be deemed to be earned and shall be immediately payable to the Grantee, or,
in cases where a Grantee has received a target award of performance shares,
100% of the target amount shall vest. Notwithstanding the preceding
provisions of this Article 6(h)(vii), if the Committee determines that the
acceleration of vesting of performance shares following a Change of Control
would cause a Change of Control transaction to be ineligible for pooling of
interests accounting under APB No. 16, which transaction (but for such
accelerated vesting) otherwise would have been eligible for such accounting
treatment, the Committee, in its sole discretion, may determine that no
such accelerated vesting shall occur.
7. Non-transferability. Each Award (other than unrestricted Stock)
-------------------
granted hereunder shall by its terms not be assignable or transferable other
than by will or the laws of descent and distribution and may be exercised,
during the Grantee's lifetime, only by the Grantee. Each share of restricted
Stock shall be non-transferable until such share becomes nonforfeitable.
Notwithstanding the foregoing, the Grantee may, to the extent provided in the
Plan and in a manner specified by the Committee, (a) designate in writing a
beneficiary to exercise his options after the Grantee's death, and (b) transfer
an option (other than an incentive stock option) by bona fide gift and not for
any consideration, to a member of the Grantee's immediate family, or to a trust
for the exclusive benefit of the Grantee and/or a member or members of the
Grantee's immediate family.
8. Exercise.
--------
(a) Exercise of Options. Subject to Articles 4, 6, 15 and 18, and
-------------------
such terms and conditions as the Committee may impose, each option shall be
exercisable in one or more installments commencing not earlier than the first
anniversary of the Grant Date of such option; provided, however, that in the
case of a Replacement Option, such option shall be exercisable commencing not
earlier than the first anniversary of the grant date of the Sears Option or
Allstate Option it replaces. Options shall not be exercisable for twelve months
following a hardship distribution that is subject to Treasury Regulation
(S)1.401(k)-1(d)(2)(iv)(B)(4), except to the extent permitted thereunder. Each
option shall be exercised by delivery to the Company of written notice of intent
to purchase a specific number of shares of Stock or restricted Stock subject to
the option. The Option Price of any shares of Stock or restricted Stock as to
which an option shall be
17
<PAGE>
exercised shall be paid in full at the time of the exercise. Payment may, at the
election of the Grantee, or if specified, as provided in the Award Agreement, be
made in any one or any combination of the following forms:
(i) check in such form as may be satisfactory to the
Committee,
(ii) Stock valued at its Fair Market Value on the date of
exercise or, if the date of exercise is not a business day, the next
succeeding business day; provided that for the exercise of a Replacement
Option, such Stock must have been held for at least six months, valued at
the Fair Market Value on the date of exercise,
(iii) Except with respect to the exercise of a Replacement Sears
Option, with the approval of the Committee, shares of restricted Stock,
each valued at the Fair Market Value of a share of Stock on the date of
exercise or, if the date of exercise is not a business day, the next
succeeding business day, or
(iv) Except with respect to the exercise of a Replacement Sears
option, through simultaneous sale through a broker of shares of
unrestricted Stock acquired on exercise, as permitted under Regulation T of
the Federal Reserve Board.
If restricted Stock ("Tendered Restricted Stock") is used to pay the
Option Price for Stock, then a number of shares of Stock acquired on exercise of
the option equal to the number of shares of Tendered Restricted Stock shall be
subject to the same restrictions as the Tendered Restricted Stock, determined as
of the date of exercise of the option. If the Option Price for restricted Stock
is paid with Tendered Restricted Stock, and if the Committee determines that the
restricted Stock acquired on exercise of the option is subject to restrictions
("Greater Restrictions") that cause it to have a greater risk of forfeiture than
the Tendered Restricted Stock, then notwithstanding the preceding sentence, all
the restricted Stock acquired on exercise of the option shall be subject to such
Greater Restrictions.
Shares of unrestricted Stock acquired by a Grantee on exercise of an
option shall be delivered to the Grantee or, at the request of the Grantee,
shall be credited directly to a brokerage account specified by the Grantee.
(b) Special Rules for Section 16 Grantees. Subject to Articles 6 and
-------------------------------------
16, no option shall be exercisable by a Section 16 Grantee during the first six
months after its Grant Date, except as exempted from Section 16(b) of the 1934
Act under Rule 16a-2(d) under the 1934 Act. This limitation shall not apply if
the Grantee dies or incurs a Disability before the end of the six-month period.
(c) Permissible Shares Issued. No shares of Stock shall be issued
-------------------------
hereunder upon option exercise except shares of Stock available under Article
3(a). Each Grantee, by acceptance of an award, waives all rights to specific
performance or injunctive or other equitable relief and acknowledges that he has
an adequate remedy at law in the form of damages
18
<PAGE>
(d) Vesting Upon Retirement, Death or Disability. Notwithstanding any
--------------------------------------------
contrary provision of the Plan, with respect to all outstanding stock options,
and options granted on or after May 21, 1998, the right to exercise each such
option then outstanding shall accrue as to 100% of the shares of Stock subject
to such option upon the Grantee's Termination of Employment on account of
Retirement, death or Disability.
(e) Vesting Upon Change of Control. Notwithstanding any contrary
------------------------------
provision of the Plan or of any Award Agreement in respect of an option,
immediately upon the occurrence of a Change of Control that occurs prior to a
Grantee's Termination of Employment, the right to exercise each option then
outstanding shall accrue as to 100% of the shares of Stock then subject to such
option. Notwithstanding the preceding provisions of this Article 8(e), if the
Committee determines that the acceleration of vesting of options following a
Change of Control would cause a Change of Control transaction to be ineligible
for pooling of interests accounting under APB No. 16, which transaction (but for
such accelerated vesting) otherwise would have been eligible for such accounting
treatment, the Committee, in its sole discretion, may determine that no such
accelerated vesting shall occur.
9. Deferral.
--------
(a) Notwithstanding anything herein to the contrary, a Grantee of an
option hereunder who is eligible to defer income under the Company's Officer
Deferred Compensation Plan may elect, at the discretion of, and in accordance
with rules which may be established by, the Committee, to defer delivery of the
proceeds of exercise of an option which is exercised by means of an exchange of
Stock as described in Article 8(a)(ii) or (iii), provided, in either such case,
that shares of Stock tendered or applied in exercise of such option shall have
been held by the Grantee for at least six months prior to such exercise. A
Grantee's election as provided in the preceding sentence shall be irrevocable.
Notwithstanding any other provision of this Article 9, a deferral election made
by a Grantee hereunder shall be void and shall not be given effect unless (i)
the Grantee's deferral election is made at least six full calendar months prior
to the calendar month in which the option otherwise would expire, (ii) the
Grantee's deferral election is made at least six full calendar months prior to
the calendar month in which the option is exercised, and (iii) the Grantee is
employed by the Company or any of its Subsidiaries on the date of exercise of
the option. For purposes of either or both of clauses (i) or (ii) of the
preceding sentence, rules established by the Committee may require an election
earlier than the six calendar month period described therein. Upon exercise of
an option to which a deferral election applies, the shares of Stock covered by
such exercise shall not be issued or transferred to the Grantee, and instead, a
number of Stock Units, as defined below, equal to the number of shares of Stock
covered by such exercise and in respect of which the Grantee has made a deferral
election, shall be credited to an account in the name of the Grantee on the
books and records of the Company (a "Deferred Option Compensation Account") at
the date of exercise. A separate Deferred Option Compensation Account shall be
maintained with respect to each effective deferral election.
(b) For purposes of this Article 9, a "Stock Unit" is a bookkeeping
entry initially representing an amount equivalent to the fair market value of
one share of Stock. Stock Units represent an unfunded and unsecured obligation
of the Company, except as otherwise provided for by the Committee. Settlement of
Stock Units shall be made by issuance of shares of
19
<PAGE>
Stock on such date or dates or upon the occurrence of such event or events as
the Committee may authorize the Grantee to designate at the time a deferral
election is made hereunder, provided, however, that in no event shall settlement
occur more than 60 days after a Grantee's Termination of Employment for any
reason. The number of shares of Stock to be so distributed may be increased by
dividend equivalents, which may be valued as if reinvested in shares of Stock.
Until a Stock Unit is settled, the number of shares of Stock represented by a
Stock Unit shall be subject to adjustment pursuant to Article 23.
(c) Grantees have the status of general unsecured creditors of the
Company with respect to their Deferred Option Compensation Accounts, and such
accounts constitute a mere promise by the Company to make payments with respect
thereto.
(d) A Grantee's right to benefit payments with respect to the Deferred
Option Compensation Accounts may not be anticipated, alienated, sold,
transferred, assigned, pledged, encumbered, attached or garnished by creditors
of the Grantee or the Grantee's beneficiary and any attempt to do so shall be
void and shall not be given effect.
(e) To the extent determined by the Committee, any amount deferred
under this Article 9, and any Deferred Option Compensation Account, may be
treated and held as a portion of the Company's Officer Deferred Compensation
Plan, in which event the provisions of said plan shall govern the operation and
administration of deferred amounts hereunder and Deferred Option Compensation
Accounts, to the extent not inconsistent with the provisions of this Article 9.
10. Loans and Guarantees. The Committee may, in its discretion except
--------------------
with respect to the Replacement of a Sears Option:
(a) allow a Grantee to defer payment to the Company of all or any
portion of (i) the Option Price of an option, (ii) the purchase price of a share
of restricted Stock, or (iii) any taxes associated with a benefit hereunder
which is not a cash benefit at the time such benefit is so taxable, or
(b) cause the Company to guarantee a loan from a third party to the
Grantee, in an amount equal to all or any portion of such option Price, purchase
price, or any related taxes. Any such payment deferral or guarantee by the
Company pursuant to this Article 10 shall be, on a secured or unsecured basis,
for such periods, at such interest rates, and on such other terms and conditions
as the Committee may determine. Notwithstanding the foregoing, a Grantee shall
not be entitled to defer the payment of such Option Price, purchase price, or
any related taxes unless the Grantee (i) enters into a binding obligation to pay
the deferred amount and (ii) except with respect to treasury shares, pays upon
exercise of an option or grant of shares of restricted Stock, as the case may
be, an amount equal to or greater than the aggregate Minimum Consideration
therefor. If the Committee has permitted a payment deferral or caused the
Company to guarantee a loan pursuant to this Article 10, then the Committee may,
in its discretion, require the immediate payment of such deferred amount or the
immediate release of such guarantee upon the Grantee's Termination of Employment
or if the Grantee sells or otherwise transfers the Grantee's shares of Stock
purchased pursuant to such deferral or guarantee.
20
<PAGE>
11. Notification under Section 83(b). The Committee may, on the Grant
--------------------------------
Date or any later date, prohibit a Grantee from making the election described
below. If the Committee has not prohibited such Grantee from making such
election, and the Grantee shall, in connection with the exercise of any option,
or the grant of any share of restricted Stock, make the election permitted under
Section 83(b) of the Internal Revenue Code (i.e., an election to include in such
Grantee's gross income in the year of transfer the amounts specified in Section
83(b) of the Internal Revenue Code), such Grantee shall notify the Company of
such election within 10 days of filing notice of the election with the Internal
Revenue Service, in addition to any filing and notification required pursuant to
regulations issued under the authority of Section 83(b) of the Internal Revenue
Code.
12. Mandatory Withholding Taxes.
---------------------------
(a) Whenever under the Plan, cash or shares of Stock are to be
delivered upon exercise or payment of an Award or upon a share of restricted
Stock becoming nonforfeitable, or any other event with respect to rights and
benefits hereunder, the Company shall be entitled to require as a condition of
delivery (i) that the Grantee remit an amount sufficient to satisfy all federal,
state, and local withholding tax requirements related thereto, (ii) the
withholding of such sums from compensation otherwise due to the Grantee or from
any shares of Stock due to the Grantee under the Plan or (iii) any combination
of the foregoing.
(b) If any disqualifying disposition described in Article 6(d)(vi) is
made with respect to shares of Stock acquired under an incentive stock option
granted pursuant to the Plan or any election described in Article 11 is made,
then the person making such disqualifying disposition or election shall remit to
the Company an amount sufficient to satisfy all federal, state, and local
withholding taxes thereby incurred; provided that, in lieu of or in addition to
the foregoing, the Company shall have the right to withhold such sums from
compensation otherwise due to the Grantee or from any shares of Stock due to the
Grantee under the Plan.
13. Elective Share Withholding.
--------------------------
(a) Subject to the prior approval of the Committee and to Article
13(b), a Grantee may elect the withholding ("Share Withholding") by the Company
of a portion of the shares of Stock otherwise deliverable to such Grantee upon
the exercise or payment of an Award or upon a share of restricted Stock's
becoming nonforfeitable (each a "Taxable Event") having a Fair Market Value
equal to
(i) the minimum amount necessary to satisfy required federal,
state, or local withholding tax liability attributable to the Taxable
Event; or
(ii) with the Committee's prior approval, a greater amount, not
to exceed the estimated total amount of such Grantee's tax liability with
respect to the Taxable Event.
(b) Each Share Withholding election by a Grantee shall be subject to
the following restrictions:
21
<PAGE>
(i) any Grantee's election shall be subject to the Committee's
right to revoke its approval of Share Withholding by such Grantee at any
time before the Grantee's election if the Committee has reserved the right
to do so at the time of its approval;
(ii) if the Grantee is a Section 16 Grantee, such Grantee's
election shall be subject to the disapproval of the Committee at any time,
whether or not the Committee has reserved the right to do so;
(iii) the Grantee's election must be made before the date (the
"Tax Date") on which the amount of tax to be withheld is determined;
(iv) the Grantee's election shall be irrevocable;
(v) a Section 16 Grantee may not elect Share Withholding to
the extent that such Share Withholding is to occur within six months after
the grant of the related option (except if the Grantee dies or incurs a
Disability before the end of the six-month period); and
(vi) a Section 16 Grantee must elect Share Withholding during
the ten business day period beginning on the third business day after the
release of the Company's quarterly or annual summary statement of sales and
earnings.
14. Termination of Employment.
-------------------------
(a) Restricted Stock. Except as otherwise provided by the Committee
----------------
on or after the Grant Date, a Grantee's shares of restricted Stock that are
forfeitable shall be forfeited upon the Grantee's Termination of Employment.
(b) Other Awards. If a Grantee has a Termination of Employment, then,
------------
unless otherwise provided in the Grant Agreement, any unexercised option to the
extent exercisable on the date of the Grantee's Termination of Employment may be
exercised by the Grantee, in whole or in part, at any time within three months
following such Termination of Employment, except that
(i) if the Grantee's Termination of Employment is on account
of Disability, then any unexercised option (except a Replacement of a Sears
Option) to the extent exercisable at the date of such Termination of
Employment, may be exercised, in whole or in part, by the Grantee at any
time within two years after the date of such Termination of Employment; and
(ii) if the Grantee's Termination of Employment is on account
of Retirement, then any unexercised option to the extent exercisable at the
date of such Termination of Employment, may be exercised, in whole or in
part, by the Grantee at any time within (a) two years after the date of
such Termination of Employment, in the case of a Replacement Sears Option
or (b) five years after the date of such Termination of Employment in the
case of all other options.
22
<PAGE>
(iii) if the Grantee's Termination of Employment is caused by
the death of the Grantee or if the Grantee's death occurs during the period
following Termination of Employment during which the option would be
exercisable under the preceding clause of Article 14(b) or under Article
14(b)(i) or (ii), then any unexercised option to the extent exercisable on
the date of the Grantee's death, may be exercised, in whole or in part, at
any time within two years after the Grantee's death by the Grantee's
personal representative or by the person to whom the option is transferred
by will or the applicable laws of descent and distribution.
(c) Maximum Extension. Notwithstanding the foregoing, no Award shall
-----------------
be exercisable beyond the maximum term permitted under the original Award
Agreement unless with respect to any option except a Replacement Sears option,
the Committee explicitly extends such original term, in which case such term
shall not be extended beyond the maximum term permitted by the Plan.
15. Equity Incentive Plans of Foreign Subsidiaries. The Committee may
----------------------------------------------
authorize any foreign Subsidiary to adopt a plan for granting Awards ("Foreign
Equity Incentive Plan"). All awards granted under such Foreign Equity Incentive
Plans shall be treated as grants under the Plan. Such Foreign Equity Incentive
Plans shall have such terms and provisions as the Committee permits not
inconsistent with the provisions of the Plan and which may be more restrictive
than those contained in the Plan. Awards granted under such Foreign Equity
Incentive Plans shall be governed by the terms of the Plan except to the extent
that the provisions of the Foreign Equity Incentive Plans are more restrictive
than the terms of the Plan, in which case such terms of the Foreign Equity
Incentive Plans shall control.
16. Substituted Awards. Except with respect to Replacement Options, the
------------------
Committee may grant substitute awards for any canceled Award granted under this
Plan or any plan of any entity acquired by the Company or any of its
Subsidiaries in accordance with this Article 16. If the Committee cancels any
Award (granted under this Plan, or any plan of any entity acquired by the
Company or any of its Subsidiaries), and a new Award is substituted therefor,
then the Committee may, in its discretion, determine the terms and conditions of
such new Award, and may provide that the Grant Date of the canceled Award shall
be the date used to determine the earliest date or dates for exercising the new
substituted Award under Article 8 hereof so that the Grantee may exercise the
substituted Award at the same time as if the Grantee had held the substituted
Award since the Grant Date of the canceled Award.
17. Securities Law Matters.
----------------------
(a) If the Committee deems necessary to comply with the Securities Act
of 1933, the Committee may require a written investment intent representation by
the Grantee and may require that a restrictive legend be affixed to certificates
for shares of Stock.
(b) If based upon the opinion of counsel for the Company, the
Committee determines that the exercise or nonforfeitability of, or delivery of
benefits pursuant to, any Award could violate any applicable provision of (i)
federal or state securities law or regulations or (ii) the listing requirements
of any national securities exchange on which are listed any of the Company's
23
<PAGE>
equity securities, then the Committee may postpone any such exercise,
nonforfeitability or delivery, as the case may be, but the Company shall use its
best efforts to cause such exercise, nonforfeitability or delivery to comply
with all such provisions at the earliest practicable date.
18. No Funding Required. Benefits payable under the Plan to any person
-------------------
shall be paid directly by the Company. The Company shall not be required to
fund, or otherwise segregate assets to be used for payment of, benefits under
the Plan.
19. No Employment Rights. Neither the establishment of the Plan, nor the
--------------------
granting of any Award shall be construed to (a) give any Grantee the right to
remain employed by the Company or any of its Subsidiaries or to any benefits not
specifically provided by the Plan or (b) in any manner modify the right of the
Company or any of its Subsidiaries to modify, amend, or terminate any of its
employee benefit plans.
20. Rights as a Stockholder. A Grantee shall not, by reason of any Award
-----------------------
(other than restricted Stock) have any right as a stockholder of the Company
with respect to the shares of Stock which may be deliverable upon exercise or
payment of such Award until such shares have been delivered to him. Shares of
restricted Stock held by a Grantee or held in escrow by the Secretary of the
Company shall confer on the Grantee all rights of a stockholder of the Company,
except as otherwise provided in the Plan or the Award Agreement. The Committee,
in its discretion, at the time of grant of restricted Stock, may permit or
require the payment of cash dividends thereon to be deferred and, if the
Committee so determines, reinvested in additional restricted Stock to the extent
shares are available under Article 3, or otherwise reinvested in Stock. Stock
dividends, deferred cash dividends and dividends in the form of property other
than cash, issued with respect to restricted Stock shall, unless otherwise
provided in the Award Agreement, be treated as additional shares of restricted
Stock that are subject to the same restrictions and other terms as apply to the
shares with respect to which such dividends are issued. The Committee may, in
its discretion, provide for crediting and payment of interest on deferred cash
dividends.
21. Nature of Payments. Any and all grants, payments of cash, or
------------------
deliveries of shares of Stock hereunder shall constitute special incentive
payments to the Grantee and shall not be taken into account in computing the
amount of salary or compensation of the Grantee for the purposes of determining
any pension, retirement, death or other benefits under (a) any pension,
retirement, profit-sharing, bonus, life insurance or other employee benefit plan
of the Company or any of its Subsidiaries or (b) any agreement between the
Company or any Subsidiary, on the one hand, and the Grantee, on the other hand,
except as such plan or agreement shall otherwise expressly provide.
22. Non-Uniform Determinations. Neither the Committee's nor the Board's
--------------------------
determinations under the Plan need be uniform and may be made by the Committee
or the Board selectively among persons who receive, or are eligible to receive,
Awards (whether or not such persons are similarly situated). Without limiting
the generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations, to enter into non-
uniform and selective Award Agreements as to (a) the identity of the Grantees,
(b) the
24
<PAGE>
terms and provisions of Awards, and (c) the treatment, under Article 14, of
Termination of Employment.
23. Adjustments. Subject to Article 6, the Committee may make such
-----------
provision with respect to Awards, including without limitation, equitable
adjustment of
(a) the aggregate numbers of shares of Stock available under Articles
3(a) and 3(b),
(b) the number of shares of Stock or shares of restricted Stock
covered by an Award, and
(c) the Option Price, or
the termination or continuation of an Award as it may determine to be
appropriate and equitable to reflect a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
acquisition of property or shares, separation, spin-off, reorganization, stock
rights offering, liquidation, or similar event, of or by the Company.
24. Amendment of the Plan. The Board may from time to time in its
---------------------
discretion amend or modify the Plan without the approval of the stockholders of
the Company, except as such stockholder approval may be required (a) to permit
transactions in Stock pursuant to the Plan to be exempt from potential liability
under Section 16(b) of the 1934 Act, (b) to permit the Company to deduct, in
computing its income tax liability pursuant to the provisions of the Internal
Revenue Code, compensation resulting from Awards, (c) to retain incentive stock
option treatment under Section 422 of the Internal Revenue Code, or (d) under
the listing requirements of any securities exchange on which are listed any of
the Company's equity securities.
25. Termination of the Plan. The Plan shall terminate on the tenth (10th)
-----------------------
anniversary of the Effective Date or at such earlier time as the Board may
determine. Any termination, whether in whole or in part, shall not affect (a)
any Award then outstanding under the Plan, or (b) the Company's ability to make
adjustments to or cancel or continue Awards in accordance with Article 23.
26. No Illegal Transactions. The Plan and all Awards granted pursuant to
-----------------------
it are subject to all laws and regulations of any governmental authority which
may be applicable thereto; and notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise Awards or receive the benefits
thereof and the Company shall not be obligated to deliver any Stock or pay any
benefits to a Grantee if such exercise, delivery, receipt or payment of benefits
would constitute a violation by the Grantee or the Company of any provision of
any such law or regulation.
27. Controlling Law. The law of the State of Delaware except its law with
---------------
respect to choice of law, shall be controlling in all matters relating to or
arising out of the Plan or any Award.
25
<PAGE>
28. Severability. If all or any part of the Plan is declared by any court
------------
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of the Plan not declared to
be unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will give
effect to the terms of such Article or part of an Article to the fullest extent
possible while remaining lawful and valid.
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized
officer, has executed this Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: July 28 1998 By /s/ CHARLES BROOM
-------------------, ------------------------------
Title: AVP/HR
26
<PAGE>
EXHIBIT 10.3
THE PMI GROUP, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Amended and Restated as of July 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 PURPOSE.......................................................................... 1
1.1 Purpose of the Plan.............................................................. 1
SECTION 2 DEFINITIONS...................................................................... 1
SECTION 3 ADMINISTRATION................................................................... 2
3.1 The Committee.................................................................... 2
3.2 Authority of the Committee....................................................... 2
3.3 Decisions Binding................................................................ 3
SECTION 4 SHARES SUBJECT TO THE PLAN....................................................... 3
4.1 Number of Shares................................................................. 3
4.2 Lapsed Awards.................................................................... 3
4.3 Adjustments in Awards and Authorized Shares...................................... 3
SECTION 5 STOCK OPTIONS.................................................................... 3
5.1 Granting of Options.............................................................. 3
5.2 Terms of Options................................................................. 4
5.3 Payment.......................................................................... 4
5.4 Deferral of Option Proceeds...................................................... 5
5.5 Options are not Incentive Stock Options.......................................... 6
SECTION 6 RESTRICTED STOCK................................................................. 6
6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date............ 6
6.2 Grant of Restricted Stock for Directors first elected after the 1996 Grant Date.. 6
6.3 Restricted Stock Escrow.......................................................... 6
6.4 Voting and other Rights.......................................................... 7
6.5 Cash Payment for Income Taxes.................................................... 7
SECTION 7 MISCELLANEOUS.................................................................... 7
7.1 No Effect on Service............................................................. 7
7.2 Indemnification.................................................................. 7
7.3 Successors....................................................................... 7
7.4 Beneficiary Designations......................................................... 7
7.5 Nontransferability of Awards..................................................... 8
7.6 No Rights as Stockholder......................................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
7.7 Withholding Requirements......................................................... 8
SECTION 8 AMENDMENT, TERMINATION, AND DURATION............................................. 8
8.1 Amendment or Termination......................................................... 8
8.2 Duration of the Plan............................................................. 8
SECTION 9 LEGAL CONSTRUCTION............................................................... 8
9.1 Gender and Number................................................................ 8
9.2 Severability..................................................................... 8
9.3 Requirements of Law.............................................................. 8
9.4 Compliance with Rule 16b-3....................................................... 9
9.5 Governing Law.................................................................... 9
9.6 Captions......................................................................... 9
</TABLE>
-ii-
<PAGE>
THE PMI GROUP, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
THE PMI GROUP, INC., hereby amends and restates The PMI Group, Inc. Stock
Plan for Non-Employee Directors, as of July 23, 1998.
SECTION 1
PURPOSE
1.1 Purpose of the Plan. The Plan is intended to closely align the
-------------------
interests of the Non-Employee Directors with the interests of the Company's
stockholders. This is achieved by making a significant portion of Non-Employee
Director compensation directly related to the total return performance of the
Shares. The Plan also is intended to encourage Share ownership on the part of
Non-Employee Directors.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Award" means, individually or collectively, a grant under the Plan of
Options, Restricted Stock, or cash.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Committee" means the committee appointed pursuant to Section 3.1 to
administer the Plan.
2.4 "Company" means The PMI Group, Inc., a Delaware corporation, or any
successor thereto.
2.5 "Director" means any individual who is a member of the Board.
2.6 "Disability" means a permanent and total disability, as determined by
the Committee (in its discretion) in accordance with uniform and non-
discriminatory standards adopted by the Committee from time to time.
2.7 "Exercise Price" means the price at which a Share may be purchased by
a Participant pursuant to the exercise of an Option.
2.8 "Fair Market Value" means the arithmetic mean of the highest and
lowest per share selling prices of the Shares, as quoted in the New York Stock
Exchange Composite Transactions Index for the date in question.
2.9 "Grant Date" means, with respect to 1996 and each subsequent calendar
year, the first business day in June of each such year. For example, for 1996,
the Grant Date is June 3,
<PAGE>
1996 (i.e., the first business day in June 1996). With respect to a particular
Award, "Grant Date" means the particular Grant Date on which the Award was
granted. Notwithstanding the preceding, a Non-Employee Director who is first
elected or appointed on other than the first business day in June, shall have an
initial Grant Date coincident with the date of their commencement of service on
the Board.
2.10 "Non-Employee Director" means a Director who is an employee of
neither the Company nor of any Subsidiary.
2.11 "Option" means an option to purchase Shares granted pursuant to
Section 5.
2.12 "Option Agreement" means the written agreement setting forth the
terms and provisions applicable to each Option granted under the Plan.
2.13 "Participant" means a Non-Employee Director who has an outstanding
Award.
2.14 "Plan" means The PMI Group, Inc. Stock Plan for Non-Employee
Directors, as set forth in this instrument and as hereafter amended from time to
time.
2.15 "Restricted Stock" means an Award of Shares granted pursuant to
Section 6.
2.16 "Shares" means the shares of the Company's common stock, $0.01 par
value.
2.17 "Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.18 "Termination of Service" means a cessation of the Participant's
service on the Board for any reason.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee. The
-------------
Committee shall consist of one or more Directors who shall be appointed by, and
serve at the pleasure of, the Company's Chief Executive Officer. The Committee
shall be comprised solely of a Director or Directors who are not eligible to
receive Awards under the Plan.
3.2 Authority of the Committee. It shall be the duty of the Committee to
--------------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) interpret the Plan and the Awards, (b) adopt rules for the administration,
interpretation and application of the Plan as are consistent therewith, (c)
interpret, amend or revoke any such rules, and (d) adopt such procedures and
subplans as are necessary or appropriate to permit participation in the Plan by
Non-Employee Directors who are foreign nationals or employed outside of the
United States.
2
<PAGE>
3.3 Decisions Binding. All determinations and decisions made by the
-----------------
Committee shall be final, conclusive, and binding on all persons, and shall be
given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
----------------
the total number of Shares available for grant under the Plan shall not exceed
100,000. Shares granted under the Plan may be either authorized but unissued
Shares or treasury Shares.
4.2 Lapsed Awards. If an Award terminates or expires for any reason, any
-------------
Shares subject to such Award again shall be available to be the subject of an
Award.
4.3 Adjustments in Awards and Authorized Shares. In the event of any
-------------------------------------------
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, Share combination, or other change in the
corporate structure of the Company affecting the Shares, the Committee shall
adjust the number and class of Shares which may be delivered under the Plan, and
the number, class, and Exercise Price of Shares subject to outstanding Awards
and future grants, in such manner as the Committee (in its sole discretion)
shall determine to be appropriate to prevent the dilution or diminution of such
Awards. Notwithstanding the preceding, the number of Shares subject to any
Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 Granting of Options.
-------------------
5.1.1 Directors serving on the 1996 Grant Date. Each Non-Employee
----------------------------------------
Director who is such on the 1996 Grant Date, automatically shall receive, as of
the 1996 Grant Date only, an Option to purchase 3,000 Shares. Each Non-Employee
who has received an Option pursuant to the preceding sentence also automatically
shall receive, as of each subsequent Grant Date, an Option to purchase 1,500
Shares, provided that the individual shall receive an Option on any such Grant
Date only if he or she both (a) is a Non-Employee Director on the Grant Date,
and (b) has served as a Non-Employee Director for the entire period since the
last Grant Date.
5.1.2 Directors first elected or appointed after the 1996 Grant Date.
--------------------------------------------------------------
Each Non-Employee Director who first becomes such after the 1996 Grant Date,
automatically shall receive on his or her initial Grant Date only (a) an Option
to purchase 1,500 Shares, plus (b) an option to purchase up to an additional
1,500 Shares (prorated based on the number of full months of service which
remain until the next Grant Date). A Director joining the Board on or before
the 15th day of the month will receive credit for service for the full month.
Each such Non-Employee Director also shall automatically receive, as of each
subsequent Grant Date, an Option to purchase 1,500 Shares annually, provided
that the individual shall receive an Option on any such Grant Date only if he or
she both (y) is a Non-Employee Director on the Grant Date, and (z) has served as
a Non-Employee Director for the entire period since the last Grant Date.
3
<PAGE>
5.2 Terms of Options.
----------------
5.2.1 Option Agreement. Each Option granted pursuant to this Section
----------------
5 shall be evidenced by a written Option Agreement (satisfactory to the
Committee) which shall be executed by the Optionee and the Company.
5.2.2 Exercise Price. The Exercise Price for the Shares subject to
--------------
each Option shall be 100% of the Fair Market Value of such Shares on the
applicable Grant Date.
5.2.3 Exercisability.
--------------
(a) Each Option granted to a Non-Employee Director in his or her
initial year of Board service pursuant to Sections 5.1.2(a) and
(b) (e.g. up to 3,000 shares) shall become exercisable in three
equal annual installments, commencing on the first anniversary
of the applicable Grant Date;
(b) For each Non-Employee Director who automatically receives, as
of each subsequent Grant Date, an Option to purchase 1,500
Shares annually, any such outstanding Option, and such awards
granted on or after July 23, 1998 shall become exercisable as
to 100% of the Shares subject to such Option in full on the
first anniversary of the applicable Grant Date.
Notwithstanding the foregoing, with respect to any outstanding Option, and
awards granted on or after May 21, 1998, upon a Non-Employee Director's death,
disability, retirement, resignation or non-reelection to the Board of Directors,
all unvested options held by such person shall immediately become exercisable.
However, except as specifically set forth above, if a Participant incurs a
Termination of Service prior to his or her Option(s) becoming fully exercisable,
the Option(s) (or portions thereof) which are not exercisable on the date of
Termination of Service shall immediately expire.
5.2.4 Expiration of Options. Subject to the last sentence of Section
---------------------
5.2.3, each Option shall terminate upon the first to occur of the following
events:
(a) The expiration of ten (10) years from the applicable Grant
Date;
(b) The expiration of three (3) months from the date of the
Participant's Termination of Service prior to age 70 for any
reason other than the Participant's death or Disability,
provided that the Committee, in its discretion, may extend such
three-month period to a maximum of the ten (10) years;
(c) The expiration of two (2) years from the date of the
Participant's Termination of Service by reason of Disability,
or
(d) The expiration of five (5) years from the date of the
Participant's Termination of Service at or after age 70 for any
reason other than the Participant's death or Disability.
4
<PAGE>
5.2.5 Death of Director. Notwithstanding Section 5.2.4, if a
-----------------
Director dies prior to the expiration of his or her Option(s) in accordance with
Section 5.2.4, his or her Option(s) which are exercisable on the date of his or
her death shall terminate two (2) years after the date of death.
5.3 Payment. Options shall be exercised by the Participant's delivery of
-------
a written notice of exercise (satisfactory to the Committee) to the Company in
care of VP Human Resources Department, with a copy to General Counsel, Legal
Department, 601 Montgomery Street, San Francisco, California 94111, or at such
other address as Company may hereafter designate in writing, setting forth the
number of Shares with respect to which the Option is to be exercised, and
accompanied by full payment for the Shares. Upon the exercise of any Option,
the Exercise Price shall be payable to the Company in full in cash or its
equivalent. As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant's designated broker), Share certificates
(which may be in book-entry form) representing such Shares.
5.4 Deferral of Option Proceeds.
---------------------------
(a) Notwithstanding anything herein to the contrary, a Participant granted
an Option hereunder who is eligible to defer income under the Company's
Directors' Deferred Compensation Plan may elect, at the discretion of, and in
accordance with rules which may be established by, the Committee, to defer
delivery of the proceeds of exercise of an Option which is exercised by means of
an exchange of Shares as described in Section 5.4(a)(ii) or (iii), provided, in
either such case, that Shares tendered or applied in exercise of such Option
shall have been held by the Participant for at least six months prior to such
exercise. A Participant's election as provided in the preceding sentence shall
be irrevocable. Notwithstanding any other provision of this Section 5.4, a
deferral election made by a Participant hereunder shall be void and shall not be
given effect unless (i) the Participant's deferral election is made at least six
full calendar months prior to the calendar month in which the option otherwise
would expire, (ii) the Participant's deferral election is made at least six full
calendar months prior to the calendar month in which the option is exercised,
and (iii) the Participant is serving as a Non-Employee Director on the date of
exercise of the Option. For purposes of either or both of clauses (i) or (ii) of
the preceding sentence, rules established by the Committee may require an
election earlier than the six calendar month period described therein. Upon
exercise of an Option to which a deferral election applies, the Shares covered
by such exercise shall not be issued or transferred to the Participant, and
instead, a number of Stock Units, as defined below, equal to the number of
Shares covered by such exercise and in respect of which the Participant has made
a deferral election, shall be credited to an account in the name of the
Participant on the books and records of the Company (a "Deferred Option
Compensation Account") at the date of exercise. A separate Deferred Option
Compensation Account shall be maintained with respect to each effective deferral
election.
(b) For purposes of this Section 5.4, a "Stock Unit" is a bookkeeping
entry initially representing an amount equivalent to the fair market value of
one Share. Stock Units represent an unfunded and unsecured obligation of the
Company, except as otherwise provided for by the Committee. Settlement of Stock
Units shall be made by issuance of Shares on such date or dates
5
<PAGE>
or upon the occurrence of such event or events as the Committee may authorize
the Participant to designate at the time a deferral election is made hereunder,
provided, however, that in no event shall settlement occur more than 60 days
after a Participant's Termination of Service for any reason. The number of
Shares to be so distributed may be increased by dividend equivalents, which may
be valued as if reinvested in Shares. Until a Stock Unit is settled, the number
of Shares represented by a Stock Unit shall be subject to adjustment pursuant to
Section 4.3.
(c) Participants have the status of general unsecured creditors of the
Company with respect to their Deferred Option Compensation Accounts, and such
accounts constitute a mere promise by the Company to make payments with respect
thereto.
(d) A Participant's right to benefit payments with respect to the Deferred
Option Compensation Accounts may not be anticipated, alienated, sold,
transferred, assigned, pledged, encumbered, attached or garnished by creditors
of the Participant or the Participant's beneficiary and any attempt to do so
shall be void and shall not be given effect.
(e) To the extent determined by the Committee, any amount deferred under
this Section 5.4, and any Deferred Option Compensation Account, may be treated
and held as a portion of the Company's Officer Deferred Compensation Plan, in
which event the provisions of said plan shall govern the operation and
administration of deferred amounts hereunder and Deferred Option Compensation
Accounts, to the extent not inconsistent with the provisions of this Section
5.4.
5.5 Options are not Incentive Stock Options. Options are not intended to
---------------------------------------
be incentive stock options within the meaning of Section 422 of the Code.
SECTION 6
RESTRICTED STOCK
6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date.
---------------------------------------------------------------------
Each Non-Employee Director who is such on a Grant Date, automatically shall
receive, as of such Grant Date, an Award of 300 Shares of Restricted Stock.
Notwithstanding the preceding, the number of Shares granted to any Non-Employee
Director on any Grant Date shall be reduced if and as necessary so that the Fair
Market Value of the Shares does not exceed $30,000 on the Grant Date.
6.2 Grant of Restricted Stock for Directors first elected after the 1996
--------------------------------------------------------------------
Grant Date. Each Non-Employee Director who first becomes such after the 1996
- ----------
Grant Date, automatically shall receive on his or her initial Grant Date only
(a) an Award of 25 Shares of Restricted Stock for each full month of service on
the Board until the next Grant Date and, (b) as of each subsequent Grant Date on
which the Non-Employee Director is such, an Award of 300 Shares of Restricted
Stock. Notwithstanding the preceding, the number of Shares granted to any Non-
Employee Director on any Grant Date shall be reduced if and as necessary so that
the Fair Market Value of the Shares does not exceed $30,000 on the Grant Date.
A Director joining the Board on or before the 15th day of the month will receive
credit for service for the full month.
6
<PAGE>
6.3 Restricted Stock Escrow. For purposes of compliance with Section 9.4,
-----------------------
Shares of Restricted Stock shall not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated by the Participant until six months after
the applicable Grant Date. Unless the Committee determines otherwise, Shares of
Restricted Stock shall be either (a) held by the Company as escrow agent until
such six-month period expires, or (b) affixed with an appropriate legend
restricting the sale, transfer, pledge, assignment, or other alienation or
hypothecation of such Shares by the Participant until expiration of the six
month period.
6.4 Voting and other Rights. After Shares of Restricted Stock have been
-----------------------
granted, the Participant may exercise full voting rights with respect to such
Shares. A Participant shall be entitled to receive all dividends and other
distributions paid with respect to such Shares. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability that are provided in Section 6.2.
6.5 Cash Payment for Income Taxes. As soon as practicable after each
-----------------------------
Grant Date, the Company shall pay to each Non-Employee Director, in cash or its
equivalent, an amount equal to the expected increase in his or her federal,
state and local income tax liability due to the Shares granted to the
Participant on such Grant Date. The formula for determining each such cash
payment shall be adopted by the Committee (in its discretion) from time to time,
but in each case shall assume that the maximum prevailing income tax rates apply
to the Participant.
SECTION 7
MISCELLANEOUS
7.1 No Effect on Service. Nothing in the Plan shall (a) create any
--------------------
obligation on the part of the Board to nominate any Participant for reelection
by the Company's stockholders, or (b) interfere with or limit in any way the
right of the Company to terminate any Participant's service.
7.2 Indemnification. Each person who is or shall have been a member of
---------------
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any Option Agreement, and (b) from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such claim, action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or
hold them harmless.
7.3 Successors. All obligations of the Company under the Plan shall be
----------
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or
7
<PAGE>
indirect purchase, merger, consolidation, or otherwise, of all or substantially
all of the business or assets of the Company.
7.4 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant may name a beneficiary or beneficiaries to whom any vested but
unpaid Award shall be paid in the event of the Participant's death. Each such
designation shall revoke all prior designations by the Participant and shall be
effective only if given in a form and manner acceptable to the Committee. In
the absence of any such designation, any vested benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate and, subject to
the terms of the Plan and of the applicable Option Agreement, any unexercised
vested Award may be exercised by the administrator or executor of the
Participant's estate.
7.5 Nontransferability of Awards. No Award granted under the Plan may be
----------------------------
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, by the laws of descent and distribution, or to the limited
extent provided in Section 7.4. All rights with respect to an Award granted to
a Participant shall be available during his or her lifetime only to the
Participant. Notwithstanding the foregoing, the Participant may, to the extent
provided in the Plan and in a manner specified by the Committee, transfer an
Option by bona fide gift and not for any consideration, to a member of the
Participant's immediate family or to a trust for the exclusive benefit of the
Participant and/or a member or members of the Participant's immediate family.
7.6 No Rights as Stockholder. Except to the limited extent provided in
------------------------
Section 6.4, no Participant (nor any beneficiary) shall have any of the rights
or privileges of a stockholder of the Company with respect to any Shares
issuable pursuant to an Award (or exercise thereof), unless and until
certificates representing such Shares shall have been issued, recorded on the
records of the Company or its transfer agents or registrars, and delivered to
the Participant, beneficiary or Company (as escrow agent).
7.7 Withholding Requirements. Prior to the delivery of any Shares or cash
------------------------
pursuant to an Award (or exercise thereof), the Company shall have the power and
the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required to be withheld with
respect to such Award (or exercise thereof).
SECTION 8
AMENDMENT, TERMINATION, AND DURATION
8.1 Amendment or Termination. The Board, in its sole discretion, may
------------------------
amend or terminate the Plan, or any part thereof, at any time and for any
reason. The amendment, suspension, or termination of the Plan shall not,
without the consent of the Participant, alter or impair any rights or
obligations under any Award theretofore granted to such Participant.
8.2 Duration of the Plan. The Plan shall commence on the date specified
--------------------
herein, and subject to Section 8.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter.
8
<PAGE>
SECTION 9
LEGAL CONSTRUCTION
9.1 Gender and Number. Except where otherwise indicated by the context,
-----------------
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
9.2 Severability. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
9.3 Requirements of Law. The granting of Awards and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
9.4 Compliance with Rule 16b-3. For the purpose of ensuring that
--------------------------
transactions under the Plan do not subject Participants to liability under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), all transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 promulgated under the 1934 Act, and any
future regulation amending, supplementing or superseding such regulation. To
the extent any provision of the Plan, Option Agreement or action by the
Committee or a Participant fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee.
9.5 Governing Law. The Plan and all Option Agreements shall be construed
-------------
in accordance with and governed by the laws of the State of California without
giving effect to any choice or conflict of law provision or rule (whether of the
State of California or otherwise) which would cause the application of the laws
of any jurisdiction other than the State of California.
9.6 Captions . Captions provided herein are for convenience only, and
--------
shall not serve as a basis for interpretation or construction of the Plan.
9
<PAGE>
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer,
has executed the Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: July 28, 1998 By: /s/ CHARLES BROWN
------- -------------------
Title: AVP/HR
10
<PAGE>
EXHIBIT 10.20
THE PMI GROUP, INC.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
EFFECTIVE APRIL 1, 1995
(AMENDED AND RESTATED AS OF JANUARY 1, 1998)
<PAGE>
ARTICLE I
Definitions
-----------
1.01 "Committee" means the Committee under the PMI Retirement Plan.
---------
1.02 "Company" means The PMI Group, Inc.
-------
1.03 "Early Retirement Age" means Early Retirement Age as defined under the
---------------------
Retirement Plan.
1.04 "Early Retirement Benefit" means the Early Retirement Benefit as
------------------------
defined under the Retirement Plan.
1.05 "Employer" means The PMI Group, Inc. as defined under the Retirement Plan.
--------
1.06 "Participant" means any employee who: (a) is eligible for benefits under
-----------
the Retirement Plan, (b) retires on or after January 1, 1989, and (c) meets the
eligibility requirements of Section 3.01 of this Plan.
1.07 "Plan" means this plan, The PMI Group, Inc. Supplemental Employee
----
Retirement Plan as set forth in the instrument and as heretofore or hereafter
amended from time to time.
1.08 "Retirement Plan Benefits" is defined in Section 4.03 of this Plan.
------------------------
1.09 "Retirement Plan" means The PMI Group, Inc. Retirement Plan.
---------------
1.10 "Retired Participant" means a Participant who retired in accordance
-------------------
with the provisions of the Retirement Plan as heretofore or hereafter amended.
1.11 "Spouse" means Spouse as defined in the Retirement Plan.
------
1.12 "Trust" shall mean a trust established pursuant to Section 4.07 of the
-----
Plan for the purposes of holding assets for the payment of the Employer's
general creditors, including the Employer's Participants. Such Trust shall be
intended to be a grantor trust, of which the Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code.
In addition, the Trust, if established, shall be irrevocable and shall conform
to the provisions of Revenue Procedure 92-64.
2
<PAGE>
ARTICLE II
Introduction
------------
2.01 Purpose. The purpose of this Plan is: (1) to restore to employees
-------
of the Company the benefits they lose under the Retirement Plan as a
result of the compensation limit in section 401(a)(17) of the Internal
Revenue Code of 1986, as amended, or any successor provision ("section
401(a)(17)"), (2) to restore to employees the benefits they lose as a
result of Section 415 of the Internal Revenue Code of 1986, as amended,
or any successor provision ("Section 415"), (3) to provide the "Beef-up"
benefit for eligible employees as described in Section 3.02(b), and (4)
to make up lost early retirement payments for individuals who failed to
reach their 20th anniversary with Allstate as described in Section
3.02(c). The Plan is an unfunded deferred compensation program for a
select group of management and highly compensated employees. Thus, the
Plan is subject to Part 1 of Title I of ERISA, but is exempt from Parts
2, 3 and 4 thereof.
2.02 Administration. The Plan will be administered by the Committee.
--------------
The Committee has all discretionary authority to issue such rules as it
deems appropriate and to interpret the provisions of the Plan and make
factual determinations, including the power to determine the rights or
eligibility of employees or participants and any other persons, and the
amounts of their benefits under the Plan, and to remedy ambiguities,
inconsistencies, or omissions. Any decision by the Committee shall be
final, binding, and conclusive on all participants and all other persons.
ARTICLE III
Eligibility and Amount of Benefits
----------------------------------
3.01 Eligibility. Each Participant is eligible to receive a benefit under
-----------
this Plan if he or she is vested in benefits under the Retirement Plan
and if:
(a) such vested benefits have been reduced because of the application
of section 401(A)(17) or 415; or
(b) he or she is eligible for the "Beef-up" as described in the
Allstate Retirement Plan Document in effect on April 1, 1995; or
(c) he or she less than 20 years of service with Allstate on April 1,
1995 and retires from the Company with at least 20 years of total service
with the Company and Allstate combined and has reached his or her 55th
birthday but has not reached his or her normal retirement date as defined
by the Allstate Retirement Plan.
3
<PAGE>
3.02 Amount of Benefit. The amount of benefit paid from the Plan will be
-----------------
equal to: (a) plus (b) plus (c) minus (d) below:
(a) The benefit which would have been payable to the Participant under
the term of the Retirement Plan, but for the restrictions of section
401(a)(17) and section 415.
(b) For Participants who retire from the Retirement Plan before
December 31, 1999 and who are at least age 55 but less than age 60, the
Company will enhance their benefit as described in (i) and (ii) below:
(i) The Participant's Final Average Earnings (FAE) will be calculated
as if he or she had continued to work until the earlier of December
31, 1999 or age 60 at their current pensionable earnings. If the FAE
is greater when calculated in this manner, it will be used in place of
the FAE calculated in the normal manner at termination.
(ii) For Participants who were hired at Allstate before 1978, his or
her benefit will be first decreased by (A) below and then increased by
(B) below:
(A) The number of years from termination to the latter of
December 31, 1999 or age 60 divided by the number of years of
Allstate service prior to January 1, 1978 times the Allstate pre-
1978 benefit.
(B) The number of years from termination to the latter of
December 31, 1999 or age 60 divided by the number of years of
service from January 1, 1988 to April 1, 1995 times the Allstate
post-1988 benefit.
(c) For Participants who retire from the Retirement Plan with at least
55 years of age and 20 years of combined service with The Company and
Allstate and who did not have 20 years of service with Allstate on April 1,
1995, The Company will provide a temporary annuity equal to: (i) as reduced
in (ii) payable for the period described in (iii) below:
(i) The monthly life annuity payable from the Allstate Retirement
Plan starting at the Participant's Normal Retirement Date as described
by the Allstate Retirement Plan. This is the accrued Allstate benefit
at the Company spin-off date as communicated by Allstate.
(ii) The monthly life annuity will be reduced by one half percent per
month (6% per year) for each month the Participant's retirement
precedes his or her Normal Retirement as described by the Allstate
Retirement Plan.
4
<PAGE>
(iii) The monthly life annuity will be paid starting on the first day
of the month following retirement until the earlier of the
Participant's death or the date which the Participant becomes eligible
to receive his or her benefit from the Allstate Retirement Plan.
Alternatively, the Participant may elect to have, in the event of his
or her death, the monthly life annuity continue to his or her
surviving spouse but not beyond the date when the Participant would
have become eligible to receive his or her benefit from the Allstate
Retirement Plan. If the Participant elects to have the full benefit
continue to his or her spouse, then the benefit in 3.02(c)(ii) above
will be further reduced two percent. If the Participant elects to have
half of the benefit continue to his or her spouse, then the benefit in
3.02(c)(ii) above will be further reduced one percent.
(d) The amount of benefit payable from the Retirement Plan.
3.03 Preretirement Surviving Spouse Benefit. Preretirement Surviving
--------------------------------------
Spouse Benefits will be payable under this Plan on behalf of a
Participant if such Participant's surviving Spouse is eligible for
benefits payable from the Retirement Plan. The benefit payable will be
determined in a manner consistent with similar benefits under the
Retirement Plan.
3.04 Death Benefits After Retirement. Benefits will be payable from this Plan
-------------------------------
to a beneficiary or contingent annuitant designated by a Retired
Participant only if such beneficiary or contingent annuitant will also
receive benefits from the Retirement Plan after such Participant's
death. The amount of the benefit payable will be determined in a manner
consistent with similar benefits under the Retirement Plan.
ARTICLE IV
Payment of Benefits
-------------------
4.01 Forms and Timing of Benefit Payments. All benefits except those described
-------------------------------------
in 3.02(c) above will be paid as a single lump sum based on the life
annuity at the time the Participant terminates or retires. The
Retirement Plan factors for calculating lump sums in effect at the time
of termination or retirement will be used to calculate the lump sum.
4.02 Plan Termination. No further benefits may be earned under this Plan with
----------------
respect to the Retirement Plan after the termination of such Retirement
Plan.
5
<PAGE>
4.03 Retirement Plan Benefits. The term "Retirement Plan Benefits" generally
------------------------
means the benefits actually payable to a Participant, Spouse,
beneficiary, or contingent annuitant under the Retirement Plan. However,
this Plan is only intended to remedy pension reductions caused by the
operation of sections 401(a)(17) and 415 and not reductions caused for
any other reason. In those instances where pension benefits are reduced
for some other reason, the term "Retirement Plan Benefits" shall be
deemed to mean the benefits that would have been actually payable but
for such other reason.
Examples of such other reasons include, but are not limited to, the
following:
(a) A reduction in pension benefits as a result of a distress
termination (as described in ERISA (S)4041(c) or any comparable
successor provision of law) of the Retirement Plan. In such a case, the
Retirement Plan Benefits will be deemed to refer to the payments that
would have been made from the Retirement Plan had it terminated on a
fully funded basis as a standard termination (as described in ERISA
(S)4041(b) or any comparable successor provision of law).
(b) A reduction of accrued benefits as permitted under section
412(c)(8) of the Internal Revenue Code of 1986, as amended, or any
comparable successor provision of law.
(c) A reduction of pension benefits as a result of payment of all or
a portion of a Participant's benefits to a third party on behalf of or
with respect to a Participant.
4.04 Facility of Payment. Any amount payable under the Plan to a person under
-------------------
legal disability or who, in the judgment of the Committee, is unable to
properly manage his financial affairs, may be paid to such person's
legal representative, or may be applied for the benefit of such person
in any manner selected by the Committee.
4.05 Review of Benefit Determinations. The Committee will provide notice in
--------------------------------
writing to any Participant or Beneficiary whose claim for benefits under
the Plan is denied and the Committee shall afford such Participant or
Beneficiary a review of its decision if so requested.
4.06 Payment and Funding of Benefits. Amounts payable under the Plan to or on
-------------------------------
account of a Participant shall be paid directly by the Employers, and
shall be provided solely from the general assets of the Employers.
Benefits under the Plan are not funded, the Employers' obligation to pay
such benefits is merely an unsecured contractual obligation, and a
Participant or Beneficiary shall be treated as a general creditor of the
Employers with respect to any benefits payable under the Plan. Except as
provided in Section 4.07, nothing in this Plan shall be deemed to create
a trust of any kind for the benefit of the Participant or any
beneficiary, or create any fiduciary relationship
6
<PAGE>
between the Company and the Participant or any beneficiary with respect
to any assets of the Company.
4.07 Contributions to Trust Upon a Change of Control. Upon a "Change of
-----------------------------------------------
Control" (as defined below) and by the fifteenth business day following
the end of each calendar month of each Plan year thereafter, the
Employer shall irrevocably deposit cash (or its equivalent) to a Trust
for the investment of benefits payable under the Plan to or on account
of each Participant. However, any contributions made to the Trust in
respect of each Participant shall remain subject to the claims of the
general creditors of the Employers. Nothing contained in this Section
4.07 shall give any Participant or beneficiary any interest in or claim
against any specific assets of the Company. For purposes of this Plan,
"Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (a), the following shall
not constitute a Change of Control: (i) any acquisition directly from
the Company, (ii) any acquisition by the Company, (iii) any acquisition
by any employee benefit plan (or related trust) sponsored or maintained
by the Company or any corporation controlled by the Company, (iv) any
beneficial ownership maintained by (but not additional acquisitions by),
The Allstate Corporation and its subsidiaries, and their respective
successors ("Allstate"), pending such time that Allstate distributes or
transfers its current ownership interest in the Outstanding Company
Common Stock and Outstanding Company Voting Securities as contemplated
by the Prospectus dated April 10, 1995, relating to the initial public
offering of the common stock of the Company, or (v) any acquisition
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 4.07. Notwithstanding the
foregoing, in its sole discretion, the Board may increase the 20%
threshold set forth above in this subsection (a) prior to any
acquisition of 20% or more beneficial ownership of the Outstanding
Company Common Stock or the Outstanding Company Voting Securities;
provided, that (i) such increased threshold shall apply only to the
acquisition and maintenance of beneficial ownership by any Person
eligible to report such beneficial ownership at the time of such
acquisition on Schedule 13G under the Exchange Act, and (ii) in the
event that any Person initially eligible to so report on Schedule 13G
thereafter ceases to be eligible to so report on Schedule 13G, the
occurrence of the event causing such Person no longer to be eligible to
so report shall be deemed an acquisition by such Person of all of the
Outstanding
7
<PAGE>
Company Common Stock and Outstanding Company Voting Securities
beneficially owned by such Person immediately prior to such occurrence;
or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board; or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets of another entity (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly, more
than 60% of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
8
<PAGE>
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person acquires beneficial ownership of 20% or
more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock as a result of the acquisition of such securities or stock by
the Company, which acquisition reduces the number of the Outstanding
Company Voting Securities or Outstanding Company Common Stock; provided,
that if after such acquisition by the Company such Person (while such
Person remains the beneficial owner of 20% or more of the Outstanding
Company Voting Securities or Outstanding Company Common Stock) becomes the
beneficial owner of additional shares of such Outstanding Company Voting
Securities or Outstanding Company Common Stock (as the case may be), a
Change of Control shall then occur. Capitalized terms used in this Section
4.07, not otherwise defined, shall have the meaning set forth in the form
of change of control employment agreement approved at the February 12, 1998
meeting of the Board of Directors.
ARTICLE V
Miscellaneous
-------------
5.01 Action by Company. Any action required or permitted to be taken by the
-----------------
Company under the Plan shall be by resolution of its Board of Directors,
by resolution of a duly authorized committee of its Board of Directors,
or by a person or persons authorized by resolution of its Board of
Directors or such committee.
5.02 Amendment and Plan Termination. The Company may, in its sole
------------------------------
discretion, terminate, suspend, or amend this Plan at any time or from
time to time, in whole or in part, but no amendment, suspension, or
termination of the Plan shall, without the consent of a Participant,
reduce the accrued benefit of the Participant or any Spouse; provided,
however, that this Section 5.02 shall not prevent reductions on account
of the Participant's (or Spouse's) benefit ceasing to be affected (or
becoming affected to a lesser degree) by the limitations of section
401(a)(17) and section 415.
5.03 No Effect on Employment. Nothing in the Plan shall interfere with or limit
-----------------------
in any way the right of the Company or the Employer directly employing
the Participant to terminate any Participant's employment at any time,
with or without cause. Employment with the Company and its affiliates is
on an at-will basis only.
5.04 Assignment of Benefits. A Participant, Retired Participant, surviving
----------------------
Spouse, or beneficiary may not, either voluntarily or involuntarily,
assign, anticipate, alienate, commute, pledge, or encumber any benefits
to which he or she is or may become entitled under the Plan, nor may the
same be subject to attachment or garnishment by any creditor's claim or
to legal process.
9
<PAGE>
5.05 Construction. The Committee shall have full discretionary authority
------------
to determine eligibility and to construe and interpret the terms of the
Plan, including the power to remedy possible ambiguities,
inconsistencies, or omissions.
5.06 Governing Law; Severability. The Plan shall be construed, administered and
---------------------------
governed in all respects in accordance with the laws of the State of
California (but without giving effect to any choice or conflict of law,
provision or rule which would cause the application of the laws of any
jurisdiction other than the State of California), and, to the extent
applicable, ERISA and the Code. If any provision of the Plan shall be
held invalid or unenforceable by a court of competent jurisdiction, the
remaining provisions hereof shall continue to be fully effective.
5.07 Number. The singular, where appearing in this Plan, will be deemed to
-------
include the plural, unless the context clearly indicates the contrary.
5.08 Participation of Affiliates. One or more affiliates of the Company may
---------------------------
become participating employers by adopting the Plan. By adopting the
Plan, an affiliate is deemed to agree to all of its terms, including (but
not limited to) the provisions granting exclusive authority to the
Company to amend the Plan and the provisions granting exclusive authority
to the Committee to administer and interpret the Plan. Any affiliate may
terminate its participation in the Plan at any time subject, in each
case, to the approval of the Company. The liabilities incurred under the
Plan to the Participants employed by each employer shall be solely the
liabilities of that employer, and no other employer shall be liable for
benefits accrued by a Participant during any period when he or she was
not employed by such employer.
5.09 Indemnification. The Company shall, and hereby does, indemnify and hold
---------------
harmless the members of the Committee, from and against any and all
losses, claims, damages or liabilities (including attorneys' fees and
amounts paid, with the approval of the Company's Board of Directors, in
settlement of any claim) arising out of or resulting from the
implementation of a duty, act or decision with respect to the Plan, so
long as such duty, act or decision does not involve gross negligence or
willful misconduct on the part of any such individual.
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by it duly authorized officer, has
executed the amended and restated Plan on the date indicated below, such
amendments shall be effective as of January 1, 1998.
10
<PAGE>
THE PMI GROUP, INC.
Dated: July 28, 1998 By: /s/ CHARLES BROOM
______________________________
Title: AVP/HR
___________________________
11
<PAGE>
EXHIBIT 10.31
THE PMI GROUP, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
(Amended and Restated as of July 23, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
SECTION 1 DEFINITIONS
<S> <C> <C>
1.1 "Affiliate".......................................... 1
1.2 "Beneficiary"........................................ 1
1.3 "Board of Directors"................................. 1
1.4 "Change of Control".................................. 1
1.5 "Code"............................................... 3
1.6 "Committee".......................................... 3
1.7 "Company"............................................ 4
1.8 "Compensation"....................................... 4
1.9 "Compensation Deferrals"............................. 4
1.10 "Disability"......................................... 4
1.11 "Financial Hardship"................................. 4
1.12 "Participant"........................................ 4
1.13 "Participant's Account" or "Account"................. 4
1.14 "Plan"............................................... 4
1.15 "Plan Year".......................................... 4
1.16 "Nonemployee Director"............................... 4
SECTION 2 PARTICIPATION
2.1 Participation........................................ 5
2.1.1 Current Nonemployee Directors............. 5
2.1.2 Initial Elections by New Nonemployee
Directors................................. 5
2.1.3 Elections for Subsequent Plan Years....... 5
2.1.4 No Election Changes During Plan Year...... 5
2.1.5 Specific Timing and Method of Election.... 5
2.2 Suspension of Compensation Deferrals................. 5
2.2.1 Automatic Suspension...................... 5
2.2.2 Permissible Suspension.................... 6
2.3 Termination of Participation......................... 6
SECTION 3 COMPENSATION DEFERRAL ELECTIONS
3.1 Compensation Deferrals............................... 6
3.2 Crediting of Compensation Deferrals.................. 6
3.3 Deemed Investment Return on Accounts................. 6
3.4 Form of Payment...................................... 7
3.5 Term of Deferral..................................... 7
3.6 Changes in Elections as to Term and Form for Payment. 7
SECTION 4 ACCOUNTING
4.1 Participants' Accounts............................... 7
4.2 Participants Remain Unsecured Creditors.............. 8
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
4.3 Accounting Methods................................... 8
4.4 Reports.............................................. 8
SECTION 5 DISTRIBUTIONS
5.1 Normal Time for Distribution......................... 8
5.2 Change of Control.................................... 8
5.3 Special Rule for Death or Disability................. 8
5.4 Special Rule re Deductibility........................ 9
5.5 Latest Permissible Distribution Date................. 9
5.6 Beneficiary Designations............................. 9
5.6.1 Spousal Consent............................. 9
5.6.2 Changes and Failed Designations............. 10
5.7 Financial Hardship................................... 10
5.8 Payments to Incompetents............................. 10
5.9 Undistributable Accounts............................. 10
5.10 Committee Discretion................................. 10
SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT
6.1 Compensation Deferral Contributions.................. 11
SECTION 7 ADMINISTRATION OF THE PLAN
7.1 Committee............................................ 11
7.2 Actions by Committee................................. 11
7.3 Powers of Committee.................................. 11
7.4 Decisions of Committee............................... 12
7.5 Administrative Expenses.............................. 12
7.6 Eligibility to Participate........................... 12
7.7 Indemnification...................................... 13
SECTION 8 FUNDING
8.1 Unfunded Plan........................................ 13
SECTION 9 MODIFICATION OR TERMINATION OF PLAN
9.1 Company's Obligation is Limited...................... 13
9.2 Right to Amend or Terminate.......................... 13
9.3 Effect of Termination................................ 13
SECTION 10 GENERAL PROVISIONS
10.1 Inalienability........................................ 13
10.2 Rights and Duties..................................... 14
10.3 No Enlargement of Rights.............................. 14
10.4 Compliance with Rule 16b-3............................ 14
10.5 Compensation Deferrals Not Counted Under Other
Employee Benefit Plans................................ 14
10.6 Applicable Law........................................ 14
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.7 Severability.......................................... 14
10.8 Captions.............................................. 15
</TABLE>
iii
<PAGE>
THE PMI GROUP, INC.
DIRECTORS' COMPENSATION PLAN
(Amended and Restated as of July 23, 1998)
THE PMI GROUP, INC., a Delaware corporation, having established The PMI
Group, Inc. Directors' Deferred Compensation Plan, hereby amends and restates
the Plan effective as of July 23, 1998, for the benefit of members of the Board
of Directors who are employees of neither the Company nor its Affiliates, in
order to provide such directors with certain deferred compensation benefits.
The Plan is an unfunded deferred compensation plan which is exempt from the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
SECTION 1
DEFINITIONS
The following words and phrases shall have the following MEANINGS unless a
different meaning is plainly required by the context:
1.1 "AFFILIATE" shall mean (a) the Company, and (b) each corporation,
trade or business which is, together with the Company, a member of a controlled
group of corporations or an affiliated service group or under common control
(within the meaning of section 414(b), (c) or (m) of the Code), but only for the
period during which such other entity is so affiliated with the Company.
1.2 "BENEFICIARY" shall mean the person or persons entitled to receive
the balance credited to a Participant's Account under the Plan upon the death of
a Participant, as provided in Section 5.4.
1.3 "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company, as constituted from time to time.
1.4 "CHANGE OF CONTROL" means the occurrence of any of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the
following shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or
related trust) sponsored
1
<PAGE>
or maintained by the Company or any corporation controlled by the
Company, (iv) any beneficial ownership maintained by (but not
additional acquisitions by), The Allstate Corporation and its
subsidiaries, and their respective successors ("Allstate"), pending
such time that Allstate distributes or transfers its current ownership
interest in the Outstanding Company Common Stock and Outstanding
Company Voting Securities as contemplated by the Prospectus dated
April 10, 1995, relating to the initial public offering of the common
stock of the Company, or (v) any acquisition pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection (c) of
this Section 1.4. Notwithstanding the foregoing, in its sole
discretion, the Board may increase the 20% threshold set forth above
in this subsection (a) prior to any acquisition of 20% or more
beneficial ownership of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities; provided, that (i) such
increased threshold shall apply only to the acquisition and
maintenance of beneficial ownership by any Person eligible to report
such beneficial ownership at the time of such acquisition on Schedule
13G under the Exchange Act, and (ii) in the event that any Person
initially eligible to so report on Schedule 13G thereafter ceases to
be eligible to so report on Schedule 13G, the occurrence of the event
causing such Person no longer to be eligible to so report shall be
deemed an acquisition by such Person of all of the Outstanding Company
Common Stock and Outstanding Company Voting Securities beneficially
owned by such Person immediately prior to such occurrence; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company or the acquisition of assets of another
entity (a "Business Combination"), in each case, unless, following
such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting
2
<PAGE>
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur
solely because any Person acquires beneficial ownership of 20% or more of the
Outstanding Company Voting Securities or Outstanding Company Common Stock as a
result of the acquisition of such securities or stock by the Company, which
acquisition reduces the number of the Outstanding Company Voting Securities or
Outstanding Company Common Stock; provided, that if after such acquisition by
the Company such Person (while such Person remains the beneficial owner of 20%
or more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock) becomes the beneficial owner of additional shares of such
Outstanding Company Voting Securities or Outstanding Company Common Stock (as
the case may be), a Change of Control shall then occur. Capitalized terms used
in this Section 1.4, not otherwise defined, shall have the meaning set forth in
the form of change of control employment agreement approved at the February 12,
1998 meeting of the Board of Directors.
1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
1.6 "COMMITTEE" shall mean the committee appointed by (and serving at the
pleasure of) the Board of Directors to administer the Plan. As of the effective
date of the Plan, the members of the Committee shall be the Compensation and
Nominating Committee of the Board of Directors.
3
<PAGE>
1.7 "COMPANY" shall mean The PMI Group, Inc., a Delaware corporation.
1.8 "COMPENSATION" shall mean the annual cash retainer, retainer for
serving as a committee chairperson (if any), and meeting fees (if any) of a
Participant. A Participant's Compensation shall not include any other type of
remuneration.
1.9 "COMPENSATION DEFERRALS" shall mean the amounts credited to
Participants' Accounts under the Plan pursuant to their deferral elections made
in accordance with Section 2.1.
1.10 "DISABILITY" or "DISABLED" shall mean the mental or physical inability
of a Participant to perform the regularly assigned duties of a member of the
Board of Directors, provided that such inability (a) has continued or is
expected to continue for a period of at least six months and (b) is evidenced by
the certificate of a physician satisfactory to the Committee stating that such
inability exists and is likely to be permanent.
1.11 "FINANCIAL HARDSHIP" shall mean a severe financial emergency which is
caused by a sudden and unexpected accident, illness or other event beyond the
control of the Participant which, absent a suspension of deferrals under Section
2.2 or accelerated distribution under Section 5.5, would result in severe
financial burden to the Participant or a member of his or her immediate family.
A Financial Hardship does not exist to the extent that the hardship may be
relieved by (a) reimbursement or compensation by insurance, (b) by liquidation
of the Participant's other assets (to the extent such liquidation would not
itself cause severe financial hardship), or (c) any loan available to the
Participant (to the extent the payments on such loan would not themselves cause
severe financial hardship.
1.12 "PARTICIPANT" shall mean a Nonemployee Director who (a) has become a
Participant in the Plan pursuant to Section 2.1 and (b) has not ceased to be a
Participant pursuant to Section 2.3.
1.13 "PARTICIPANT'S ACCOUNT" or "ACCOUNT" shall mean, as to any
Participant, the separate account maintained on the books of the Company in
order to reflect his or her interest under the Plan.
1.14 "PLAN" shall mean The PMI Group, Inc. Directors' Deferred Compensation
Plan, as set forth in this instrument and as hereafter amended from time to
time.
1.15 "PLAN YEAR" shall mean the calendar year.
1.16 "NONEMPLOYEE DIRECTOR" means a member of the Board of Directors who is
an employee of neither the Company nor of any Affiliate.
4
<PAGE>
SECTION 2
PARTICIPATION
2.1 PARTICIPATION. Each Nonemployee Director's decision to become a
Participant shall be entirely voluntary.
2.1.1 CURRENT NONEMPLOYEE DIRECTORS. Each Nonemployee Director who
both (a) is such on July 1, 1997, and (b) previously elected to make
Compensation Deferrals under the Plan for the 1997 Plan Year, shall have his or
her Compensation Deferral election continue in effect for the remainder of the
1997 Plan Year only (and subject to the other provisions of the Plan).
2.1.2 INITIAL ELECTIONS BY NEW NONEMPLOYEE DIRECTORS. Each
individual who first becomes a Nonemployee Director after July 1, 1997 may elect
to become a Participant in the Plan by electing, within thirty days of the date
of his or her hire or promotion (as the case may be), to make Compensation
Deferrals under the Plan. An election under this Section 2.1.2 to make
Compensation Deferrals shall be effective only for the remainder of the Plan
Year with respect to which the election is made.
2.1.3 ELECTIONS FOR SUBSEQUENT PLAN YEARS. A Nonemployee Director
may elect to become a Participant (or to continue or reinstate his or her active
participation) in the Plan for any subsequent Plan Year by electing, no later
than December 31 of the preceding Plan Year, to make Compensation Deferrals
under the Plan. An election under this Section 2.1.3 to make Compensation
Deferrals shall be effective only for the Plan Year with respect to which the
election is made.
2.1.4 NO ELECTION CHANGES DURING PLAN YEAR. After the beginning of a
Plan Year, a Participant shall not be permitted to change or revoke his or her
deferral election for such Plan Year, except to the limited extent provided in
Section 2.2.
2.1.5 SPECIFIC TIMING AND METHOD OF ELECTION. Notwithstanding any
contrary provision of this Section 2.1, the Committee, in its sole discretion,
shall determine the manner and deadlines for Participants to make Compensation
Deferral elections. The deadlines prescribed by the Committee may be earlier
than the deadlines specified in this Section 2.1, but shall not be later than
such specified deadlines.
2.2 SUSPENSION OF COMPENSATION DEFERRALS.
2.2.1 AUTOMATIC SUSPENSION. In the event that a Participant receives
a financial hardship withdrawal from The PMI Group, Inc. Savings and Profit-
Sharing Plan or any other plan (maintained by the Company or an Affiliate) which
contains a qualified cash or deferred arrangement under section 401(k) of the
Internal Revenue Code of 1986, as amended (collectively, the "401(k) Plans"),
the Participant's Compensation Deferrals under the Plan (if any) shall be
suspended for a period of twelve (12) months from the date that the Participant
received such hardship withdrawal. Notwithstanding the preceding, the
Participant's
5
<PAGE>
Compensation Deferrals shall be not be so suspended if the Committee determines
that such suspension is not required in order to preserve the tax-qualification
of the 401(k) Plans.
2.2.2 PERMISSIBLE SUSPENSION. In the event that a Participant incurs
a Financial Hardship, the Committee, in its sole discretion, may suspend the
Participant's Compensation Deferrals for the remainder of the Plan Year.
However, an election to make Compensation Deferrals under Section 2.1 shall be
irrevocable as to amounts deferred as of the effective date of any suspension in
accordance with this Section 2.2.2.
2.3 TERMINATION OF PARTICIPATION. A Nonemployee Director who has become a
Participant shall remain a Participant until his or her entire vested Account
balance is distributed. However, a Nonemployee Director who has become a
Participant may or may not be an active Participant making Compensation
Deferrals for a particular Plan Year, depending upon whether he or she has
elected to make Compensation Deferrals for such Plan Year.
SECTION 3
COMPENSATION DEFERRAL ELECTIONS
3.1 COMPENSATION DEFERRALS. At the times and in the manner prescribed in
Section 2.1, each Nonemployee Director may elect to defer portions of his or her
Compensation and to have the amounts of such deferrals credited to his or her
Account. For each Plan Year, a Nonemployee Director may elect to defer an
amount equal to any percentage or any specific dollar amount of his or her
Compensation, provided that the percentage or dollar amount elected by the
Participant shall result in an expected deferral of not less than $5,000 of his
or her Compensation. Notwithstanding any contrary provision of the Plan, the
Committee may reduce a Participant's Compensation Deferrals to the extent
necessary to satisfy any deductions required by law.
3.2 CREDITING OF COMPENSATION DEFERRALS. The amounts deferred pursuant to
Section 3.1 shall reduce the Participant's Compensation for the Plan Year and
shall be credited to the Participant's Account as of the date on which the
amounts (but for the deferral) otherwise would have been paid to the
Participant. For each Plan Year, the exact dollar amount to be deferred from
each Compensation payment shall be determined by the Committee under such
formulae as it shall adopt from time to time.
3.3 DEEMED INVESTMENT RETURN ON ACCOUNTS. Although no assets will be
segregated or otherwise set aside with respect to a Participant's Account, the
amount that is ultimately payable to the Participant with respect to his or her
Account shall be determined as if such Account had been invested in common stock
of the Company (including reinvestment of any deemed dividends). The Committee,
in its sole discretion, shall adopt (and may modify from time to time) such
rules and procedures as it deems necessary or appropriate to implement the
deemed investment of the Participants' Accounts. However, such procedures may
differ among Participants or classes of Participants, as determined by the
Committee in its discretion.
6
<PAGE>
3.4 FORM OF PAYMENT. Each Participant shall indicate on his or her
deferral election (made pursuant to Section 3.1) the form of payment for the
Compensation Deferrals made pursuant to such election. A Participant may elect
(a) a lump sum payment, or (b) a fixed number of annual installment payments
(not to exceed ten). A Participant's election as to the form of payment shall
apply to all amounts credited to the Participant's Account for the Plan Year
with respect to which the election is made, and except to the limited extent
provided in Section 3.6, shall be irrevocable.
3.5 TERM OF DEFERRAL. Each Participant shall indicate on his or her
deferral election made pursuant to Section 3.1 the time for payment for
Compensation Deferrals (and deemed investment returns, gains and losses thereon)
made pursuant to such election. A Participant may elect a term of deferral
equal to any whole number (not less than one) of calendar years specified in his
or her deferral election. In addition, pursuant to such procedures as the
Committee (in its discretion) may adopt from time to time, a Participant may
elect a term of deferral which ends upon the later (or earlier) of the
expiration of a specified period or the occurrence of a specific event (for
example, the later of ten years or termination of service on the Board of
Directors). A Participant's election as to the term of deferral shall apply to
all amounts credited to the Participant's Account for the Plan Year with respect
to which the election is made, and except to the limited extent provided in
Section 3.6, shall be irrevocable.
3.6 CHANGES IN ELECTIONS AS TO TERM AND FORM FOR PAYMENT. A Participant
may change his or her election under Section 3.4 and/or Section 3.5 for amounts
credited to the Participant's Account for any Plan Year, provided that any such
election will be effective only if (a) such election is made at least two Plan
Years prior to the Plan Year in which payment of such amounts is scheduled to
commence (without giving effect to such election), (b) the newly elected
scheduled payment commencement date is not earlier than the second Plan Year
after the Plan Year in which such election is made, and (c) payment of such
amounts has not actually commenced. For example, if a Participant initially
elected to receive his or 1999 Plan Year deferrals in a lump sum to be paid
during the 2003 Plan Year, the Participant instead may elect to receive payment
in the form of ten annual installments commencing during the 2004 Plan Year,
provided that such election is made on or before December 31, 2001. (i.e., not
----
less than two Plan Years prior to the Plan Year in which payment of such amounts
previously was scheduled to commence, and with a newly elected scheduled payment
commencement date which is not earlier than the second Plan Year after the Plan
Year in which such election is made).
SECTION 4
ACCOUNTING
4.1 PARTICIPANTS' ACCOUNTS. For each Plan Year, at the direction of the
Committee, there shall be established and maintained on the books of the
Company, a separate Account or Accounts for each Participant to which shall be
credited all Compensation Deferrals made by the Participant during such Plan
Year, and deemed investment returns, gains and losses on such Compensation
Deferrals.
7
<PAGE>
4.2 PARTICIPANTS REMAIN UNSECURED CREDITORS. All amounts credited to a
Participant's Account under the Plan shall continue for all purposes to be a
part of the general assets of the Company. Each Participant's interest in the
Plan shall make him or her only a general, unsecured creditor of the Company.
4.3 ACCOUNTING METHODS. The accounting methods or formulae to be used
under the Plan for the purpose of maintaining the Participants' Accounts,
including the calculation and crediting (or debiting) of deemed returns, gains
and losses, shall be determined by the Committee, in its sole discretion. The
accounting methods or formulae selected by the Committee may be revised from
time to time.
4.4 REPORTS. Each Participant shall be furnished with periodic statements
of his or her Account, reflecting the status of his or her interest in the Plan,
at least annually.
SECTION 5
DISTRIBUTIONS
5.1 NORMAL TIME FOR DISTRIBUTION. Subject to Sections 5.2 through 5.5 and
Section 5.10, distribution of the balance credited to a Participant's Account
shall commence as soon as administratively practicable after the end of the
term(s) of deferral elected by the Participant under Section 3.5, in accordance
with the following rules. If, pursuant to Section 3.4, the Participant elected
to receive annual installment payments, his or her first installment shall be
equal to the balance then credited to his or her Account, divided by the number
of installments to be made. Each subsequent annual installment shall be paid to
the Participant as near as administratively practicable to each anniversary of
the first installment payment. The amount of each subsequent installment shall
be equal to the balance then credited to the Participant's Account, divided by
the number of installments remaining to be made. While a Participant's Account
is in installment payout status, the unpaid balance credited to the
Participant's Account shall continue to be credited (or debited) with deemed
investment returns, gains and losses under Section 3.3.
5.2 CHANGE OF CONTROL. If there is a Change of Control, the balance then
credited to a Participant's Account shall be distributed to him or her in a lump
sum as soon as administratively practicable after the date of the Change of
Control. Deemed investment returns, gains and losses shall be credited (or
debited) prior to any such accelerated distribution in accordance with Section
3.3. The amount of any such accelerated lump sum distribution shall also
include any amount that the Participant deferred but which has not yet been
credited to his or her Account.
5.3 SPECIAL RULE FOR DEATH OR DISABILITY. If a Participant dies or
becomes Disabled, the balance then credited to his or her Account shall be
distributed to the Participant (or his or her Beneficiary) at the time and in
the form elected by the Participant pursuant to Sections 3.4 and 3.5; provided,
however, that the Committee, in its sole discretion, may elect to distribute
such amount in a lump sum as soon as administratively practicable after the date
of death or
8
<PAGE>
Disability. In accordance with Section 3.3, deemed investment returns, gains and
losses shall be credited (or debited) prior to any such accelerated
distribution.
5.4 SPECIAL RULE RE DEDUCTIBILITY. Notwithstanding any contrary provision
of Section 5.1, any payment scheduled for a particular Plan Year shall not be
made in such Plan Year to the extent necessary to avoid application of the
deductibility limitation of section 162(m) of the Code. (For this purpose,
deductibility shall be determined by adding such payment to all other
compensation paid by the Company and its Affiliates to the Participant during
the Plan Year.) If, pursuant to the foregoing sentences, any amounts are not
paid when originally scheduled, such amounts shall be paid in the first
subsequent taxable year in which such payments would not be subject to the
deductibility limitation of section 162(m) of the Code. During any such delay
in payment, unpaid amounts shall continue to be credited (or debited) with
deemed investment returns, gains and losses under Section 3.3. Notwithstanding
the foregoing, distribution of a Participant's Account shall be made without
regard to the deductibility limitation of section 162(m) of the Code if the time
for distribution is accelerated pursuant to Section 5.2 or Section 5.3.
5.5 LATEST PERMISSIBLE DISTRIBUTION DATE. Notwithstanding any contrary
provision of this Section 5, any amount which is credited to a Participant's
Account on January 15 of the second calendar year following the year in which
the Participant terminates service on the Board of Directors shall be
distributed to the Participant (or his or her Beneficiary) in a single lump sum
as soon as administratively practicable after such January 15. Any such amount
shall continue to be credited (or debited) with deemed investment returns, gains
and losses until the date of payment. For example, if a Participant terminates
service on the Board of Directors during July 2000, and an amount remains
credited to his or her Account on January 15, 2002 (after application of the
other provisions of Section 5), then such amount (as increased or decreased by
deemed investment returns, gains and losses) shall be distributed to the
Participant (or his or her Beneficiary) in a lump sum as soon as
administratively practicable after January 15, 2002.
5.6 BENEFICIARY DESIGNATIONS. Each Participant may, pursuant to such
procedures as the Committee may specify, designate one or more Beneficiaries.
5.6.1 SPOUSAL CONSENT. If a Participant designates a person other
than or in addition to his or her spouse as a primary Beneficiary, the
designation shall be ineffective unless the Participant's spouse consents to the
designation. Any spousal consent required under this Section 5.6 shall be
ineffective unless it (a) is set forth in writing in a form specified in the
discretion of the Committee, (b) acknowledges the effect of the Participant's
designation of another person as his or her Beneficiary under the Plan, and (c)
is signed by the spouse and witnessed by an authorized agent of the Committee or
a notary public. Notwithstanding this consent requirement, if the Participant
establishes to the satisfaction of the Committee that written spousal consent
may not be obtained because the spouse cannot be located, his or her designation
shall be effective without a spousal consent. Any spousal consent required
under this Section 5.6 shall be valid only with respect to the spouse who signs
the consent. A Participant may revoke his or her Beneficiary designation at any
time, provided that such revocation is in writing.
9
<PAGE>
5.6.2 CHANGES AND FAILED DESIGNATIONS. A Participant may designate
different Beneficiaries (or may revoke a prior Beneficiary designation) at any
time by delivering a new designation (or revocation of a prior designation) in
accordance with Section 5.6.1. Any designation or revocation shall be effective
only if it is received by the Committee. However, when so received, the
designation or revocation shall be effective as of the date the notice is
executed (whether or not the Participant still is living), but without prejudice
to the Committee on account of any payment made before the change is recorded.
The last effective designation received by the Committee shall supersede all
prior designations. If a Participant dies without having effectively designated
a Beneficiary, or if no Beneficiary survives the Participant, the Participant's
Account shall be payable to his or her surviving spouse, or, if the Participant
is not survived by his or her spouse, the Account shall be paid to his or her
estate.
5.7 FINANCIAL HARDSHIP. In the event that a Participant incurs a
Financial Hardship, the Committee, in its sole discretion and notwithstanding
any contrary provision of the Plan, may determine that all or part of the
Participant's Account shall be paid to him or her immediately; provided,
however, that the amount paid to the Participant pursuant to this Section 5.7
shall be limited to the amount reasonably necessary to alleviate the
Participant's Financial Hardship. Also, payment under this Section 5.7 may not
be made to the extent that the hardship may be relieved by suspension of the
Participant's Compensation Deferrals in accordance with Section 2.2.
5.8 PAYMENTS TO INCOMPETENTS. If any individual to whom a benefit is
payable under the Plan is a minor or legally incompetent, the Committee shall
determine whether payment shall be made directly to the individual, any person
acting as his or her custodian or legal guardian under the California Uniform
Transfers to Minors Act, his or her legal representative or a near relative, or
directly for his or her support, maintenance or education.
5.9 UNDISTRIBUTABLE ACCOUNTS. Each Participant and (in the event of
death) his or her Beneficiary shall keep the Committee advised of his or her
current address. If the Committee is unable to locate the Participant or
Beneficiary to whom a Participant's Account is payable under this Section 5, the
Participant's Account shall continue to be credited (or debited) with deemed
investment returns, gains and losses in accordance with Section 3.3. Accounts
that, in accordance with the preceding sentence, have been undistributable for a
period of thirty-five months shall be forfeited as of the end of the thirty-
fifth month. If a Participant whose Account was forfeited under this Section
5.9 (or his or her Beneficiary) files a claim for distribution of the Account
after the date on which it was forfeited, and if the Committee determines that
such claim is valid, then the forfeited balance shall be paid by the Company in
a lump sum cash payment as soon as practicable thereafter (without interest or
any deemed investment returns, gains or losses after the date of forfeiture).
5.10 COMMITTEE DISCRETION. Within the specific time periods described in
this Section 5, the Committee shall have sole discretion to determine the
specific timing of the payment of any Account balance under the Plan. In
addition and notwithstanding any contrary provision of the Plan, the Committee,
in its sole discretion, may cause the balance credited to a Participant's
10
<PAGE>
Account to be paid to him or her in a lump sum at any time following the
Participant's cessation of service on the Board of Directors.
SECTION 6
PARTICIPANT'S INTEREST IN ACCOUNT
6.1 COMPENSATION DEFERRAL CONTRIBUTIONS. Subject to Sections 8.1
(relating to creditor status) and 9.2 (relating to amendment and/or termination
of the Plan), a Participant's interest in the balance credited to his or her
Account at all times shall be 100% vested and nonforfeitable.
SECTION 7
ADMINISTRATION OF THE PLAN
7.1 COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall have the authority to control and manage the operation and
administration of the Plan. Any member of the Committee may resign at any time
by notice in writing mailed or delivered to the Secretary of the Company.
7.2 ACTIONS BY COMMITTEE. Each decision of a majority of the members of
the Committee then in office shall constitute the final and binding act of the
Committee. The Committee may act with or without a meeting being called or held
and shall keep minutes of all meetings held and a record of all actions taken by
written consent.
7.3 POWERS OF COMMITTEE. The Committee shall have all powers and
discretion necessary or appropriate to supervise the administration of the Plan
and to control its operation in accordance with its terms, including, but not by
way of limitation, the following powers:
(a) to interpret and determine the meaning and validity of the
provisions of the Plan and to determine any question arising under, or
in connection with, the administration, operation or validity of the
Plan or any amendment thereto;
(b) to determine any and all considerations affecting the eligibility
of any Nonemployee Director to become a Participant or remain a
Participant in the Plan;
(c) to cause one or more separate Accounts to be maintained for each
Participant;
(d) to cause Compensation Deferrals and deemed investment returns,
gains and losses to be credited to Participants' Accounts;
(e) to establish and revise a method or procedure for the deemed
investment of Participants' Accounts, as provided in Section 3.3;
11
<PAGE>
(f) to establish and revise an accounting method or formula for the
Plan, as provided in Section 4.3;
(g) to determine the manner and form in which any distribution is to
be made under the Plan;
(h) to determine the manner and form for making elections under the
Plan;
(i) to determine the status and rights of Participants and their
spouses, Beneficiaries or estates;
(j) to employ such counsel, agents and advisers, and to obtain such
legal, clerical and other services, as it may deem necessary or
appropriate in carrying out the provisions of the Plan;
(k) to establish, from time to time, rules for the performance of its
powers and duties and for the administration of the Plan;
(l) to arrange for annual distribution to each Participant of a
statement of benefits accrued under the Plan;
(m) to publish a claims and appeal procedure pursuant to which
individuals or estates may claim Plan benefits and appeal denials of
such claims;
(n) to delegate to any one or more of its members or to any other
person, severally or jointly, the authority to perform for and on
behalf of the Committee one or more of the functions of the Committee
under the Plan; and
(o) to decide all issues and questions regarding Account balances, and
the time, form, manner and amount of distributions to Participants.
7.4 DECISIONS OF COMMITTEE. All actions, interpretations, and decisions
of the Committee shall be conclusive and binding on all persons, and shall be
given the maximum possible deference allowed by law.
7.5 ADMINISTRATIVE EXPENSES. All expenses incurred in the administration
of the Plan by the Committee, or otherwise, including legal fees and expenses,
shall be paid and borne by the Company.
7.6 ELIGIBILITY TO PARTICIPATE. No member of the Committee who is also a
Nonemployee Director shall be excluded from participating in the Plan if
otherwise eligible, but he or she shall not be entitled, as a member of the
Committee, to act or pass upon any matters pertaining specifically to his or her
own Account under the Plan.
12
<PAGE>
7.7 INDEMNIFICATION. The Company shall, and hereby does, indemnify and
hold harmless the members of the Committee, from and against any and all losses,
claims, damages or liabilities (including attorneys' fees and amounts paid, with
the approval of the Board of Directors, in settlement of any claim) arising out
of or resulting from the implementation of a duty, act or decision with respect
to the Plan, so long as such duty, act or decision does not involve gross
negligence or willful misconduct on the part of any such individual.
SECTION 8
FUNDING
8.1 UNFUNDED PLAN. All amounts credited to a Participant's Account under
the Plan shall continue for all purposes to be a part of the general assets of
the Company. The interest of the Participant in his or her Account, including
his or her right to distribution thereof, shall be an unsecured claim against
the general assets of the Company. Nothing contained in the Plan shall give any
Participant or beneficiary any interest in or claim against any specific assets
of the Company.
SECTION 9
MODIFICATION OR TERMINATION OF PLAN
9.1 COMPANY'S OBLIGATION IS LIMITED. The Company intends to continue the
Plan indefinitely, and to maintain each Participant's Account until it is
scheduled to be paid to him or her in accordance with the provisions of the
Plan. However, the Plan is voluntary on the part of the Company, and the
Company does not guarantee to continue the Plan. The Company at any time may,
by amendment of the Plan, suspend Compensation Deferrals or may discontinue
Compensation Deferrals, with or without cause. Complete discontinuance of all
Compensation Deferrals shall be deemed a termination of the Plan.
9.2 RIGHT TO AMEND OR TERMINATE. The Board of Directors, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason, provided that no amendment or termination of the Plan shall,
without the consent of the Participant, reduce the balance then credited to the
Participant's Account.
9.3 EFFECT OF TERMINATION. If the Plan is terminated pursuant to this
Section 9, the balances credited to the Accounts of the affected Participants
shall be distributed to them at the time and in the manner set forth in Section
5; provided, however, that the Committee, in its sole discretion, may authorize
accelerated distribution of Participants' Accounts as of any earlier date.
SECTION 10
GENERAL PROVISIONS
10.1 INALIENABILITY. In no event may any Participant, Beneficiary, spouse
or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose
of any right or interest under the Plan; and such rights and interests shall not
at any time be subject to the claims of creditors
13
<PAGE>
nor be liable to attachment, execution or other legal process. Accordingly, for
example, a Participant's interest in the Plan is not transferable pursuant to a
domestic relations order.
10.2 RIGHTS AND DUTIES. Neither the Company nor the Committee shall be
subject to any liability or duty under the Plan except as expressly provided in
the Plan, or for any action taken, omitted or suffered in good faith.
10.3 NO ENLARGEMENT OF RIGHTS. Neither the establishment or maintenance of
the Plan, the making of any Compensation Deferrals nor any action of the Company
or the Committee, shall be held or construed to confer upon any individual any
right to be continue as a member of the Board of Directors.
10.4 COMPLIANCE WITH RULE 16B-3. All transactions under the Plan are
intended to be exempt from liability under section 16(b) of the Securities
Exchange Act of 1934, as amended ("section 16(b)"). To the extent deemed
necessary or advisable by the Committee, any election, payment, distribution or
other transaction by or on behalf of any Nonemployee Director may be canceled or
delayed in order to ensure that such payment will not result in any liability
under section 16(b) to such individual.
10.5 COMPENSATION DEFERRALS NOT COUNTED UNDER OTHER EMPLOYEE BENEFIT PLANS.
Compensation Deferrals under the Plan will not be considered for purposes of
contributions or benefits under any other employee benefit plan sponsored by the
Company or any Affiliate, except to the extent specifically provided in any such
plan.
10.6 APPLICABLE LAW. The provisions of the Plan shall be construed,
administered and enforced in accordance with the laws of the State of California
(other than its conflict of laws provisions).
10.7 SEVERABILITY. If any provision of the Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provisions of the Plan, and in lieu of each provision which is held invalid or
unenforceable, there shall be added as part of the Plan a provision that shall
be as similar in terms to such invalid or unenforceable provision as may be
possible and be valid, legal, and enforceable.
14
<PAGE>
10.8 CAPTIONS. The captions contained in and the table of contents
prefixed to the Plan are inserted only as a matter of convenience and for
reference and in no way define, limit, enlarge or describe the scope or intent
of the Plan nor in any way shall affect the construction of any provision of the
Plan.
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer,
has executed the Plan on the date indicated below.
THE PMI GROUP, INC.
/s/ CHARLES BROOM
- ---------------------------------------
By: Charles Broom
Title: Assist. VP, Human Resources
Date: July 28, 1998
--------
15
<PAGE>
EXHIBIT 11.1
------------
THE PMI GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands, except per share data) 1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
BASIC NET INCOME PER COMMON SHARE:
Net income $46,787 $42,279 $92,555 $91,451
Average common shares outstanding 31,918 33,618 32,173 33,920
------- -------- ------- -------
Basic net income per common share $ 1.47 $ 1.26 $ 2.88 $ 2.70
======= ======= ======= =======
DILUTED NET INCOME PER COMMON SHARE:
Net income $46,787 $42,279 $92,555 $91,451
------- ------- ------- -------
Average common shares outstanding 31,918 33,618 32,173 33,920
Net shares to be issued upon
exercise of dilutive stock options
after applying treasury stock method 201 98 188 106
------- ------- ------- -------
Average shares outstanding 32,119 33,716 32,361 34,026
------- ------- ------- -------
DILUTED NET INCOME PER COMMON SHARE $ 1.46 $ 1.25 $ 2.86 $ 2.69
======= ======= ======= =======
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,316,078
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 151,673
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,496,807
<CASH> 8,862
<RECOVER-REINSURE> 35,021
<DEFERRED-ACQUISITION> 47,966
<TOTAL-ASSETS> 1,705,831
<POLICY-LOSSES> 201,726
<UNEARNED-PREMIUMS> 81,071
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,442
0
0
<COMMON> 352
<OTHER-SE> 1,071,873
<TOTAL-LIABILITY-AND-EQUITY> 1,705,831
235,173
<INVESTMENT-INCOME> 42,716
<INVESTMENT-GAINS> 10,191
<OTHER-INCOME> 10,023
<BENEFITS> 68,675
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 92,496
<INCOME-PRETAX> 129,272
<INCOME-TAX> 36,717
<INCOME-CONTINUING> 92,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,555
<EPS-PRIMARY> 2.88
<EPS-DILUTED> 2.86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
