Restricted Stock Plan

Exhibit 10.4


HIGHLANDS INSURANCE GROUP
1997 RESTRICTED STOCK PLAN
(as amended through May 10, 1999)


1. Purpose


This Plan's purpose is to align the interests of management more closely with those of stockholders, by providing an incentive to invest in Highlands Insurance Group, Inc. common stock, and by rewarding long service with the Company and its Subsidiaries.


2. Definitions


For purposes of this Plan, the following terms shall have the definitions set forth below:


(a) "Board." The Company's Board of Directors.


(b) "Committee." The Compensation Committee of the Board. No member of the Committee shall participate in the administration of the Plan unless he is a nonemployee director described in Rule 16b-3(e)(3) promulgated by the Securities and Exchange Commission or any successor definition thereto.


(c) "Company." Highlands Insurance Group, Inc., a Delaware corporation.


(d) "Date of Issuance." The date Restricted Shares are issued to a Participant.


(e) "Escrow Agent." The bank or other institution appointed by the Company from time to time to hold Restricted Shares during the Restricted Period.


(f) "Participant." An employee of the Company or a Subsidiary selected for participation in the Plan pursuant to Section 4.


(g) "Plan." The Highlands Insurance Group 1997 Restricted Stock Plan.


(h) "Restricted Period." The period described in Section 6(c).


(i) "Restricted Shares." The shares of common stock of the Company reserved pursuant to Section 3 hereof and any such shares issued to a Participant pursuant to this Plan.


(j) "Subsidiary" or "Subsidiaries." A corporation or corporations of which the Company owns, directly or indirectly, shares having a majority of the ordinary voting power for the election of directors.


3. Restricted Share Reserve


(a) Establishment. The Company shall establish a Restricted Share reserve to which shall be credited 350,000 shares of the common stock of the Company, par value $.01 per share. Should the shares of the Company's common stock be increased or decreased, or changed into or exchanged for, a different number or kind of shares of stock or other securities of the Company or of another corporation, due to a stock split or stock dividend or combination of shares or any other change, or exchange for other securities, by reclassification, reorganization, merger, consolidation, recapitalization or otherwise, the number of shares then remaining in the Restricted Share reserve shall be adjusted appropriately to reflect such action. If any such adjustment results in a fractional share, the fraction shall be disregarded.


(b) Adjustments to Reserve. Upon the grant of shares hereunder, the reserve shall be reduced by the number of shares so granted. Upon the forfeiture of any Restricted Shares, the reserve shall be increased by such number of shares, and such shares may again be the subject of grants hereunder.


(c) Source of Restricted Shares. As the Board shall in its sole discretion determine, Restricted Shares may be authorized but unissued shares or treasury shares. All authorized and unissued shares issued as Restricted Shares in accordance with the Plan shall be fully paid and non-assessable shares and free from preemptive rights.


4. Eligibility


(a) Eligible Employees. Any management employee of the Company or any Subsidiary (including officers and directors, except for persons serving as directors only) shall be eligible to receive a grant of Restricted Shares pursuant to the Plan.


(b) Selection by the Committee. From the employees eligible to receive grants pursuant to the Plan, the Committee may from time to time select employees to receive grants. The Committee shall base its selections on the positions and responsibilities of the eligible employees, the value of their services to the Company and its Subsidiaries and such other factors as the Committee deems pertinent.


(c) Participation in Other Stock Plans. A person who has received options or other rights to purchase stock of the Company or a Subsidiary may exercise the same in accordance with their terms, and shall not by reason thereof be ineligible to receive Restricted Shares under this Plan. A person who has received Restricted Shares hereunder shall not be ineligible for that reason to be granted any option or other rights to purchase stock.


5. Amounts of Grants


(a) Participant Election. The number of Restricted Shares granted to each Participant shall be equal to the number of shares of common stock of the Company, if any, that the Participant purchases under the Plan. Each Participant shall elect in writing, within


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the time permitted by the Committee, how many shares of common stock of the Company to purchase pursuant to the Plan. Such an election shall be made by delivering to the Secretary of the Company a written election on the form provided by the Company. Any such election shall be accompanied by a stock power endorsed in blank in order to permit the Escrow Agent to transfer Restricted Shares to the Company in the event they are forfeited.


(b) Purchase of Shares. The Secretary of the Company shall arrange for purchase in the market of the number of shares elected by Participants. The Secretary shall inform each Participant promptly of the amoun ...