================================================================= RELIANCE BANKRUPTCY NEWS Issue Number 1 ----------------------------------------------------------------- Copyright 2001 (ISSN XXXX-XXXX) June 13, 2001 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- RELIANCE BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, On an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. Each issue is prepared by Peter A. Chapman, Editor. Subscription rate is US$45 per issue. Reproduction of RELIANCE BANKRUPTCY NEWS is prohibited without permission. ================================================================= IN THIS ISSUE ------------- [00000] HOW TO ORDER A SUBSCRIPTION TO RELIANCE BANKRUPTCY NEWS [00001] BACKGROUND & DISCRIPTION OF RELIANCE GROUP HOLDINGS, INC. [00002] COMPANY'S PRESS RELEASE CONCERNING CHAPTER 11 FILING [00003] RELIANCE DEBTORS' CHAPTER 11 DATABASE [00004] RELIANCE FINANCIAL'S LARGEST UNSECURED CREDITORS [00005] RELIANCE GROUP'S LARGEST UNSECURED CREDITORS [00006] OVERVIEW OF & TERM SHEET FOR THE PROPOSED RESTRUCTURING KEY DATE CALENDAR ----------------- 06/12/01 Voluntary Petition Date 06/27/01 Deadline for filing Schedules of Assets and Liabilities 06/27/01 Deadline for filing Statement of Financial Affairs 06/27/01 Deadline for filing Lists of Leases and Contracts 07/02/01 Deadline to provide Utilities with adequate assurance 09/11/01 Deadline to make decisions about lease dispositions 09/10/01 Deadline to removal actions pursuant to F.R.B.P. 9027 10/10/01 Expiration of Debtors' Exclusive Plan Proposal Period 12/09/01 Expiration of Debtors' Exclusive Solicitation Period 06/26/03 Deadline for Debtors' Commencement of Avoidance Actions Bar Date for filing Proofs of Claim First Meeting of Creditors pursuant to 11 USC Sec. 341 ---------------------------------------------------------------- [00000] HOW TO ORDER A SUBSCRIPTION TO RELIANCE BANKRUPTCY NEWS ----------------------------------------------------------------- RELIANCE BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. 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Name: ---------------------------------------------- Firm: ---------------------------------------------- Address: ---------------------------------------------- ---------------------------------------------- Phone: ---------------------------------------------- Fax: ---------------------------------------------- E-Mail: ---------------------------------------------- ----------------------------------------------------------------- [00001] BACKGROUND & DISCRIPTION OF RELIANCE GROUP HOLDINGS, INC. ----------------------------------------------------------------- Reliance Group Holdings, Inc. Park Avenue Plaza 55 E. 52nd St. New York, NY 10055 Telephone (212) 909-1100 Fax (212) 909-1864 http://www.rgh.com Reliance Group Holdings, Inc., is a holding company that owns 100% of Reliance Financial Services Corporation. Reliance Financial, in turn, owns 100% of Reliance Reliance Insurance Company. The Company is unable to service its mountain of debt: (a) On November 1, 1993, RFS entered into a revolving credit facility and term loan agreement with certain financial institutions and now owes $237,500,000 under the Credit Agreement -- $100,000,000 under the revolving credit facility and $137,500,000 in term loans. The Credit Agreement is secured by a pledge of all of the common stock of RIC. The principal amount of the loans under the Credit Agreement and all accrued but unpaid interest matured on November 10, 2000 but was not paid by RFS. (b) On November 15, 1993, RGH issued (i) 9% senior notes due November 15, 2000, of which $291,710,000 (including $7,500,000 of Senior Notes held by RIC) in principal amount and all accrued but unpaid interest are outstanding, and (ii) 9-3/4% senior subordinated debentures due November 15, 2003, of which $171,770,000 in principal amount and all accrued but unpaid interest are outstanding. The Senior Notes and the Subordinated Debentures are unsecured obligations of RGH. The principal outstanding amount and all accrued but unpaid interest under the Senior Notes matured on November 15, 2000 but was not paid by RGH. (c) As of September 30, 2000, RGH had an intercompany obligation to RIC in the amount of $284,900,000. Reliance Insurance is one of the oldest property and casualty insurance companies in the United States, tracing its roots back to 1817. 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. The property and casualty insurance operations of RIC incurred a substantial operating loss in 1999. The 1999 operating loss included, among other things, a substantial increase of net loss reserves for policies issued in 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. On June 8, 2000, A.M. Best & Company downgraded the claims paying rating of RIC from "A-" (Excellent) to "B++" (Very Good), and further downgraded RIC to "B" (Fair) on July14, 2000, and to "C" (Weak) on August 16, 2000. As a result of the Best downgrades, RIC determined to cease writing new and renewal business in all lines of business. It also decided to sell and/or transfer renewal rights to property and casualty lines of business to the extent possible, and developed a run-off plan to provide for the orderly downsizing of its business and the payment of claims under existing policies. RIC's insurance business is subject to regulation and supervision in the jurisdictions in which RIC does business. Following the downgrades of RIC's claims paying rating in summer 2000, insurance regulators in various states in which RIC and certain of its then subsidiaries were domiciled expressed concern about the potential impact of the downgrades on RIC's operating performance and the Reliance Entities' ability to meet their debt obligations. In response to the Pennsylvania Insurance Department's desire to receive information and to review and approve certain transactions, RIC, which is domiciled in Pennsylvania, and the Pennsylvania Insurance Department entered into an agreement on August 17, 2000. Under the agreement, RIC could not pay dividends or other distributions without the Pennsylvania Insurance Department's approval. Certain subsidiaries of RIC entered into similar agreements with insurance regulators in the states in which such subsidiaries are domiciled. On December 1, 2000, Best further downgraded the claims paying rating of RIC to "D" (Poor). On January 29, 2001, the Pennsylvania Insurance Department, with RIC's consent, entered a formal order of supervision with respect to RIC, and a new agreement with the Department, replacing the August 17, 2000 agreement, became effective. The order of supervision and the new agreement expanded the information flow to, and required approvals of RIC actions by, the Pennsylvania Insurance Department. On January 31, 2001, Best further downgraded RIC to "E" (Under Regulatory Supervision). Reliance Group has been unable to complete the audit of its financial statements for fiscal year 2000 due to significant changes in RIC's operational and organizational structure as a result of its decision to commence run-off operations. RIC estimates (subject to audit) an underwriting loss on a GAAP basis for the year 2000 of $1.9 billion to $2.2 billion, excluding net investment income, realized gains on investments and the gain on the sale of its surety operations. Reliance Insurance expects a loss for the first quarter of 2001, and RGH expects, as of December 31, 2000, to write off its investment in RIC. Consequently, RGH's loss in the first quarter of 2001 is expected to be approximately $30,000,000, reflecting primarily accrued interest on its outstanding indebtedness and corporate overhead and not results at RIC. RIC estimates an underwriting loss on a GAAP basis for the first quarter of 2001 of $110,000,000 to $150,000,000. On May 29, 2001, the Commonwealth Court of Pennsylvania entered an order granting a petition of the Pennsylvania Insurance Department, 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. In a letter, dated June 7, 2001, the Pennsylvania Insurance Department, as rehabilitator of RIC, took the position that cash held at RGH belongs to RIC and that any disbursements of such cash constitutes a violation of the order of rehabilitation. In addition, the Pennsylvania Insurance Department filed a complaint, dated June 11, 2001, seeking to impose a constructive or resulting trust on RGH cash and to enjoin any disbursements of such cash. The Debtors dispute the assertions of the Pennsylvania Insurance Department, as RIC merely has an unsecured contractual claim against RGH's estate. RGH and RFSC's principal source of funds consist of dividends, advances and net tax payments from their insurance subsidiaries. As a result of the events described in the foregoing paragraphs, the Companies do not expect to receive any dividends in the foreseeable future and their ability to service indebtedness under their credit facility and indentures is impossible without restructuring. ---------------------------------------------------------------- [00002] COMPANY'S PRESS RELEASE CONCERNING CHAPTER 11 FILING ---------------------------------------------------------------- NEW YORK, New York -- June 12, 2001 -- Reliance Group Holdings, Inc. (RGH) today announced that on June 11, RGH and Reliance Financial Services Corporation (RFS), its wholly-owned subsidiary, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Company said it elected to file for Chapter 11 relief in order to implement a financial restructuring of the Company. The Company said that it has reached an agreement in principle with holders of the majority of RFS' bank debt, and an ad hoc committee consisting of holders of approximately 50 percent of the outstanding principal amount of RGH's 9 percent Senior Notes and holders of approximately 50 percent of the outstanding principal amount of RGH's 9 3/4 percent Senior Subordinated Debentures, on the major economic terms of a plan of reorganization. Under the terms of the agreement, RFS' lenders will receive new 10-year notes issued by the reorganized RFS that will bear interest in kind at RFS' sole option and be payable solely from dividends or other distributions received by the reorganized RFS from Reliance Insurance Company (RIC), a wholly-owned subsidiary of RFS. All current common stock of RGH and RFS will be extinguished. RFS' bank lenders will receive 86 percent of the voting power of the reorganized RFS and be entitled to 100 percent of all cash recoveries of the reorganized RFS (other than dividends or other distributions received from RIC) until such time that the bank lenders shall have received from such cash recoveries of the reorganized RFS an amount equal to the portion of the RGH excess cash distributed to RIC under the proposed restructuring, plus interest. After that point, RFS' bank lenders will be entitled to 86 percent of all cash recoveries of the reorganized RFS, excluding all distributions from RIC. The remaining interest in the reorganized RFS, including cash recoveries from RIC after full repayment of the new notes, will be distributed to RGH bondholders and holders of allowed general unsecured claims against the Company on a pro rata basis based on the claims of such creditors. In addition, the reorganized RGH will issue 100 percent of its new common stock to RGH bondholders and holders of allowed general unsecured claims against the Company. The proposed plan also provides for the distribution, following payment of administrative expenses and priority claims, of excess cash at RGH to the RGH bondholders, holders of allowed general unsecured claims against the Company and RIC on a pro rata basis based on the claims of the RGH bondholders and holders of allowed general unsecured claims as of November 15, 2000 and the claims of RIC as of September 30, 2000 (less any claims of the IRS paid by RGH on account of RIC). All distributions made to the RGH bondholders under the proposed plan will be divided among the holders of Senior Notes and the holders of Senior Subordinated Debentures on a 85.4-14.6 percent basis. The Company said that the terms negotiated with the RFS lender group and the RGH bondholder group will form the basis for a plan of reorganization to be filed with the bankruptcy court at a later date. Any plan of reorganization is subject to bankruptcy court approval. As previously announced, on May 29, RIC was placed in rehabilitation by the Commonwealth Court of Pennsylvania upon request of the Pennsylvania Department of Insurance, with the consent of RIC. RIC, in rehabilitation under the Pennsylvania Insurance Commissioner, is a major creditor of RGH. The Company has been in discussions with the Pennsylvania Department of Insurance regarding the terms negotiated with the RFS lender group and the RGH bondholder group. The Department, however, has not approved the terms of the agreement in principle. On June 11, the Department filed a complaint with the Commonwealth Court of Pennsylvania seeking to impose a constructive or resulting trust on RGH cash and to enjoin any disbursements of such cash. The Company disputes the allegations contained in the complaint. ----------------------------------------------------------------- [00003] RELIANCE DEBTORS' CHAPTER 11 DATABASE ----------------------------------------------------------------- DEBTORS: Reliance Financial Services Corporation Reliance Group Holdings, Inc. CHAPTER 11 PETITION DATE: June 12, 2001 COURT: United States Bankruptcy Court Southern District of New York One Bowling Green New York, NY 10004 BANKRUPTCY CASE NOS.: 01-13403-ajg and 01-13404-ajg DEBTORS' COUNSEL: Steven R. Gross, Esq. Lorna G. Schofield, Esq. Debevoise & Plimpton 875 Third Avenue New York, NY 10022-6225 (212) 909-6000 Fax : (212) 909-6836 TOTAL ASSETS: $12,598,054,000 TOTAL LIABILITIES: $12,877,472,000 UNITED STATES TRUSTEE: Office of United States Trustee 33 Whitehall Street 21st Floor New York, NY 10004 (212) 510-0500 ----------------------------------------------------------------- [00004] RELIANCE FINANCIAL'S LARGEST UNSECURED CREDITORS ----------------------------------------------------------------- Entity Nature Of Claim Claim Amount ------ --------------- ------------ Chase Manhattan Bank Loan pursuant to $45,509,524 380 Madison Avenue, 9th Flr. the Credit Agreement New York, NY 10017 dated as of November Tom Dinneen 1, 1993 and amended (212) 622-4864 from time to time, among RFS and the lenders thereto (the "Credit Agreement") Deutche Banc Alex. Brown Loan pursuant to the $23,795,238 130 Liberty St., 30th Floor Credit Agreement New York, NY 10006 Ray Peters (212) 250-8367 Credit Lyonnais Loan pursuant to the $20,176,190 1301 Avenue of the Americas Credit Agreement New York, NY 10019 Linda Tulloch (212) 261-7744 Bank of New York Loan pursuant to the $20,176,190 One Wall Street, 17th Floor Credit Agreement New York, NY 10286 Albert Taylor (212) 635-7284 Bank of America, N.A. Loan pursuant to the $20,176,190 335 Madison Avenue Credit Agreement New York, NY 10017 Henry Yu (212) 503-7211 Bank of Montreal Loan pursuant to the $17,190,476 115 South LaSalle Street Credit Agreement Chicago, IL 60603 Geoffrey R. McConnell (312) 750-8702 ABN Amro Bank N.V. Loan pursuant to the $17,190,476 10 East 53rd S., 37th Floor Credit Agreement New York, NY 10022 Steven Wimpenny (212) 891-0626 First Union National Bank Loan pursuant to the $17,190,476 PA 4819 Credit Agreement 1339 Chestnut St., 3rd Floor Philadelphia, PA 19107 Tom Stitchberry (215) 973-3246 Sanwa Bank Loan pursuant to the $17,190,476 601 S. Figueroa St., 8th Flr. Credit Agreement Los Angeles, CA Jerry McDermott 213) 896-7067 Fleet Bank Loan pursuant to the $17,190,476 1133 Avenue of the Americas Credit Agreement 2nd Floor New York, NY 10036 Donald Nicholson (860) 986-6933 Union Bank of California N.A. Loan pursuant to the $12,666,667 Special Asset Division H-750 Credit Agreement 350 California Street San Francisco, CA 94103 Nancy Perkins, V.P. (415) 705-7692 ----------------------------------------------------------------- [00005] RELIANCE GROUP'S LARGEST UNSECURED CREDITORS ----------------------------------------------------------------- Entity Nature Of Claim Claim Amount ------ --------------- ------------ Wells Fargo Bank 9% Senior Notes $291,710,000 Gavin Wilkinson due Nov.15, 2000 Minnesota, N.A. MAC N9303 120 Sixth & Marquette Minneapolis, MN 55479 (612) 667 3777 HSBC Bank USA 9-3/4% Senior $171,770,000 Russ Paladino Subordinated Corporate Trust Debentures Administration due Nov.15, 2003 140 Broadway, 12th Floor New York, NY 10005-1180 (800) 975 4722 Lowell Freiberg Accrued Benefit $5,478,708 115 Central Park West Under RGH Benefit Apt. 11C Equalization Plan New York, NY 10023 (212) 769 4353 David Woodward Accrued Benefit $225,020 Under RGH Benefit Equalization Plan Fred Schriever Accrued Benefit $225,020 Under RGH Benefit Equalization Plan David Noyes Severance Pay $200,000 Credit Suisse First Boston Professional Fees $25,000 Bear, Stearns & Co., Inc Professional Fees $25,000 FIS Sale of $18,105 Publications Aetna U.S. Healthcare Insurance premiums, $8,103 service fee New York State Estimated $3,510 Tax Payment Oxford Health Plans Monthly medical $1,518 premium New York City Dept. Estimated $1,400 of Finance tax payment Saul Ewing LLP Restructuring $1,094 matters Aetna Life Insurance Group universal $986 life premium The Bank of New York Professional $855 services First Unum Life Group insurance $250 premium Intaboro Car services $250 Congressional Quarterly, Subscription fees $170 Inc. Mitchell's Newspaper delivery $126 Safeco Life Insurance Co. Insurance premium $121 Joseph D'Emilio Flexible spending $99 reimbursement for current employee Unum Life Insurance Co. Insurance premiums $44 Federal Express Delivery fees $39 Avaya Financial Services Telephone Lease Unknown Paul Minish, Verde Alleged violation Unknown Investments, Inc. of securities laws and Gary Kimmel Donald and Bonnie Lee Alleged violation Unknown Slok and Gary Kimmel of securities laws ----------------------------------------------------------------- [00005] OVERVIEW OF & TERM SHEET FOR THE PROPOSED RESTRUCTURING ----------------------------------------------------------------- Prior to commencing these chapter 11 cases, the Debtors negotiated with a committee representing approximately 50% of the aggregate principal amount of the Senior Notes and approximately 50% of the aggregate principal amount of the Subordinated Debentures and with representatives of Lenders holding, in aggregate, more than a majority in principal amount of the debt outstanding under the Credit Agreement, and reached agreement on the major economic terms of a plan of reorganization. The Pennsylvania Insurance Department has not approved the terms of the proposed restructuring. Overview -------- The terms of the Plan provide for the distribution of excess cash at RGH: (A) first, to the payment of administrative expenses of RGH and RFS, (B) second, to the payment of all priority claims, and (C) the remaining portion thereof to the holders of the RGH Debt Securities, the holders of certain general unsecured claims against RGH and RIC on a pro rata basis to be determined based on the claims of the holders of RGH Debt Securities and the General Unsecured Creditors as of November 15, 2000 and, in the case of RIC, its intercompany receivable from RGH as of September 30, 2000 less any payments made by RGH on account of priority claims in favor of the Internal Revenue Service attributable to RIC. Under the terms of the Plan, all outstanding common stock of RGH will be canceled, and reorganized RGH will issue 100% of its common stock to the holders of the RGH Debt Securities and the General Unsecured Creditors on a pro rata basis to be determined based on the claims of such creditors as of the Petition Date. In addition, all outstanding common stock of RFS will be canceled, and reorganized RFS will issue two new classes of common stock: (1) The Class A common stock of reorganized RFS will be issued to the Lenders and will represent 86% of the voting power of RFS and 86% of the entitlements to the Non-RIC Revenues, provided that an amount equal to the RIC Excess Cash, plus interest thereon calculated at a rate of LIBOR plus 87.5 basis points, shall be distributed first and solely to the Lenders holding such New RFS Class A Common Stock. The New RFS Class A Common Stock shall be subject to restrictions on transfers, redemptions and new issuances of New RFS Class A Common Stock during the period commencing on the date of the Consummation of the transactions contemplated by the Plan and ending on the second anniversary of the Effective Date. (The term "RIC Revenues" means all of the dividends and other distributions received by RFS from RIC, and the term "Non-RIC Revenues" means all of the revenues, profits and cash (and similar items) of RFS or any of its subsidiaries other than RIC Revenues.) (2) The Class B common stock of reorganized RFS will be issued to the holders of the RGH Debt Securities and the General Unsecured Creditors on a pro rata basis to be determined based on the claims of such creditors as of the Petition Date. The New RFS Class B Common Stock will represent 14% of the voting power of RFS and 14% of the Non-RIC Revenues, provided that an amount equal to the RIC Excess Cash, plus interest thereon calculated at a rate of LIBOR plus 87.5 basis points, shall be distributed from the Non-RIC Revenues first and solely to the Lenders holding the New RFS Class A Common Stock. After the date on which all of the New Notes shall have been repaid in full by indefeasible payments in cash, the holders of the New RFS Class B Common Stock shall also be entitled to 100% of the RIC Revenues. The New RFS Class B Common Stock shall be subject to restrictions on transfers, redemptions and new issuances of New RFS Class B Common Stock during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. All distribution to the holders of the RGH Debt Securities pursuant to the terms of the Plan will be allocated 85.4% to the holders of the Senior Notes and 14.6% to the holders of the Senior Subordinated Debentures. Under the terms of the Plan, the Lenders will also receive new notes issued by reorganized RFS on the Effective Date: (a) the New Notes will be issued in the aggregate principal amount of $237,750,000; (b) the New Notes will mature on the tenth anniversary of the Effective Date; (c) the New Notes will be payable solely from the RIC Revenues and subject to mandatory prepayments from the RIC Revenues; (d) interest on the New Notes will be paid quarterly in arrears in cash at a rate of LIBOR plus 87.5 basis points or in kind at a rate of LIBOR plus 287.5 basis points, at reorganized RFS' sole option; (e) the New Notes will be secured by a pledge of the stock of RIC; (f) the New Notes will be subject to restrictions on transfers and selective redemptions during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date; and (g) the aggregate principal amount of the New Notes, if issued after September 30, 2001, shall be increased on a daily basis thereafter up to and including the Effective Date at a rate equal to LIBOR plus 287.5 basis points. All other intercompany accounts will be canceled, provided that Reliance Development Group, a wholly-owned subsidiary of RGH, shall transfer to RGH on the Effective Date $5,000,000 in cash previously received by RDG in connection with a San Diego real estate development project. All other creditors and interest holders are unimpaired. Detailed Term Sheet ------------------- June 11, 2001 Preliminary and Tentative For Discussion Purposes Only RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES DEBT RESTRUCTURING TERM SHEET This term sheet sets forth a proposed debt restructuring transaction (the "Restructuring") involving Reliance Group Holdings, Inc. ("RGH") and Reliance Financial Services Company ("RFSC") through a pre-negotiated Chapter 11 case on the terms set forth herein. The relevant elements of the existing capital structures of RGH, RFSC, Reliance Development Group ("RDG"), Reliance Development Group of Glendale ("RDGG") (collectively, the "Company") and Reliance Insurance Company and its subsidiaries ("RIC") are outlined below estimated as of November 15, 2000, except as otherwise indicated. {Note 1} Please note that the terms of this term sheet are an integrated compromise and are not divisible. Nothing contained in the attached term sheet shall constitute an offer susceptible of an acceptance of a legally binding obligation of the Banks (as defined below) or any other party in interest. The term sheet is being provided to you in furtherance of settlement discussions and, accordingly, should not be disclosed to any party or person and, pursuant to applicable law, should not be offered into evidence. DESCRIPTION OF EXISTING CAPITAL STRUCTURES RGH (i) Priority claims including the claim in favor of the Internal Revenue Service as a result of potential audit adjustments or otherwise (the "IRS Obligation"); (ii) $304.8 million claim amount (reflecting $291.7 million face amount plus $13.1 million accrued interest as of November 15, 2000) of 9.00% Senior Notes due November 15, 2000 (the "Senior Notes"); (iii) $180.2 million claim amount (reflecting $171.8 million face amount plus $8.4 million accrued interest as of November 15, 2000) of 9.75% Senior Subordinated Debentures due November 15, 2003 (the "Senior Subordinated Debentures" together with the Senior Notes, the "Bonds"); (iv) $284.9 {Note 2} million intercompany obligation to RIC (the "RIC Claim") {Note 3}; (v) allowed general unsecured claims against RGH (the "General Unsecured Claims") {Note 4}; and (vi) 118,165,295 shares of issued and outstanding common stock (the "Old RGH Stock"). RFSC (i) Priority claims including the IRS Obligation; (ii) $237.75 million claim amount (reflecting $237.5 million face amount plus $247,000 accrued interest as of November 15, 2000) of bank debt (the "Bank Debt") owing under that certain Credit Agreement between RFSC and certain lenders party thereto dated as of November 1, 1993, as amended and restated as of April 25, 1995, and as further amended, modified and/or otherwise supplemented from time to time; (iii) $49.8 million intercompany obligation to RGH (the "RFSC/RGH Obligation"); and (iv) 1,000 shares of issued and outstanding common stock (the "Old RFSC Stock") 100% owned by RGH. RDG (i) Priority claims including the IRS Obligation; (ii) $65.8 million intercompany obligation to RGH (the "RDG/RGH Obligation"); and (iii) 100 shares of issued and outstanding common stock (the "RDG Stock") 100% owned by RGH. RDGG (i) Priority claims including the IRS Obligation; (ii) $12.0 million intercompany obligation to RIC (the "RDGG/RIC Obligation"); and (iii) 10,000 shares of issued and outstanding common stock (the "RDGG Stock") 100% owned by RDG. RIC (i) Priority claims including the IRS Obligation; and (ii) 44,586,783 shares of issued and outstanding common stock (the "RIC Stock") 100% owned by RFSC. TREATMENT OF CLAIMS {Note 5} The Banks: The Banks will receive (i) the New Notes (as defined below), and (ii) 100% of the class A common stock of RFSC (the "New RFSC Class A Common Stock"). The Bondholders, etc.: The holders of the Bonds (the "Bondholders") and the holders of the General Unsecured Claims (the "General Unsecured Creditors") will receive (i) 100% of the class B common stock of RFSC (the "New RFSC Class B Common Stock"), {Note 6} 100% of the common stock of RGH (the "New RGH Common Stock") and (iii) a pro rata portion of the Excess Cash (as defined below) available after reserves are established. The Bondholders' share of the Excess Cash (and other distributions pursuant to the plan of reorganization of RGH) will be allocated 85.4% to the holders of the Senior Notes and 14.6% to the Senior Subordinated Debentures. Old RGH Stock, etc.: After RFSC emerges from bankruptcy, the Old RFSC Stock and all other equity interests in RFSC (including options and warrants to acquire equity interests in RFSC) shall be canceled unless expressly provided for herein. Similarly, after RGH emerges from bankruptcy, the Old RGH Stock and all other equity interests in RGH (including options and warrants to acquire equity interests in RGH) shall be canceled unless expressly provided for herein. Intercompany Obligations: All intercompany obligations (other than the Services Agreement, dated March 16, 2001, between RIC and RGH) shall be canceled. DESCRIPTION OF ELEMENTS OF PROPOSED NEW CAPITAL STRUCTURE New Notes: The holders of the Bank Debt (the "Banks") will receive new notes issued by RFSC (each, a "New Note" and, collectively, the "New Notes"), the terms of which shall be in form and substance satisfactory to the Banks in their sole discretion, but in any event shall provide that: (a) the New Notes will be issued in the aggregate principal amount of $237.75 million; {Note 7} (b) the New Notes will be issued on the effective date of a plan of reorganization for RFSC (the "Effective Date"); (c) the New Notes will mature on the 10th anniversary of the Effective Date; (d) the New Notes shall be payable solely from the RIC Revenues (as defined below) and shall be subject to mandatory prepayments from the RIC Revenues; (e) interest on the New Notes will be paid quarterly in arrears in cash at a rate of LIBOR plus 87.5 basis points or in kind at a rate of LIBOR plus 287.5 basis points, at RFSC's sole option; {Note 8} (f) the New Notes will be secured by a pledge of the stock of RIC; and (g) the New Notes shall be subject to restrictions on transfers and selective redemptions during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date, provided that any such transfers or selective redemptions which are approved by the Board of RFSC (as defined below) shall be permitted. New RFSC Class A Common Stock: The terms of the New RFSC Class A Common Stock shall be satisfactory to the Banks and the Bondholders in their sole discretion but in any event shall nclude (in the aggregate) (x) 86% of the voting power of RFSC, (y) 86% of the entitlements to the Non-RIC Revenues (as defined below), provided that an amount equal to the RIC Excess Cash plus interest thereon calculated at a rate of LIBOR plus 87.5 basis points shall be distributed first and solely to the Banks holding such New RFSC Class A Common Stock, and (z) restrictions on transfers, redemptions and new issuances of New RFSC Class A Common Stock during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date, provided that any such transfers, redemptions or issuances which are approved by the Board of RFSC (as defined below) shall be permitted. As used herein, (i) the term "RIC Revenues" shall mean all of the dividends and other distributions received by RFSC from RIC and (ii) the term "Non-RIC Revenues" shall mean all of the revenues, profits and cash (and similar items) of RFSC or any of its subsidiaries (other than RIC Revenues). New RFSC Class B Common Stock: The terms of the New RFSC Class B Common Stock shall be satisfactory to the Banks and the Bondholders in their sole discretion but in any event shall include (in the aggregate) (w) 14% of the voting power of RFSC, (x) 14% of the Non-RIC Revenues, {Note 9} provided that an amount equal to the RIC Excess Cash plus interest thereon calculated at a rate of LIBOR plus 87.5 basis points shall be distributed from the Non-RIC Revenues first and solely to the Banks holding New RFSC Class A Common Stock, (y) after the date on which all of the New Notes shall have been repaid in full by indefeasible payments in cash, 100% of the RIC Revenues and (z) restrictions on transfers, redemptions and new issuances of New RFSC Class B Common Stock during the period commencing on the Effective Date and ending on the second anniversary of the Effective Date, provided that any such transfers or issuances which are approved by the Board of RFSC (as defined below) shall be permitted. {Note 10} New RGH Common Stock: The terms of the New RGH Common Stock shall be satisfactory to the Banks and the Bondholders in their sole discretion. Deconsolidation Option: Notwithstanding anything to the contrary contained in this term sheet, if, upon the vote of (x) the Banks holding a majority of the Bank Debt or (y) the Bondholders holding a majority of the Bonds, RFSC and RIC are not deconsolidated from RGH, then (i) RGH and RFSC will merge (with RGH surviving), (ii) the New Class A Common Stock and the New Class B Common Stock will be issued by RGH instead of RFSC, provided that the holders of such New Class B Common Stock shall also be entitled to all of the dividends and other distributions received by RGH from RDG, (iii) the New RGH Common Stock will not be issued and (iv) if the Bondholders elected not to proceed with the deconsolidation pursuant to preceding clause (y), the Banks shall be entitled to 100% of the Non-RIC Revenues. MISCELLANEOUS ITEMS Excess Cash: The excess cash available at RGH11 shall be applied (i) first, to the payment of administrative expenses of RGH and RFSC, (ii) second, to the payment of all priority claims, and (iii) the remaining portion thereof (the "Excess Cash") {Note 12} shall be distributed to (a) the Bondholders, (b) the General Unsecured Creditors and (c) RIC on a pro rata basis to be determined based on the claims of the Bondholders and the General Unsecured Creditors on November 15, 2000 and, in the case of RIC, the RIC Claim (the amount so distributed to RIC being herein referred to as the "RIC Excess Cash"). {Note 13} The Bondholders, the General Unsecured Creditors and RIC shall receive their respective shares of the Excess Cash as soon as practicable after the later of (i) the effective date of a plan of reorganization of RGH and (ii) the fixing and payment of all administrative and priority claims. Corporate Governance: All of the corporate governance provisions will be subject to applicable regulatory requirements and approvals and applicable state law, including but not limited to 40 P.S. 991.1401 et seq. in respect of insurance holding companies and 40 P.S. 221.14 et seq. in respect of domestic insurers in rehabilitation proceedings. The new boards of directors for RGH and RFSC (collectively, the "Boards") each will be composed of ten (10) members. The Banks will select nine (9) of the directors for each of the Boards and the Bondholders will select one (1) director for each of the Boards, consistent with applicable regulatory requirements and applicable state law. Alternatively, each of the Boards may be composed of less than ten (10) members, in which case the Banks may select less than nine (9) of the directors for each of the Boards and the Bondholders will select one (1) director for each of the Boards, provided that the voting rights amongst the directors will be weighted such that in the aggregate the directors selected by the Banks will have 86% of the voting rights and the director selected by the Bondholders will have 14% of the voting rights with respect to each Board. This division of the Boards shall continue for so long as any of the New Notes remain outstanding. There will be no supermajority voting restrictions in any of the charter documents for RFSC or RGH. The Banks will select (a) the new chairman for each of the Boards and (b) the new chief executive officer for each of RFSC and RGH. The Bondholders have selected Goldin Associates to be placed at RGH from the RGH Petition Date to the effective date of RGH's plan of reorganization in order to monitor, and report on, the operations of RGH during RGH's Chapter 11 case. Goldin Associates shall not have any authority or responsibility over the plan process and shall not charge fees in excess of $25,000 per month for such services. Intercompany Claims: All intercompany claims between any of RGH, RFSC, RIC, RDG and RDGG, shall be canceled; provided that RGH and RDG shall agree that, on the effective date of RGH's plan of reorganization, RDG shall transfer to RGH $5 million previously received by RDG in connection with the San Diego real estate development project. The parties hereto acknowledge that any payments received by RDG from Reliance Oriental Warehouse LLC, a Delaware single member limited liability company whose sole member is RIC ("ROW"), pursuant to the Development Agreement, dated as of August 1, 2000 (the "Development Agreement"), between RDG and ROW are for the benefit of the officers and employees of RDG in consideration for their services in connection with the construction project contemplated by the Development Agreement, and the parties hereto agree that they shall not object to the distribution of any such payments to such officers and employees. Administrative Fees: The administrative fees of RGH and RFSC (including, without limitation, the fees and expenses of the financial advisors and legal counsel for RGH and/or RFSC and any creditors for whom RGH and/or RFSC pays certain fees) will have been paid currently prior to commencement of the case effecting the Restructuring and, to the extent incurred after the commencement of the case, said fees will be paid during the case. Any outstanding administrative fees outstanding at the Effective Date, shall be paid in cash at that time. In order to preserve the possibility of recoveries to RGH on account of its direct or indirect ownership interests in RFSC and related property rights, the parties confirm that they will support a request to have RGH pay the administrative expenses of RFSC as being in the best interests of RGH, its creditors, and estates by reason of the need to facilitate the orderly administration of the Chapter 11 Cases with all constituent parties adequately represented. Tax Allocation Agreement: The Tax Allocation Agreement between RGH and RIC will be terminated as of the Effective Date. Commissioner: Although the parties have communicated with, and seek the support of, the Commissioner of the Insurance Department for the Commonwealth of Pennsylvania (the "Commissioner") concerning the terms and conditions herein, the Commissioner to date has not approved this term sheet. Documentation: Any agreement shall be subject to the negotiation, execution and delivery of definitive documentation setting forth the terms of the transactions outlined herein. * * * {Note 1} The use of November 15, 2000 in this term sheet for calculating accrued interest on the Bonds (as defined below) and the Bank Debt (as defined below) is solely for illustrative purposes. The actual claim amounts that will be used for purposes of a plan of reorganization for RGH and RFSC (but not for purposes of determining allocations of Excess Cash, which shall be determined based on claim amounts as of November 15, 2000) will include interest accrued through the dates of filing of bankruptcy petitions for RGH and RFSC (the "RGH Petition Date" and "RFSC Petition Date", respectively). {Note 2} Reflects the Company's estimate as of October 27, 2000. Includes $268 million in tax claims, $1.7 million in general payables from RGH to RIC, $15.2 million in loans and interest due from RGH to RCG Information Technology, Inc. {Note 3} For all purposes of this term sheet, the RIC Claim shall be fixed at $284.9 million less that portion of the IRS Obligation paid by RGH and which is attributable to RIC. {Note 4} Although the term sheet references that distributions will be made to holders of General Unsecured Claims, it should be noted that certain claims of "insiders" may be subject to challenge. Therefore, any references herein to distributions to holders of General Unsecured Claims should be deemed to refer to only such claims as are allowed pursuant to a final order of the bankruptcy court. RGH and RFSC recognize and agree that the Bonds and the Banks shall have standing to review claims, including Priority Claims and General Unsecured Claims, and if appropriate to object to, or participate in the litigation and/or settlement of, any such claims. {Note 5} In summary, this term sheet contemplates that RFSC and RIC will deconsolidate from RGH. As a result of the RFSC bankruptcy, the Banks will receive (i) the New Notes in an aggregate principal amount equal to the Bank Debt (it being understood and agreed that accrued interest on the Bank Debt which shall have accrued from November 16, 2000 through the Petition Date shall be forgiven in exchange for the New RFSC Class A Common Stock), (ii) 86% voting control of RFSC, and (iii) 100% of the Non-RIC Revenues until the Banks have received an amount equal to the RIC Excess Cash (plus interest thereon), and thereafter, 86% of the Non-RIC Revenues, and the Bondholders and the General Unsecured Creditors will receive, indirectly through RGH until RGH itself emerges from bankruptcy (and thereafter, directly on a going forward basis), (i) a pro rata share of the Excess Cash, (ii) 14% voting control of RFSC, (iii) 14% of the Non-RIC Revenues (after the Banks have received an amount equal to the RIC Excess Cash, plus interest thereon), (iv) 100% of the dividend entitlements to all other economic benefits, after repayment in full of the New Notes and (v) when RGH itself merges from bankruptcy, 100% of the New RGH Common Stock. If, upon the vote of (x) the Banks holding a majority of the Bank Debt or (y) the Bondholders holding a majority of the Bonds, such deconsolidation does not occur, then (i) RGH and RFSC will merge (with RGH surviving), (ii) the New Class A Common Stock and the New Class B Common Stock will be issued by RGH instead of RFSC, provided that the holders of such New Class B Common Stock shall also be entitled to all of the dividends and other distributions received by RGH from RDG, (iii) the New RGH Common Stock will not be issued and (iv) if the Bondholders elect not to proceed with the deconsolidation pursuant to preceding clause (y), the Banks shall be entitled to 100% of the Non-RIC Revenues. {Note 6} The distribution of the New RFSC Class B Common Stock will be made initially to RGH and upon RGH's emergence from bankruptcy such stock will be distributed to the Bondholders and General Unsecured Creditors directly. {Note 7} The Restructuring as it relates to RFSC is structured to preserve an unrestricted ability to use the Company's net operating losses attributable to RIC in future taxable periods by qualifying under a "bankruptcy exception". In order to qualify for this exception, the "old and cold" Banks (generally, those Banks that have held their Bank Debt for at least 18 months before the RFSC Petition Date) will in the aggregate have to receive, in full or partial satisfaction of the debt owing to such Banks (including accrued interest on such debt), stock representing at least 50% of the vote and value of RFSC immediately after it has emerged from bankruptcy (the "old and cold test"). Accordingly, the Banks have agreed to forgo a portion of the accrued pre-petition interest on the Bank Debt in connection with the Restructuring. {Note 8} The aggregate principal amount of the New Notes shall, if issued after September 30, 2001, be increased on a daily basis thereafter up to and including the Effective Date at a rate equal to LIBOR plus 287.5 basis points. {Note 9} Shall be forfeited in the event that the Bondholders elect not to proceed with the deconsolidation. {Note 10} In order to satisfy the old and cold test and therefore qualify under the bankruptcy exception, the respective terms of the New RFSC Class A Common Stock and New RFSC Class B Common Stock will be designed to ensure that the old and cold Banks receive stock representing at least 50% of the vote and value of RFSC immediately after it has emerged from bankruptcy by providing all Banks (including Banks that are not old and cold) with 86% of the vote and value of RFSC on a pro rata basis. Approximately 58.91% of the Banks are currently old and cold. Therefore, the Banks must receive at least 84.875% of the vote and value of reorganized RFSC to satisfy the old and cold test. However, satisfaction of the old and cold test will ultimately be dependent on a valuation that concludes that the New RFSC Class A Common Stock is worth at least 84.875% of the total value of the New RFSC Class A Common Stock and New RFSC Class B Common Stock. {Note 11} Determined after pre-petition payments by RGH to the RGH pension plan in an aggregate amount of up to $2,000,000. {Note 12} It is intended that Excess Cash (as defined herein) shall include all cash contained in Reliance's calculation of "Available Cash for Distribution" notwithstanding that such cash may be held by an entity other than RGH. {Note 13} In the event that the Commissioner seeks to claim a greater share of the Excess Cash (calculated after giving effect to footnote 3), the Bondholders shall be permitted to challenge any such claim, and neither the Banks nor the Company shall take any position (other than a neutral position) with respect to any such challenge by the Bondholders. *** End of Issue No. 1 ***