UNITED STATES BANKRUPTCY COURT Case No. 01-13404(AJG)
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SOUTHERN DISTRICT OF NEW YORK Chapter 11
RELIANCE GROUP HOLDINGS, INC.
-----------------------------
(NAME OF DEBTOR)
Monthly Operating Statement for
the period from September 1, 2005 through September 30, 2005
Debtor's Address:
-----------------
5 Hanover Square
New York, NY 10004
Debevoise & Plimpton LLP
------------------------
(Debtor's Attorneys)
Monthly Operating Profit (Loss): ($ 182)
($ in thousands)
Cash Disbursements: $ 324
($ in thousands)
Report Preparer: Ray Yaworski
The undersigned, having reviewed the attached report and being familiar with the
Debtor's financial affairs, verifies under the penalty of perjury, that the
information contained therein is complete, accurate and truthful to the best of
my knowledge.
Date: October 17, 2005 /s/ Paul Zeller
---------------
Paul W. Zeller
President and CEO
Indicate if this is an amended statement by checking here AMENDED STATEMENT ____
Debtors-in-Possession
(000s)
For the Period
September 1, For the Period
2005 to June 12, 2001 to
September 30, September 30,
2005 2005
Revenues $ - $ -
------ -----------
Costs and expenses:
Operating and administrative 35 7,763
Pension plan actuarial adjustments and expenses 9,059
Depreciation 144
------ -----------
Total costs and expenses 35 16,966
------ -----------
Income (loss) before reorganization items (35) (16,966)
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Reorganization items:
Professional fees 487 23,586 (a)
Increase in allowance on balance due from
Reliance Development Group, Inc. 10,334
Correction on interest due on bonds 3,611
Reduction of balance due Reliance Insurance
Company per settlement (see Notes 2 and 4) (10,765)
PBGC settlement (see Note 2 and 4) 79,298
RFSC settlement payment (see Note 4) 2,537
Underwriters' Settlement (See Note 4) (205) (205)
Interest earned on accumulated cash resulting
from Chapter 11 proceeding (135) (6,343)
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Total reorganization items 147 102,053
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Income tax benefits net of deficiency interest
of $3,179 (see Note 2) (93,823)
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Net income (loss) $ (182) $ (25,196)
====== ===========
(a) Includes $254 of pre-petition charges approved for payment by Judge
Gonzalez on November 16, 2001.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
Reliance Group Holdings, Inc.
Debtor-in-Possession
Unaudited Consolidated Statement of Cash Flows, excluding subsidiaries
which are not Debtors-in-Possession
(000s)
September 1, 2005 For the Period
to September 30, June 12, 2001 to
2005 September 30, 2005
Cash flows from operating activities:
Loss from operations before reorganization items $ (35) $ (17,137)
Adjustments to reconcile loss to net cash provided by
operating activities:
Income tax recovery 17,706
Depreciation 144
Changes in:
(Increase) decrease in Prepaid expenses 8,826
Increase (decrease) in Post-petition payables 4 877
Increase (decrease) in Liabilities subject to compromise 1,702
--------- -----------
Net cash provided (used) by operating activities before
reorganization items (31) 12,118
--------- -----------
Operating cash flows from reorganization items -
Interest received on cash accumulated because
of the Chapter 11 proceeding 135 6,454
Application of retainer towards reorganization
professional fees 450
RFSC settlement payment (2,537)
Payment of reorganization item (293) (20,993)
Distribution to Reliance Insurance Company (in Liquidation) (45,347)
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Net cash used by reorganization items (158) (61,973)
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Net cash used by operating activities (189) (49,855)
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Cash flows from investing activities -
Loan to Reorganized RFS Corp. (see Note 4) (2,537)
Receipts from Reliance Development Group, Inc. 5,800
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Net cash provided by investing activities - 3,263
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Cash flows from financing activities -
Proceeds of split dollar policies 4,584
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Net cash provided by financing activities - 4,584
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Net decrease in cash and cash equivalents (189) (42,008)
Cash and cash equivalents at beginning of period 47,022 88,841
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Cash and cash equivalents at end of period $ 46,833 $ 46,833
========= ===========
3
Reliance Group Holdings, Inc.
Debtor-in-Possession
Unaudited Consolidated Balance Sheet, excluding subsidiaries
which are not Debtors-in-Possession
(000s)
September 30, 2005 August 31, 2005
Assets
Cash $ 46,833 $ 47,022
Accounts and Notes Receivable 13,090 13,090
Prepaid expenses and deposits 353 353
Note receivable from Reorganized RFS Corp. (see Note 4) 2,537 2,537
Underwriters' Settlement (See Note 4) 205 205
Due from Reliance Development Group, Inc.
less allowance of $60,334 (see Note 1)
Property, plant and equipment, net of accumulated
depreciation of $1,567 - -
----------- -----------
Total assets $ 63,018 $ 63,207
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Liabilities and Shareholders' Deficit
Liabilities not subject to compromise
Post-petition - accounts payable $ 1,430 $ 1,322
Professional fee holdback payable 1,861 1,771
Pension Benefit Guaranty Corp. administrative claim
(see Notes 2 and 4)
Liabilities subject to compromise (see Notes 2 and 4) 851,852 851,852
----------- -----------
Total liabilities 855,143 854,945
----------- -----------
Shareholders' deficit
Common stock, par value $.01 per share 11,616 11,616
Additional paid in capital 558,541 558,541
Accumulated deficit (see Notes 1 and 4) (1,362,282) (1,362,100)
----------- -----------
Total shareholders' deficit (792,125) (791,943)
----------- -----------
Total liabilities and shareholders' deficit $ 63,018 $ 63,002
=========== ===========
4
Reliance Group Holdings, Inc.
Debtor-in-Possession
Additional information
September 30, 2005
SCHEDULE OF FEDERAL, STATE AND LOCAL TAXES COLLECTED, RECEIVED, DUE OR WITHHELD
All wages and salaries paid (GROSS) or incurred. $ 24,000
The amount of payroll taxes withheld:
Federal (FIT, FICA, FICA-MED) 5,149
State 1,692
The amount of employer payroll tax contributions incurred:
FICA-med 344
Gross taxable sales N/A
Sales tax collected N/A
Property taxes N/A
Any other taxes N/A
Date and amount paid over to each taxing agency for taxes
September 1, 2005
Internal Revenue Service $ 5,493
State Income Taxes 1,692
INSURANCE
All insurance policies are fully paid for the current period.
The amounts for workers compensation and disability insurance have been fully
paid for the period.
5
Reliance Group Holdings, Inc.
Debtor-in-Possession
Additional information
September 30, 2005
PAYMENTS TO PROFESSIONALS
Amount of
Professional Payment
-------------------------------------- ---------
Debevoise & Plimpton LLP $ 52,246
Orrick Herrington & Sutcliffe LLP 172,388
White & Case LLP 68,045
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RELIANCE GROUP HOLDINGS, INC.
(DEBTOR-IN-POSSESSION)
ORGANIZATION, BUSINESS AND PROCEEDINGS UNDER CHAPTER 11
Reliance Group Holdings, Inc. ("RGH" or the "Debtor") is an insurance
holding company. Until May 2001, RGH's principal business was the indirect
ownership of Reliance Insurance Company ("RIC") through Reliance Financial
Services Corporation ("RFSC"), RGH's then wholly owned subsidiary. RIC is one of
the oldest property and casualty insurance companies in the United States. RIC
offered a number of insurance products over the years, including a broad range
of commercial property and casualty insurance products, primarily in the United
States. However, the property and casualty insurance operations of RIC incurred
a substantial operating loss in 1999, including among other things a substantial
increase of net reserves for policies of prior years. During the second quarter
of 2000, an additional substantial increase was made to net loss reserves
related to policies issued in prior periods. As a result of a series of
downgrades, RIC determined to cease writing business and to sell or transfer
policy renewal rights to the extent possible and developed a run-off policy for
the orderly downsizing of its business. On May 29, 2001, the Commonwealth Court
of Pennsylvania entered an order granting a petition of the Pennsylvania
Department of Insurance, with RIC's consent, for the rehabilitation of RIC.
Under the order, the Pennsylvania Insurance Commissioner is directed to take
possession of RIC's assets and business and to take such actions as the nature
of the case and the interests of the policyholders, creditors or the public may
require. As of May 29, 2001, RGH and RFSC have had no control over the
operations and assets of RIC. On October 3, 2001, the Commonwealth Court of
Pennsylvania entered an order granting a petition of the Pennsylvania Department
of Insurance for liquidation of RIC.
During the year ended December 31, 2000, the Debtor wrote off its
entire investment in RIC and its subsidiaries of $1.47 billion. The loss
incurred during 2000 by RIC and its subsidiaries materially exceeded the amount
written off by the Debtor.
BANKRUPTCY PROCEEDINGS
On June 12, 2001, the Debtor, together with its subsidiary RFSC, filed
a voluntary petition for relief under Chapter 11 of Title 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The Debtor is authorized to
operate its business in the ordinary course as debtor-in-possession. On June 22,
2001, the Office of the United States Trustee for the Southern District of New
York (the "U.S. Trustee") appointed the Official Unsecured Bank Committee (the
"Bank Committee") and the Official Unsecured Creditors' Committee (the
"Creditors' Committee") to represent the interests of the Debtor's unsecured
creditors. The Debtor has entered into various settlements in connection with
its bankruptcy case, as discussed in Notes 2 and 4.
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On June 2, 2004, the Bank Committee filed a plan of reorganization of
RFSC, together with a related disclosure statement. The disclosure statement was
approved by order of the Bankruptcy Court dated July 7, 2004. A hearing to
consider the confirmation of the plan was scheduled for August 24, 2004 and
subsequently adjourned to October 20, 2004, but ultimately was not convened. On
November 3, 2004, the Creditors' Committee filed a plan of reorganization (the
"RFSC Plan") and related disclosure statement for RFSC in form and content
substantially similar to the plan and disclosure statement, as amended,
previously filed by the Bank Committee. The Bankruptcy Court approved the
disclosure statement on December 8, 2004. The Bankruptcy Court entered an order
confirming the RFSC Plan on January 25, 2005. The RFSC Plan became effective on
April 22, 2005 (the "Effective Date"). Consequently, as of April 30, 2005, RFSC
was no longer included in the RGH financial statements and such financial
statements have been adjusted accordingly.
On August 18, 2005, the Creditors' Committee filed a plan of
reorganization of RGH, together with a related disclosure statement. The
disclosure statement was approved by order of the Bankruptcy Court dated
September 22, 2005. A hearing to consider the confirmation of the plan is
scheduled for November 7, 2005.
BASIS OF PRESENTATION
The Debtor's unaudited consolidated financial statements have been
prepared in accordance with Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") and generally
accepted accounting principles applicable to a going concern which, unless
otherwise noted, assumes the realization of assets and the payment of
liabilities in the ordinary course of business. SOP 90-7 requires (i) that
pre-petition liabilities that are subject to compromise be segregated in the
Debtor's consolidated balance sheet as liabilities subject to compromise and
(ii) that revenues, expenses, realized gains and losses, and provisions for
losses resulting from the reorganization and restructuring of the Debtor be
reported separately as reorganization items in the consolidated statement of
operations. As a result of the reorganization proceedings under Chapter 11, the
Debtor may take, or may be required to take, actions that may cause assets to be
realized, or liabilities to be liquidated, for amounts other than those
reflected in the unaudited consolidated financial statements. As a result of the
Debtor's recurring losses, the Chapter 11 filing and circumstances relating to
these events, including the Debtor's debt structure and current economic
conditions, realization of assets and liquidation of liabilities are subject to
significant uncertainty.
Certain footnote disclosures normally included in unaudited
consolidated financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted from the interim
financial information. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included.
The preceding financial statements - unaudited consolidated balance
sheet, unaudited consolidated statements of operations, and unaudited
consolidated statements of cash flows - were prepared for the period from
September 1, 2005 through September 30, 2005.
8
RELIANCE GROUP HOLDINGS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 1 - DUE FROM RELIANCE DEVELOPMENT GROUP, INC.
The collectibility of the balance of $60,334 due from Reliance
Development Group, Inc. ("RDG"), a wholly owned subsidiary of Reliance Group
Holdings, Inc. ("RGH" or the "Debtor"), is dependent upon the future operations
of RDG. While it appears the RDG will generate future cash flow, it does not
appear that such cash flows will be sufficient to repay to the Debtor any
portion of the balance due. An allowance of $50,000 was provided in the June
2002 operating statement to reduce the net receivable to management's estimate
of its net realizable value at that time. The allowance was increased by $9,334
in June 2003 based on a further impairment of RDG's position. In June 2004 the
remaining balance was deemed uncollectable and was fully reserved.
NOTE 2 - LIABILITIES SUBJECT TO COMPROMISE
As a result of the Chapter 11 filing, all actions to collect the
payment of pre-petition indebtedness are subject to compromise. Generally,
actions to enforce or otherwise effect payment of pre-petition liabilities are
stayed. These claims are reflected in the September 30, 2005 unaudited
consolidated balance sheet as Liabilities Subject to Compromise. Although
pre-petition claims are generally stayed, the Bankruptcy Court approved the
Debtor's motions to pay (i) pre-petition employee obligations relating to
certain plans and policies providing medical and dental coverage to the Debtor's
employees and (ii) pre-petition claims for workers' compensation premium
payments. In addition, substantially all actions to enforce or otherwise effect
payment of pre-filing obligations are stayed.
Valuation methods used in Chapter 11 reorganization cases vary
depending on the purpose for which they are prepared and used and are rarely
based on generally accepted accounting principles, the basis on which the
accompanying financial statements are prepared. Accordingly, the values set
forth in the accompanying consolidated financial statements are not likely to be
indicative of the values presented to or used by the Bankruptcy Court.
As of September 30, 2005, the Debtor had liabilities subject to compromise of
approximately $851,852 as follows:
Forign, state and local income taxes $ 2,000
Debenture notes payable 463,480
Payable to Reliance Insurance Company (see Note 4) 242,653
Payable to Pension Benefit Guaranty Corp. 81,000
Accounts payable and accrued liabilities 62,719
---------
$ 851,852
=========
All amounts presented above may be subject to future adjustments
depending on Bankruptcy Court actions, further development with respect to
disputed claims, or other events.
9
Executory Contracts and Other Unsecured Claims
The Debtor may reject pre-petition executory contracts and unexpired
leases with the approval of the Bankruptcy Court. Damages resulting from
rejection of executory contracts and unexpired leases are treated as general
unsecured claims and are classified as liabilities subject to compromise. A bar
date is the date by which claims against the Debtor must be filed if the
claimants wish to receive any distribution in this Chapter 11 case. The bar date
established by the Bankruptcy Court in this Chapter 11 case was December 21,
2001. All known claimants subject to the bar date were notified of their need to
file a proof of claim with the Bankruptcy Court. Differences between liability
amounts estimated by the Debtor and claims filed by the creditors will be
investigated and the Bankruptcy Court will make a final determination of the
allowable claim.
Tax Claims
The Department of the United States Treasury, Internal Revenue Service
(the "IRS") filed a proof of claim against RGH in the amount of $434,642 for the
tax years 1988-1999. The Debtor had received approval from the Bankruptcy Court
to settle this claim for a net refund of not materially less than $12,600. The
IRS agreed to this settlement (as approved by the Joint Committee on Taxation of
the United States Congress) with refunds having been received in January 2004
totaling $14,077 for the tax years ending December 31, 1988 through 1994.
Accordingly, the pre-petition claims for Federal taxes, including deferred taxes
have been eliminated in these operating statements.
The New York State Department of Taxation and Finance (the "NY State
Tax Authority") filed a proof of claim in the amount of $3,718. The Debtor
objected to this claim, and the parties agreed to a settlement, which resolved
all of the NY State Tax Authority's claims by stipulating that the NY State Tax
Authority has an allowed unsecured pre-petition priority claim in the amount
equal to $300. The Bankruptcy Court approved this settlement by entering the
Stipulation and Order reflecting the terms of the settlement on April 7, 2004.
The New York City Department of Finance (the "NYC Tax Authority") filed
a proof of claim against RGH in the amount of $2,378. On October 25, 2004, the
Debtor objected to the claim, and the parties agreed to a settlement, which
resolved all of the NYC Tax Authority's claims by stipulating that the NYC Tax
Authority has an allowed unsecured pre-petition priority claim in the amount
equal to $590. The Bankruptcy Court approved this settlement by entering the
Stipulation and Order reflecting the terms of the settlement on May 11, 2005.
Pension Plan Matters
Due to the deficiency between the actuarial present value of
accumulated plan benefits and the net assets of the plan, a contribution was
required to be made to the Reliance Group Holdings, Inc. Pension Plan (the "RGH
Pension Plan") on April 15, 2003. The Bankruptcy Court denied the Debtor
permission to make this contribution and all subsequent contributions, including
minimum funding obligations. In addition, the payments to the Pension Benefit
Guaranty Corporation (the "PBGC") of the annual premiums and preliminary
premiums due in 2003 and 2004 have not been made. A total of $2,516 was due to
the PBGC on account of the aforementioned contribution and premium obligations.
10
On February 24, 2004, RGH received a Notice of Determination from the
PBGC informing RGH of the PBGC's decision to take over and involuntarily
terminate the plan as of January 31, 2004. On July 7, 2004, RGH received the
Bankruptcy Court's permission to enter into a trusteeship agreement with the
PBGC pursuant to which the takeover and plan termination would occur. The PBGC
previously filed a proof of claim in anticipation of the plan termination in an
amount equal to $10,100.
The Reliance Insurance Company Retirement Plan (the "RIC Retirement
Plan") was terminated by the PBGC effective February 28, 2002. The PBGC
previously filed claims totaling $152,092, portions of which the PBGC asserted
were entitled to administrative priority, against RGH and RFSC in respect of the
RIC Retirement Plan.
In connection with the RGH Pension Plan and the RIC Retirement Plan, on
September 29, 2004 the Bank Committee and the Creditors' Committee filed a
motion to approve a stipulation with the PBGC pursuant to which, among other
things, RGH executed a trusteeship agreement with a January 31, 2004 termination
date. Pursuant to the stipulation, the PBGC agreed to reduce its claims against
RGH (including the claim relating to the plan termination) to an unsecured claim
in the amount of $81,000, and to reduce its claim against RFSC to (i) an
unsecured claim in the amount of $82,500 (the "RFSC Agreed Amount") and (ii) an
administrative priority claim in the amount of $3,000. In no event shall the
total recovery by PBGC from both RGH and RFSC exceed the RFSC Agreed Amount. On
October 15, 2004, the Bankruptcy Court approved the stipulation with the PBGC.
The Statement of Operations had reflected the claim of $82,500 along with the
administrative claim of $3,000 less the pension plan deficiency previously
provided of $1,702. In connection with the RGH/RFSC Settlement, the
administrative priority claim in the amount of $3,000 was assumed by RFSC, and
the PBGC claim referred to above was reduced to $81,000 in the Statement of
Operations for April 2005 (see Note 4).
Accounts payable and accrued liabilities include claims against the
Debtor under the Supplemental Employee Retirement Program (the "SERP"). Due to
the aforementioned termination of the RGH Pension Plan and the PBGC's takeover,
it is likely that the Debtor's liability under the SERP will increase. This
increase cannot be determined at this time. Subject to the satisfaction or
waiver of certain conditions precedent, it is anticipated that all claims of
certain directors and officers against the Debtor, including their respective
SERP claims, if any, will be resolved pursuant to the terms of the D&O
Settlement (see Note 4).
NOTE 3 - REORGANIZATION ITEMS
The Debtor has incurred reorganization related charges of approximately
$487 and $23,586 for the month ended September 30, 2005 and the period from June
12, 2001 through September 30, 2005, respectively. Reorganization costs are
directly associated with the reorganization proceedings under the Debtor's
Chapter 11 case and the Chapter 11 case of RFSC. Included in such costs are
amounts related to accruals or payments for professional and advisory fees
incurred in connection with these bankruptcy cases. In addition, reorganization
items for period from June 12, 2001 through September 30, 2005 also include an
increase in the allowance on the balance due from Reliance Development Group,
Inc., a reduction in the balance due to RIC (see Notes 1 and 4) totaling $431,
recognition of the PBGC claims of $79,298 (see Note 2), and an increase in
interest due on the bonds by $3,611, which have been reflected in the
Reorganization Items line of the Consolidated Statement of Operations.
11
NOTE 4 - SETTLEMENT OF LITIGATION
PA Settlement
On May 28, 2003, the Bankruptcy Court entered an order (the "PA
Settlement Order") in the Debtor's Chapter 11 case which, among other things,
approved a settlement agreement and related side letter (together, the "PA
Settlement") between the Commissioner of Insurance for the Commonwealth of
Pennsylvania, in her capacity as liquidator (the "Liquidator") of RIC and the
Official Committee of Unsecured Creditors and the Official Unsecured Bank
Committee. The PA Settlement Order provides that the PA Settlement shall be
binding upon the Debtor and the Debtor's Estate. The effectiveness of the PA
Settlement was conditioned on receipt of the PA Settlement Order and the
approval of the PA Settlement by the Commonwealth Court of Pennsylvania, which
was granted on June 19, 2003.
The PA Settlement was entered into by the parties to settle and resolve
various disputes with respect to ownership interests of the Debtor's Estate, on
the one hand, and the Liquidator's RIC estate, on the other hand, relating to
directors and officers insurance policies and the proceeds thereof, cash held by
the Debtor, certain net operating losses and certain tax refunds, and with
respect to the amount of the Liquidator's allowed claim in the Debtor's Chapter
11 case.
Among other things, the PA Settlement provides for:
o the allocation of certain tax refunds, if any, under Section 847 of the
Internal Revenue Code;
o the allocation of the benefits of net operating losses for income tax
purposes, to the extent available, among RIC, RFSC, and the Debtor;
o the allocation of proceeds, if any, received (including proceeds from
insurers under certain directors and officers liability insurance
policies) in certain litigation against officers and directors of RIC,
RFSC, or the Debtor;
o the Liquidator to have a priority claim over $45,000 in cash held by
the Debtor (see below);
o the allocation to RIC of certain additional cash now or hereafter held
by RFSC or the Debtor; and
o a $288,000 aggregate allowed claim by the Liquidator in the Chapter 11
cases of the Debtor and RFSC, which claim is settled in full against
the Debtor and RFSC by the terms of the PA Settlement as outlined above
in this Note 4.
For more information on the terms of the Order and the PA Settlement,
see the Order and attached PA Settlement, which has been filed in the Debtor's
Chapter 11 case.
On March 31, 2004, the Debtor distributed $45,000 in cash along with
accumulated interest to February 29, 2004 of $309 to satisfy the priority claim
referred to above. On April 1, 2004, the Debtor distributed $38, representing
accumulated interest for the month of March 2004.
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RGH/RFSC Settlement
On February 27, 2004, the Bankruptcy Court entered an order in the
Debtor's Chapter 11 case approving the RGH/RFSC Settlement Term Sheet, dated as
of January 29, 2004 (the "RGH/RFSC Settlement"), between the Bank Committee and
the Creditors' Committee. Under the RGH/RFSC Settlement, among other things:
o RGH and RFSC each have a 50% undivided interest in certain tax refunds
apportioned to them after giving effect to the PA Settlement;
o RGH and RFSC are to apportion their respective interests in certain
existing cash and future cash flows, after giving effect to the PA
Settlement, including RGH providing funding to RFSC from and after the
Effective Date of the RFS Plan, pursuant to certain term and revolving
loan facilities;
o RGH and RFSC are to apportion, as between themselves, the proceeds of
certain litigation recoveries allocated to them by the Liquidator
pursuant to the PA Settlement, 72.5% to RGH and 27.5% to RFSC; and
o RGH is entitled to a 20% undivided interest in cash distributions made
from RIC to RFSC (other than the RFSC's interest in the
above-referenced tax refunds).
For a full recitation of the terms of the RGH/RFSC Settlement, see the
RFS Plan, the order approving the RGH/RFSC Settlement, and the RGH/RFSC
Settlement Term Sheet attached thereto.
D&O Settlement
On April 7, 2005, the Bankruptcy Court entered an order in the Debtor's
Chapter 11 case approving a Settlement Agreement, dated as of February 24, 2005
(the "D&O Settlement"), among the Liquidator, certain directors and officers of
the Debtor, RFSC, and RIC, and certain insurers (the "Insurers") that issued
director and officer liability insurance policies (the "Policies") to the
Debtor, RFSC, RIC and their respective affiliates. The Bank Committee and the
Creditors' Committee have executed separate consents to the D&O Settlement. The
order approving the D&O Settlement provides that the D&O Settlement shall be
binding upon the Debtor and the Debtor's estate. The effectiveness of the D&O
Settlement is conditioned, among other things, on the confirmation of the
Debtor's plan of reorganization.
Subject to the satisfaction of the conditions to its effectiveness, and
unless it is otherwise terminated in accordance with its terms, the D&O
Settlement will govern the resolution of certain disputes involving the
Liquidator, the directors and officers and the Insurers, and the availability
and application of proceeds from the Policies to such settlements and to the
resolution of other litigation brought against the directors and officers. A
copy of the D&O Settlement has been filed on the docket in the Debtor's Chapter
11 case. In summary, under the D&O Settlement:
o the Insurers agree to make available insurance proceeds in the amount
of $122,640 (the "Settlement Amount") from the Policies for
satisfaction of pending and future claims against directors and
officers;
o of the Settlement Amount, a maximum of $21,384 of insurance proceeds
will be reserved for resolution of certain pending director and officer
litigation, other than litigation involving the Liquidator;
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o of the Settlement Amount, a maximum of $13,500 of insurance proceeds
will be placed into a separate escrow account, to fund defense costs
relating to possible future claims against the directors and officers;
o the remainder of the Settlement Amount, which shall not be less than
$85,000, will be paid to the Liquidator, 40% of which will be allocated
to the Debtor and RFSC by the Liquidator in accordance with the terms
of PA Settlement and apportioned between RGH and RFSC as set forth in
the RGH/RFSC Settlement; and
o the Liquidator, the Debtor, RFSC, the directors and officers and the
Insurers will dismiss the pending litigation between and among them,
and execute and deliver mutual releases, including releases of all
proofs of claim filed against the Debtor by the directors and officers.
The Debtor understands that the conditions to the effectiveness of the
D&O Settlement have not been satisfied in full. Accordingly, the impact of the
D&O Settlement on the Debtor's operating results, if any, will be reflected in
future Monthly Operating Reports, only after such conditions have been satisfied
and the D&O Settlement has become effective in accordance with its terms.
Underwriters Settlement
On September 14, 2005, the Bankruptcy Court entered an order in the
Debtor's Chapter 11 case approving a settlement (the "Underwriters Settlement"),
among the Liquidator, the Debtor, RIC and Lloyd's Underwriters and Companies
(other than Zurich Reinsurance (London) Limited) (the "Underwriters"), settling
claims made by RIC against the Underwriters relating to a judgment against RIC.
Pursuant to the Underwriters Settlement, the Debtor is entitled to receive
$205,000, which amount equals 12.5% of the total amount of the Underwriters
Settlement in accordance with a prior separate agreement between RIC and the
Debtor.
14