<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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 1-8278
RELIANCE GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3082071
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
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
--- ---
As of August 1, 1997, 114,709,000 shares of common stock of Reliance Group
Holdings, Inc. were outstanding.
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
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<TABLE>
<CAPTION>
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Quarters and Six-Month
Periods Ended June 30, 1997 and 1996 (Unaudited).......................................... 2
Consolidated Balance Sheet at June 30, 1997 (Unaudited) and
December 31, 1996......................................................................... 3
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 1997 (Unaudited).......................................... 4
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 1997 and 1996 (Unaudited).......................................... 5
Notes to Consolidated Financial Statements (Unaudited)......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 9
PART II. OTHER INFORMATION, AS APPLICABLE.......................................................... 14
SIGNATURES.............................................................................................. 16
</TABLE>
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
--------- ----------- ----------- -----------
===================================================================================================================================
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned .............................................. $ 689,929 $ 636,752 $ 1,332,124 $ 1,246,619
Net investment income ........................................ 70,644 70,443 144,923 141,160
Gain on sales of investments ................................. 13,431 18,936 28,735 23,404
Other ........................................................ 65,558 41,765 115,725 80,499
--------- ----------- ----------- -----------
839,562 767,896 1,621,507 1,491,682
--------- ----------- ----------- -----------
Claims and expenses:
Policy claims and settlement expenses ........................ 326,036 440,360 645,262 757,067
Policy acquisition costs and other insurance expenses ........ 359,666 334,695 689,128 640,190
Interest ..................................................... 22,106 22,015 44,226 44,272
Other operating expenses ..................................... 76,742 52,339 137,847 101,978
--------- ----------- ----------- -----------
784,550 849,409 1,516,463 1,543,507
--------- ----------- ----------- -----------
Income (loss) before income taxes and equity
in investee company ...................................... 55,012 (81,513) 105,044 (51,825)
Income tax (provision) benefit ............................... (17,800) 30,900 (33,500) 21,700
Equity in investee company ................................... 2,350 2,912 3,904 4,936
--------- ----------- ----------- -----------
Income (loss) from continuing operations ..................... 39,562 (47,701) 75,448 (25,189)
Litigation settlement of discontinued operation .............. -- -- (7,500) --
--------- ----------- ----------- -----------
Net income (loss) ............................................ $ 39,562 $ (47,701) $ 67,948 $ (25,189)
========= =========== =========== ===========
Per share information:
Income (loss) from continuing operations ..................... $ .33 $ (.41) $ .63 $ (.21)
Litigation settlement of discontinued operation .............. -- -- (.06) --
--------- ----------- ----------- -----------
Net income (loss) ............................................ $ .33 $ (.41) $ .57 $ (.21)
========= =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding .......................... 120,172 117,610 119,844 117,552
</TABLE>
See notes to consolidated financial statements
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RELIANCE GROUP HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1997 1996
============================================================================================
(In thousands, except per share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $814,335 and $801,738) ............... $ 802,585 $ 787,836
Fixed maturities available for sale - at quoted market
(amortized cost $2,558,810 and $2,595,929) .......... 2,588,352 2,623,669
Equity securities - at quoted market (cost $420,989
and $436,053) ....................................... 719,923 716,606
Short-term investments ................................. 174,430 319,165
Cash ........................................................ 46,807 40,853
Premiums and other receivables .............................. 1,438,063 1,250,331
Reinsurance recoverables .................................... 3,944,321 3,576,953
Investments in real estate - at cost, less accumulated
depreciation ........................................... 273,372 286,664
Investment in investee company .............................. 160,558 159,157
Deferred policy acquisition costs ........................... 230,643 215,438
Excess of cost over fair value of net assets acquired, less
accumulated amortization .............................. 244,474 249,464
Other assets ................................................ 433,811 364,995
------------ ------------
$ 11,057,339 $ 10,591,131
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
============================================================================================
Unearned premiums ........................................... $ 1,659,426 $ 1,468,299
Unpaid claims and related expenses .......................... 6,738,987 6,530,258
Accounts payable and accrued expenses ....................... 526,026 578,002
Reinsurance ceded premiums payable .......................... 384,388 365,412
Federal and foreign income taxes, including deferred taxes .. 104,203 70,948
Term loans and short-term debt .............................. 239,542 236,167
Debentures and notes ........................................ 665,365 665,365
------------ ------------
10,317,937 9,914,451
------------ ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per share, 225,000
shares authorized, 114,703 and 114,282 shares
issued and outstanding ............................... 11,470 11,428
Additional paid-in capital ............................. 542,717 540,465
Retained earnings (deficit) ............................ (400) (50,012)
Net unrealized gain on investments ..................... 211,549 198,786
Net unrealized loss on foreign currency translation .... (25,934) (23,987)
------------ ------------
739,402 676,680
------------ ------------
$ 11,057,339 $ 10,591,131
============ ============
</TABLE>
See notes to consolidated financial statements
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Retained Unrealized Foreign
Common Paid-In Earnings Gain on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
===========================================================================================================================
(In thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ................ $11,428 $ 540,465 $ (50,012) $ 198,786 $ (23,987) $ 676,680
Issuance of common stock ................ 42 1,738 1,780
Transactions of investee
company ............................ 514 (479) 35
Net income .............................. 67,948 67,948
Dividends ($.16 per share) .............. (18,336) (18,336)
Appreciation after deferred
income taxes ....................... 13,242 13,242
Foreign currency translation ............ (1,947) (1,947)
------- ---------- --------- ----------- ----------- -------------
Balance, June 30, 1997 .................. $11,470 $ 542,717 $ (400) $ 211,549 $ (25,934) $ 739,402
======= ========== ========= =========== =========== =============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 1997 1996
===============================================================================
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES .......... $(139,881) $ (72,582)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale .......... 273,195 526,810
Equity securities ............................ 176,519 214,307
Maturities and repayments of:
Fixed maturities available for sale .......... 152,203 45,317
Fixed maturities held for investment ......... 15,298 24,790
Purchases of:
Fixed maturities available for sale .......... (372,552) (724,354)
Fixed maturities held for investment ......... (31,568) (42,976)
Equity securities ............................ (143,772) (202,061)
Decrease in short-term investments - net ......... 149,092 250,256
Other - net ...................................... (58,679) (34,300)
--------- ---------
159,736 57,789
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in term loans ........................... 40,000 30,894
Increase (decrease) in short-term debt - net ..... 3,390 (3,606)
Repayments of term loans ......................... (40,735) (10,241)
Issuance of common stock ......................... 1,780 4,932
Dividends ........................................ (18,336) (18,253)
--------- ---------
(13,901) 3,726
--------- ---------
Increase (decrease) in cash ...................... 5,954 (11,067)
Cash, beginning of period ........................ 40,853 52,914
--------- ---------
Cash, end of period .............................. $ 46,807 $ 41,847
========= =========
Supplemental disclosures of cash flow information:
Interest paid .................................... $ 37,500 $ 38,100
========= =========
Income taxes paid ................................ $ 12,500 $ 2,900
========= =========
See notes to consolidated financial statements
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at June 30,
1997, and the results of operations, changes in shareholders' equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1996) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.4 million and $3.9
million for the second quarter and first six months of 1997 compared to $2.9
million and $4.9 million in the corresponding 1996 periods.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
Six Months Ended June 30 1997 1996
---------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues ................................. $299,057 $268,227
Income from continuing operations
before income taxes ................... 22,943 35,065
Net income ............................... 15,000 23,100
Net income per share ..................... .84 1.30
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<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------
1997 1996
--------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Direct ....................... $ 1,705,811 $ 1,573,762 $ 1,464,406 $ 1,394,503
Assumed ...................... 230,121 183,815 181,028 163,302
Ceded ........................ (916,135) (812,156) (730,179) (678,993)
----------- ----------- ----------- -----------
Net Premiums ................. $ 1,019,797 $ 945,421 $ 915,255 $ 878,812
=========== =========== =========== ===========
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Gross ...................................................... $ 1,163,635 $ 1,120,321
Reinsurance recoveries ..................................... (537,118) (395,067)
----------- -----------
Net policy claims and settlement expenses .................. $ 626,517 $ 725,254
=========== ===========
</TABLE>
For the six months ended June 30, 1996, gross policy claims and settlement
expenses included a charge of $134.5 million and net policy claims and
settlement expenses included a charge of $134.0 million to increase property and
casualty insurance loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987.
4. LEGAL PROCEEDINGS OF DISCONTINUED OPERATION
On June 13, 1997, a Judgment was entered dismissing the claims asserted by the
Superintendent of Insurance of New York against Frank B. Hall & Co. Inc.
("Hall") and the other Hall defendants in the action described in note 14 of the
Company's 1996 Annual Report. The Judgment approves the amended settlement
agreement described in note 4 of the Company's Report on Form 10-Q for the
quarterly period ended March 31, 1997. In connection with the amended settlement
agreement, the Company recorded a charge of $7.5 million in the first six months
of 1997 which was classified as a charge pertaining to a discontinued operation.
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<PAGE>
5. ADOPTION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This Statement
requires dual presentation of basic and diluted income per share. Basic income
per share is computed by dividing net income by the weighted average common
shares outstanding for the period. Diluted income per share reflects the
potential dilution that could occur if securities, such as stock options, were
exercised or otherwise converted into common stock. This Statement will be
effective for financial statements for periods ending after December 15, 1997
and early application is not permitted.
Pro forma income per share, assuming the Company had adopted the Statement
effective January 1, 1996, is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
----- ----- ------ ------
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic income (loss) per share:
Income (loss) from continuing operations ......... $ .35 $(.42) $ .66 $ (.22)
Litigation settlement of discontinued operation... -- -- (.07) --
----- ----- ------ ------
Net income (loss) ................................ $ .35 $(.42) $ .59 $ (.22)
===== ===== ====== ======
Diluted income (loss) per share:
Income (loss) from continuing operations ......... $ .33 $(.42) $ .63 $ (.22)
Litigation settlement of discontinued operation... -- -- (.06) --
----- ----- ------ ------
Net income (loss) ................................ $ .33 $(.42) $ .57 $ (.22)
===== ===== ====== ======
</TABLE>
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<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales
of investments, of $30.8 million ($.26 per share) and $56.8 million ($.47
per share) in the second quarter and first six months of 1997, compared
to operating losses of $60.0 million ($.51 per share) and $40.4 million
($.34 per share) in the corresponding 1996 periods. The 1996 losses
resulted from a second quarter after-tax charge of $87.1 million ($.74
per share) to increase property and casualty net loss reserves for
asbestos-related and environmental pollution claims. Excluding the
effects of this charge, income from operations was $27.1 million ($.23
per share) and $46.7 million ($.40 per share) in the quarter and six
months ended June 30, 1996. The improved results in 1997, when compared
to 1996 and excluding the effects of the $87.1 million charge to
strengthen net loss reserves, reflect increased operating profits in the
title insurance operations.
Net income was $39.6 million ($.33 per share) and $67.9 million ($.57 per share)
in the three months and six months ended June 30, 1997 which includes after-tax
gains on sales of investments of $8.7 million ($.07 per share) and $18.7 million
($.16 per share), respectively. Net income for the first six months of 1997 also
includes a charge of $7.5 million ($.06 per share) for a litigation settlement
pertaining to a subsidiary which was discontinued in 1991. (See note 4 to the
accompanying unaudited consolidated financial statements). The net losses were
$47.7 million ($.41 per share) and $25.2 million ($.21 per share) in the second
quarter and first six months of 1996 which included after-tax gains on sales of
investments of $12.3 million ($.10 per share) and $15.2 million ($.13 per
share), respectively.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written in the quarter and six months ended June 30, 1997 increased
to $512.5 million and $1.02 billion from $439.8 million and $915.3 million in
the corresponding 1996 periods. Net premiums earned in the quarter and six
months ended June 30, 1997 likewise increased to $485.1 million and $945.4
million from $439.0 million and $878.8 million in the corresponding 1996
periods. These increases in premiums written and premiums earned resulted from
growth in both domestic and international operations, and reflect increased
writings in workers' compensation, ocean and inland marine, general liability,
surety and accident and health lines, as well as premiums generated from the
start-up of the Company's non-standard automobile insurance business.
Underwriting losses for the second quarter and first six months of 1997 were
$6.7 million and $13.8 million and the combined ratios (calculated on a GAAP
basis), after policyholders' dividends, were 100.6% and 100.9%. The strong
underwriting results in 1997 reflect continued underwriting profits in surety,
workers' compensation, general liability and ocean and inland marine lines of
business. Underwriting losses for the second quarter and first six
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<PAGE>
months of 1996 were $140.7 million and $150.8 million, and the combined ratios
were 131.6% and 116.8%. Included in the 1996 underwriting results is a second
quarter pretax charge of $134.0 million to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in or
before 1987. Excluding the effects of this pretax charge, underwriting losses
were $6.7 million and $16.8 million in the second quarter and first six months
of 1996 and the combined ratios were 101.1% and 101.6%.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations was
$62.8 million and $129.2 million in the three-month and six-month periods ended
June 30,1997 compared to $63.0 million and $126.3 million in the corresponding
1996 periods. The changes in net investment income in 1997, when compared to the
prior year, reflects growth in the size of the fixed maturity investment
portfolio which, in the second quarter of 1997, was offset by the effects of
lower interest rates.
Gains on sales of investments were $13.3 million and $27.6 million in the second
quarter and first six months of 1997 compared to $19.9 million and $23.8 million
in the corresponding 1996 periods. These gains primarily resulted from sales of
equity securities.
TITLE INSURANCE OPERATIONS
Premiums and fees in the second quarter and first six months of 1997 were $204.8
million and $386.7 million compared to $197.7 million and $367.8 million in the
corresponding 1996 periods. The increase in premiums and fees in 1997 reflect
the continued strong residential resale markets and commercial real estate
markets.
Agency commissions in the second quarter and first six months of 1997 were $86.2
million and $170.4 million compared to $88.7 million and $164.5 million in the
corresponding 1996 periods. Other expenses increased to $100.0 million and
$190.4 million in the second quarter and first half of 1997 from $90.9 million
and $174.7 million in the corresponding 1996 periods reflecting increased
employee compensation expense due to the higher levels of business activity. The
expense ratios of the title insurance operations (which includes agent
commissions) were 90.4% and 92.8% in the second quarter and first six months of
1997 compared to 90.2% and 91.5% in the corresponding 1996 periods. The
provision for claim losses was $10.0 million and $18.7 million in the second
quarter and first six months of 1997 compared to $17.2 million and $31.8 million
in the corresponding 1996 periods. The title insurance operations have
benefitted from favorable paid claims experience in recent years, a trend which
is expected to continue.
INVESTMENT PORTFOLIO
At June 30, 1997, the Company's investment portfolio aggregated $4.0 billion (at
cost), of which 11% was invested in equity securities. The Company seeks to
maintain a diversified
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<PAGE>
and balanced fixed maturity portfolio representing a broad spectrum of
industries and types of securities. The portfolio is managed to achieve a proper
balance of safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At June 30, 1997, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $457.4 million (13% of the fixed income portfolio) and $142.8 million (4%
of the fixed income portfolio), respectively. Substantially all of the Company's
non-investment grade and non-rated securities are classified as available for
sale and, accordingly, are carried at market value.
OTHER OPERATIONS
RCG International, Inc. ("RCG"), a subsidiary of the Company, primarily provides
technical services in the information technology industry. Information
technology revenues increased to $46.4 million and $84.8 million in the second
quarter and first six months of 1997 from $32.9 million and $63.2 million in the
corresponding 1996 periods resulting from increased assignments from existing
and new clients. Information technology operating expenses were $46.3 million
and $84.7 million in the second quarter and first six months of 1997 compared to
$32.0 million and $61.3 million in the corresponding 1996 periods. The increase
in operating expenses resulted from higher employee compensation expense
associated with the increased revenues and higher selling, recruiting and
administrative costs associated with building the infrastructure of the
information technology operations. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of operations.
At June 30, 1997, the Company's real estate operations had holdings with a
carrying value of $273.4 million, which includes nine shopping centers with an
aggregate carrying value of $117.6 million, office buildings and other
commercial properties, with an aggregate carrying value of $92.8 million, and
undeveloped land with a carrying value of $63.0 million.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $2.4 million and $3.9 million in the
three-month and six-month periods ending June 30, 1997 compared to $2.9 million
and $4.9 million in the corresponding 1996 periods from the Company's investment
in Zenith National Insurance Corp. ("Zenith"). The decline in investee company
income reflects increased underwriting losses by Zenith.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These payments aggregated $72.7 million for
the six months ended June 30, 1997. The Company's ability to receive cash
dividends has depended upon and continues to depend upon the dividend paying
ability of its insurance subsidiaries. The Insurance Law of Pennsylvania, where
Reliance Insurance Company (the Company's principal property and casualty
insurance subsidiary) is domiciled, limits the maximum amount of dividends which
may be paid without approval by the Pennsylvania Insurance Department. Under
such law, Reliance Insurance Company may pay dividends during the year equal to
the greater of (a) 10% of the preceding year-end policyholders' surplus or (b)
the preceding year's statutory net income. Furthermore, the Pennsylvania
Insurance Department has broad discretion to limit the payment of dividends by
insurance companies. There is no assurance that Reliance Insurance Company will
meet the tests in effect from time to time under Pennsylvania law for the
payment of dividends without prior Insurance Department approval or that any
requested approval will be obtained. Reliance Insurance Company has been advised
by the Pennsylvania Insurance Department that any required approval will be
based upon a solvency standard and will not be unreasonably withheld. Any
significant limitation of Reliance Insurance Company's dividends would adversely
affect the Company's ability to service its debt and to pay dividends on its
common stock.
Total common stock dividends paid by Reliance Insurance Company during the first
six months of 1997 were $58.9 million. During 1997, $118.5 million would be
available for dividend payments by Reliance Insurance Company under Pennsylvania
law. The Company believes such amount will be sufficient to meet its cash needs.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. For the six months ended June 30, 1997, Reliance Insurance
Company utilized $88.5 million of cash flow for operating activities. Operating
cash flow is traditionally low during the first half of the year, reflecting
the increase in accounts receivable and payments of certain expenses, such as
premium taxes and contingent commissions of the property and casualty insurance
operations, which are accrued during the previous year. Reliance Insurance
Company carefully monitors its cash, short-term investments and marketable
securities to maintain adequate balances for timely payment of claims and other
operating requirements. At June 30, 1997, Reliance Insurance Company had $215.1
million of cash and short-term investments.
For the six months ended June 30, 1997, the Company utilized $139.9 million of
cash flow for operating activities compared to $72.6 million in the
corresponding 1996 period. The decline in operating cash flow reflects higher
payments for property and casualty policy claims and related expenses and lower
levels of operating cash flow from the title insurance operations.
The Company generated $159.7 million of cash flow from investing activities for
the six months ended June 30, 1997 compared to $57.8 million in the
corresponding 1996 period.
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<PAGE>
Net sales of marketable securities generated $218.4 million of cash flow in 1997
compared to $92.1 million in the corresponding 1996 period.
For the six months ended June 30, 1997, the Company used $13.9 million of cash
flow for financing activities, principally for the payment of dividends. The
Company generated $3.7 million of cash flow from financing activities for the
six months ended June 30, 1996, primarily from term loan borrowings. On July 8,
1997, the Company increased term loan borrowings by $25 million to $187.5
million. The additional borrowings were used to redeem all outstanding 7.866%
senior reset notes, due December 1, 2000. The outstanding principal amount of
such notes was $25 million, including $9.6 million held by Reliance Insurance
Company. The redemption price was 100% of the principal amount of such notes
plus interest from June 1, 1997 to the redemption date.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At June 30, 1997,
borrowings aggregating $35 million were outstanding under this facility.
Certain current and former senior executives of the Company are limited
partners in a partnership which owns various real estate properties. The
general partner of the partnership was, until late June 1997, an
indirect subsidiary of Reliance Insurance Company. At June 15, 1997, the
partnership's total outstanding debt was $174.6 million, including $12.7
million borrowed from the Company under a line of credit. As of June 15,
1997, $38 million of that indebtedness was guaranteed by Reliance
Financial. In June 1997, the capital stock of the indirect subsidiary
was reclassified, investors unaffiliated with the Company acquired all
of its common stock and Reliance Insurance Company acquired $27.6
million face amount of its preferred stock. Subsequently, the former
indirect subsidiary sold to Reliance Insurance Company $11 million in
aggregate principal amount of senior notes and to the Company $18
million in aggregate principal amount of subordinated notes, the line of
credit from the Company to the partnership was repaid in full and the
Reliance Financial guarantee was terminated.
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
-13-
<PAGE>
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
On May 8, 1997, at the annual meeting of stockholders of the Company,
the stockholders elected the thirteen directors set forth below and
voted upon and authorized the adoption by the Company of the Reliance
Group Holdings, Inc. 1997 Stock Option Plan and Employee Stock Purchase
Plan. The number of votes cast for, against (where applicable) or
withheld, as well as the number of abstentions and broker non-votes
(where applicable), were as follows:
Proposal - Election of Directors:
For Withheld
----------- ---------
Saul P. Steinberg 108,646,089 730,637
Robert M. Steinberg 108,696,772 679,954
George R. Baker 108,688,771 687,955
George E. Bello 108,704,728 671,998
Dennis A. Busti 108,704,743 671,983
Lowell C. Freiberg 108,694,715 682,011
Dr. Thomas P. Gerrity 108,695,352 681,374
Jewell Jackson McCabe 108,691,252 685,474
Irving Schneider 102,331,525 7,045,201
Bernard L. Schwartz 108,691,936 684,790
Richard E. Snyder 108,705,301 671,425
Thomas J. Stanton, Jr. 108,700,375 676,351
James E. Yacobucci 108,700,870 675,856
Proposal - Approval of the Reliance Group Holdings, Inc. 1997 Stock
Option Plan
For: 81,025,909
Against: 16,751,682
Abstain: 275,816
Broker Non-Votes: 11,323,319
Proposal - Approval of the Reliance Group Holdings, Inc. Employee Stock
Purchase Plan
For: 96,570,142
Against: 1,222,447
Abstain: 260,819
Broker Non-Votes: 11,323,318
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Reliance Group Holdings, Inc. Employee Stock Purchase Plan
10.2 Reliance Group Holdings, Inc. 1997 Stock Option Plan
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
1997.
-15-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE GROUP HOLDINGS, INC.
---------------------------------------
(Registrant)
Date: August 14, 1997 /s/ George E. Bello
--------------- -------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-16-
<PAGE>
Exhibit 10.1
RELIANCE GROUP HOLDINGS, INC.
EMPLOYEE STOCK PURCHASE PLAN
February 7, 1997
The purpose of this Employee Stock Purchase Plan (the "Plan")
is to provide eligible employees of Reliance Group Holdings, Inc.
(the "Company") and certain of its subsidiaries with convenient
opportunities to purchase shares of the Company's common stock, par
value $.10 per share (the "Common Stock"), commencing on May 5,
1997. The aggregate number of shares of Common Stock which may be
issued under the Plan shall be Ten Million (10,000,000) shares,
subject to adjustment as provided in Section 16 hereof.
1. Administration. The Plan will be administered by the
Company's Board of Directors (the "Board") or by a committee
appointed by the Board (the "Committee"). The Board or the
Committee has authority to make, amend and rescind rules and
regulations for the administration of the Plan (except as otherwise
provided in Section 2 below) and its interpretation and decisions
with regard thereto shall be final and conclusive. The Plan will be
administered at the Company's expense.
2. Eligibility. Participation in the Plan will neither be
permitted nor denied contrary to the requirements of Section 423 of
the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder (the "Code"). All employees of the Company,
including directors of the Company who are also employees of the
Company, and all employees of any subsidiary of the Company (as
defined in Section 424(f) of the Code) designated by the Chairman of
the Board of the Company from time to time (a "Designated
Subsidiary;" provided that such term shall not include any company
which is not a subsidiary of the Company on the Exercise Date (as
defined in Section 10)), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 10) to
purchase Common Stock under the Plan; provided that:
(a) such employees are customarily employed by the
Company or a Designated Subsidiary for more than 20 hours per
week and for more than five months per calendar year;
8091.16
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<PAGE>
Exhibit 10.1
(b) such employees have been employed by the Company or
a Designated Subsidiary for at least six (6) continuous months
prior to enrolling in the Plan; and
(c) such employees are employees of the Company or a
Designated Subsidiary on the first day of the applicable
Offering Period (as defined below);
and provided further that, no employee may be granted an Option (as
defined in Section 10) hereunder if such employee, immediately after
the option is granted, would own 5% or more of the total combined
voting power or value of all classes of stock of the Company or any
subsidiary of the Company. For purposes of the preceding sentence,
the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and all stock which
the employee has a contractual right to purchase under outstanding
stock options shall be treated as stock owned by the employee.
3. Offerings. The Company will make one or more offerings
("Offerings") to eligible employees to purchase Common Stock under
the Plan. Offerings will begin May 5, 1997 or on such later date as
the Committee shall determine, with respect to the 1997 calendar
year (the "Initial Year"), and each January 1st thereafter (the
"Offering Commencement Date"). Each Offering Commencement Date will
begin a calendar year period (an "Offering Period") during which
payroll deductions will be made and held for the purchase of Common
Stock at the end of the Offering Period; provided, however, that
with respect to the Initial Year, the period commencing on May 5,
1997 (or such later date as the Committee shall determine) and
ending on December 31, 1997 shall constitute the Offering Period.
4. Participation. An employee eligible on, or who will be
eligible as of, the Offering Commencement Date of any Offering
Period may participate in such Offering by completing and forwarding
a payroll deduction authorization form ("Payroll Form") to the
employee's appropriate payroll office no later than April 22, 1997,
in the case of the Offering Period for the Initial Year, and no
later than December 1, for each subsequent Offering Period. The
Payroll Form will authorize a regular payroll deduction from the
Compensation (as defined below) received by the employee during the
Offering Period in the amounts permitted by Section 5 below.
Subject to limitations contained in clause (a) of Section 5 hereof,
unless an employee files a new Payroll Form, withdraws from the Plan
or ceases to be eligible to participate in the Plan, such employee's
deductions and purchases will continue at the rate specified in such
employee's Payroll Form for future Offerings under the Plan for as
long as the Plan remains in effect.
8091.16
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<PAGE>
Exhibit 10.1
The term "Compensation" means the amount of money reportable on
the employee's Federal Income Tax Withholding Statement, excluding
allowances and reimbursements for expenses (such as relocation
allowances for travel expenses), income or gains on the exercise of
Company stock options or stock appreciation rights, and similar
items, whether or not shown on the employee's Federal Income Tax
Withholding Statement, but including, the amount of pre-tax
contributions, if any, authorized by the employee under any plan
maintained by the Company or the Designated Subsidiary that
qualifies under Section 401(k) or Section 125 of the Code.
5. Deductions. (a) With respect to any Offering, an
employee may authorize a payroll deduction in a fixed dollar amount
per pay period; provided that (i) an employee's aggregate payroll
deductions during any Offering Period cannot exceed 15% of such
employee's annualized Compensation (rounded to the next highest
whole dollar amount), and (ii) an employee's maximum aggregate
payroll deductions with respect to any Offering Period may not
exceed $21,250. The employee's fixed dollar payroll deduction shall
be indicated on the employee's Payroll Form.
(b) Contributions to the Plan may be made only by means of
payroll deductions. Accordingly, an employee who is on an unpaid
leave from the Company or any Designated Subsidiary (whether
pursuant to a disability leave, a leave of absence or otherwise) at
any time during an Offering Period (including on the Offering
Commencement Date) but who is eligible to participate in the Plan on
the Offering Commencement Date of any Offering and has completed and
forwarded the Payroll Form in accordance with Section 4 hereof will
be entitled to participate in such Offering; provided, however, that
such employee will not be entitled to make contributions to the Plan
at any time during such unpaid leave from the Company or a
Designated Subsidiary and will be entitled to make contributions to
the Plan by means of payroll deductions once his or her pay from the
Company or a Designated Subsidiary is resumed.
(c) No employee may be granted an Option (as defined in
Section 10) which permits such employee the right to purchase Common
Stock under the Plan and any other stock purchase plan of the
Company and its subsidiaries, taken together, to accrue at a rate
which exceeds $25,000 of the fair market value of such Common Stock
(determined on the Offering Commencement Date of the Offering Period
or the nearest prior business day) for each calendar year in which
the Option is outstanding at any time.
6. Deduction Changes. An employee may decrease or
discontinue his or her payroll deduction once during any Offering
8091.16
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<PAGE>
Exhibit 10.1
Period by filing a new Payroll Form. However, an employee may not
increase his or her payroll deduction during an Offering Period. If
an employee elects to discontinue his or her payroll deductions
during an Offering Period, but does not elect to withdraw his or her
funds pursuant to Section 9 hereof, funds deducted prior to such
employee's election to discontinue will be applied to the purchase
of Common Stock on the Exercise Date (as defined in Section 10).
7. Accounts. The Board or the Committee shall appoint a
custodian, which may be the Company or an affiliate of the Company
(the "Custodian"), to maintain an account for each employee in the
Plan (the "Account"), which Account shall reflect, at any time, the
number of shares of Common Stock theretofore purchased under the
Plan by such employee. Each employee who is a participant in the
Plan shall receive a statement as soon as practicable after the end
of each Offering Period reflecting the purchases for such employee's
Account under the Plan through the end of such Offering Period.
8. Interest. Interest will not be paid on (a) any payroll
deductions, except to the extent that the Board or the Committee, in
its sole discretion, elects to credit such payroll deductions with
interest at such per annum rate as it may from time to time
determine, or (b) any amounts which are returned to the employee
because such employee's payroll deductions exceeded 15% of such
employee's Compensation.
9. Withdrawal of Funds. An employee may at any time prior to
the close of business on the last business day in an Offering
Period, and for any reason, permanently withdraw all amounts
theretofore deducted from such employee's compensation (without
interest thereon) and thereby withdraw from participation in an
Offering (a "Withdrawal"). Partial withdrawals are not permitted.
Notice of any withdrawal, on forms approved by the Company, must be
received by the Company prior to 5:00 p. m., Eastern Time, on the
last business day in an Offering Period. In the event of a
Withdrawal, the employee may not resume participation in the Plan
during the remainder of the Offering Period during which such
Withdrawal occurred. The employee may participate in any subsequent
Offering in accordance with terms and conditions established by the
Board or the Committee.
10. Purchase of Shares. (a) On the Offering Commencement
Date of each Offering Period, the Company will grant to each
eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last business day of such Offering
Period (the "Exercise Date") (provided that such employee is an
employee of the Company or any of its Designated Subsidiaries on the
Exercise Date, or on any date which is within 45 days prior to the
8091.16
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<PAGE>
Exhibit 10.1
Exercise Date), at the option price hereinafter provided, such
number of whole and fractional shares of Common Stock of the Company
reserved for purposes of the Plan as does not exceed two hundred
percent (200%) of the number of shares determined by dividing (i)
the aggregate payroll deductions authorized by the employee on the
Payroll Form with respect to the Offering Period, by (ii) 85% of the
closing price of the Common Stock on the New York Stock Exchange
(or, if the Common Stock is no longer listed on the New York Stock
Exchange, on any other national securities exchange on which the
Common Stock is listed) on the Offering Commencement Date of the
Offering Period or the nearest prior business day (subject to the
limitations set forth herein pursuant to Section 423 of the Code).
(b) The purchase price for each share purchased (the
"Option Price") by an employee will equal 85% of the closing price
of the Common Stock on the New York Stock Exchange (or, if the
Common Stock is no longer listed on the New York Stock Exchange, on
any other national securities exchange on which the Common Stock is
listed) on (i) the Offering Commencement Date of the Offering Period
or the nearest prior business day or (ii) the Exercise Date,
whichever closing price shall be less. If no sales of Common Stock
were made on such a day, the price of the Common Stock for purposes
of clauses (i) and (ii) above shall be the reported price for the
next preceding day on which sales were made.
(c) Each employee who (i) has not made a Withdrawal and
(ii) was an employee of the Company or a Designated Subsidiary
within 45 days prior to the Exercise Date shall be deemed to have
exercised his or her Option at the Option Price on such date and
shall be deemed to have purchased from the Company the number of
whole and fractional shares of Common Stock reserved for the purpose
of the Plan that such employee's accumulated payroll deductions on
such date will pay for as determined by the Option Price set forth
in paragraph (b) above (but not in excess of the maximum number
determined in the manner set forth in paragraph (a) above).
11. Issuance of Certificates. After an employee or Plan
participant has held shares of Common Stock purchased under the Plan
for two years from the date of grant of the Option to purchase such
shares, the employee or Plan participant may request from the
Company a certificate (or certificates) representing such shares.
Certificates may be issued only in the name of the employee or Plan
participant, or in the name of the employee or Plan participant and
another person of legal age as joint tenants with rights of
survivorship.
12. Rights on Retirement, Death, or Termination of Employment.
In the event of a participating employee's termination of employment
8091.16
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<PAGE>
Exhibit 10.1
prior to the last business day of an Offering Period, no further
payroll deductions shall be taken from any pay due and owing to an
employee and, unless such event has occurred within 45 days prior to
the Exercise Date, the amount of all payroll deductions thereto made
by employee shall be paid to the employee (without interest) or, in
the event of the employee's death, (a) to a beneficiary previously
designated by the employee or (b) in the absence of such a
designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has
been appointed to the knowledge of the Company, to such other
person(s) as the Company may, in its discretion, designate. Any
shares in the employee's Account shall be delivered by the Custodian
to the employee or his or her legal representative as soon as
practicable following such termination. If, (i) prior to the last
business day of the Offering Period, the Designated Subsidiary by
which an employee is employed shall cease to be a subsidiary of the
Company, or the employee is transferred to a subsidiary of the
Company that is not a Designated Subsidiary, or (ii) the employee is
not an employee of the Company or any of its Designated Subsidiaries
on any date which is 45 days prior to the Exercise Date, in any such
case the employee shall be deemed to have terminated employment for
the purposes of the Plan.
13. Optionees Not Stockholders. Neither the granting of an
Option to an employee nor deductions from such employee's pay shall
render such employee a stockholder of the shares of Common Stock
covered by an Option under the Plan until such shares have been
purchased by and issued to such employee.
14. Rights Not Transferable. Rights under the Plan are not
transferable by a participating employee other than by will or the
laws of descent and distribution, and are exercisable during the
employee's lifetime only by the employee.
15. Application of Funds. All funds received by the Company
under the Plan may be combined with other corporate funds and may be
used for any corporate purpose.
16. Adjustment in Case of Changes Affecting Common Stock. In
the event of a subdivision of outstanding shares of Common Stock, or
the payment of a dividend in Common Stock, the number of shares
approved for the Plan, and the share limitation set forth in Section
10, shall be increased proportionately, and such other adjustment
shall be made as may be deemed equitable by the Board or the
Committee. In the event of any other change affecting the Common
Stock, such adjustment shall be made as may be deemed equitable by
the Board or the Committee to give proper effect to such event.
8091.16
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<PAGE>
Exhibit 10.1
17. Adjustments. In the event of any change (through
recapitalization, merger, consolidation, stock dividend, split-up,
combination or exchanges of shares or otherwise) in the character or
amount of the Common Stock (or any other transaction described in
Section 424 (a) of the Code) after any Option is granted hereunder
and prior to the exercise thereof, the Option, to the extent that it
has not been exercised, shall entitle the holder to such number and
kind of securities as such holder would have been entitled to had
such holder actually owned the stock subject to the Option at the
time of the occurrence of such change, with any such adjustment and
adjustment in the exercise price of the Option to be made in
accordance with Section 424(a) of the Code. If any such event
should occur, the number of shares subject to Options which are
authorized to be issued hereunder, but which have not been issued,
shall be similarly adjusted. If any other event shall occur, prior
to the exercise of an Option granted hereunder, which shall increase
or decrease the amount of Common Stock outstanding and which the
Board or the Committee, in its sole discretion, shall determine
equitably requires an adjustment in the number of shares which the
holder of such Option should be permitted to acquire, such
adjustment as the Board or the Committee shall determine may be
made, and when so made shall be effective and binding for all
purposes of this Plan.
18. Amendment of the Plan. The Board may at any time, and
from time to time, amend the Plan in any respect, except that in no
event may any amendment be made which would cause the Plan to fail
to comply with Section 16 under the Securities Exchange Act of 1934,
as amended, and the rules promulgated thereunder, as in effect from
time to time, or Section 423 of the Code.
19. Insufficient Shares. In the event that the total number
of shares of Common Stock specified in elections to be purchased
under any Offering plus the number of shares purchased under
previous offerings under the Plan exceeds the maximum number of
shares issuable under the Plan, the Board or the Committee will
allot, in such manner as it may determine (provided that all
employees granted options under the Plan shall have the same rights
and privileges with respect thereto), the shares of Common Stock
then available.
20. Termination of the Plan. The Plan may be terminated at
any time by the Board; provided that such termination will not apply
to then outstanding Options.
21. Governmental Regulations. (a) The Company's obligation
to sell and deliver Common Stock under the Plan is subject to
listing of the Common Stock on a national stock exchange or
8091.16
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<PAGE>
Exhibit 10.1
quotation on the Nasdaq National Market and the approval of all
governmental authorities required in connection with the
authorization, issuance, or sale of the Common Stock.
(b) The Plan shall be governed by New York law, except to
the extent that such law is preempted by federal law.
(c) The Plan is intended to comply with the provisions of
Rule 16b-3 promulgated under the Exchange Act and Section 423 of the
Code. Any provision inconsistent with such rule or such Section
shall to that extent be inoperative and shall not affect the
validity of the Plan.
22. Issuance of Shares. Shares may be issued upon exercise of
an Option from authorized but unissued Common Stock, from shares
held in the treasury of the Company, from any combination of the
foregoing or from any other proper source.
23. Window Periods. Dispositions of shares purchased under
the Plan may be made only during the following specified window
periods: February 20 through March 5, May 5 through May 20, August
5 through August 20 and November 5 through November 20. No
dispositions may be made after 5:00 p.m. (Eastern Time) on the last
business day of each window period.
24. Notification upon Sale of Shares. Each employee agrees by
entering the Plan to promptly give the Company notice of any
disposition of shares purchased under the Plan where such
disposition occurs within two years after the date of grant of the
Option pursuant to which such shares were purchased. If an employee
or Plan participant disposes of any shares of Common Stock purchased
under the Plan within two years after the date of grant of the
Option to purchase such shares (a "Disqualifying Disposition"), the
Disqualifying Disposition shall be made only through the brokerage
facilities provided by the Plan.
25. Effective Date and Approval of Shareholders. The Plan
shall take effect on February 7, 1997, subject to approval by the
shareholders of the Company as required by Section 423 of the Code,
which approval must occur within twelve months of the adoption of
the Plan by the Board; provided that, if approval of the Company's
shareholders is not received prior to twelve months of the adoption
of the Plan by the Board, no shares of Common Stock shall be
purchased under the Plan and all amounts deducted from participants'
Compensation during the Initial Offering Period under the Plan shall
be returned as promptly as practicable thereafter, without interest.
8
<PAGE>
Exhibit 10.2
RELIANCE GROUP HOLDINGS, INC.
1997 STOCK OPTION PLAN
PART I
PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL;
RESERVATION OF SHARES; PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this Reliance Group
Holdings, Inc. 1997 Stock Option Plan (this "Plan") is to provide
incentives to selected key employees of the Company and/or its
Affiliates who contribute, and are expected to contribute,
materially to the success of the Company and its Affiliates; to
provide a means of rewarding outstanding performance; and to
enhance the interest of such key employees in the Company's
continued success and progress by providing them a proprietary
interest in the Company. Further, this Plan is designed to enhance
the Company's ability to maintain a competitive position in
attracting and retaining qualified key personnel necessary for the
continued success and progress of the Company.
ARTICLE II
Definitions
Certain terms used herein shall have the meaning below
stated, subject to the provisions of Section 7.1.
"Affiliate" means a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by,
the Company.
"Board" or "Board of Directors" means the Board of Directors
of the Company.
"Chairman" means the Chairman of the Board of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
1
<PAGE>
"Committee" means, except as set forth in Article X, the Stock
Option Committee appointed by the Board to administer this Plan
pursuant to Article VII.
"Common Stock" means, subject to the provisions of Section
9.3, the authorized common stock of the Company, par value $.10 per
share.
"Company" means Reliance Group Holdings, Inc.
"Disability" means a physical or mental impairment of
sufficient severity such that an Employee is both eligible for and
in receipt of benefits under the long-term disability provisions of
the Company's benefit plans.
"Employee" means an employee (including an officer) of the
Company or of an Affiliate of the Company.
"Fair Market Value" means the closing price at which the
Common Stock of the Company shall have been sold regular way on the
New York Stock Exchange on the date as of which such value is being
determined or, if no sales occurred on such day, then on the next
preceding day on which there were such sales, or, if at any time
the Common Stock shall not be listed on the New York Stock
Exchange, the fair market value as determined by the Committee on
the basis of available prices for such Common Stock or in such
manner as may be authorized by applicable regulations under the
Code.
"Key Employee" means an Employee selected to participate in
this Plan pursuant to the terms hereof.
"Non-Qualified Option" means an option to purchase Common
Stock, granted by the Company to a Key Employee pursuant to Section
5.1. Non-Qualified Options are not intended to qualify as
"incentive stock options" under Section 422 of the Code and the
regulations thereunder.
"Option" means a Non-Qualified Option.
"Option Agreement" has the meaning assigned to it in Section
5.1(c) hereof.
"Plan" means the Reliance Group Holdings, Inc. 1997 Stock
Option Plan, as set forth herein and as from time to time amended.
"Special Compensation Committee" means the Special
Compensation Committee of the Board.
2
<PAGE>
ARTICLE III
Shareholder Approval; Reservation of Shares
3.1 Shareholder Approval. This Plan shall be effective upon
approval of the Plan by a vote of a majority of shares of Common
Stock cast on the Plan (including abstentions to the extent
abstentions are counted as voting under applicable state law), at
an annual meeting of shareholders.
3.2 Shares Reserved Under Plan. Subject to adjustment under
the provisions of Section 9.3 hereof, the maximum number of shares
of Common Stock which may be issued and sold under this Plan is
7,500,000 shares. Such shares may be either authorized and
unissued shares or shares issued and thereafter acquired by the
Company. Shares issued pursuant to this Plan shall be subject to
all applicable provisions of the Certificate of Incorporation and
By-Laws of the Company in existence at the time of issuance of such
shares and at all times thereafter. If Options granted under this
Plan shall terminate or cease to be exercisable by reason of
expiration, surrender for cancellation or otherwise without having
been wholly exercised, new Options may be granted under this Plan
covering the number of shares to which such termination or
cessation relates.
ARTICLE IV
Participation in Plan
4.1 Eligibility to Receive Options. Options under this Plan
may be granted only to officers and other Key Employees of the
Company or an Affiliate of the Company on the date the Option is
granted. A member of the Board of Directors who is not also an
Employee of the Company or of an Affiliate of the Company shall not
be eligible to receive an Option.
4.2 Participation Not Guarantee of Employment. Nothing in
this Plan or in the instrument evidencing the grant of an Option
shall in any manner be construed to limit in any way the right of
the Company or an Affiliate to terminate a Key Employee's
employment at any time, without regard to the effect of such
termination on any rights such Key Employee would otherwise have
under this Plan, or give any right to such a Key Employee to remain
employed by the Company or an Affiliate thereof in any particular
position or at any particular rate of compensation.
3
<PAGE>
PART II
OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
(a) Grant. The Committee or the Special Compensation
Committee, as the case may be, may grant Options to Key Employees.
All Options under this Plan shall be granted within ten years of
the date on which this Plan is approved by the shareholders of the
Company. No more than 1,500,000 of the shares issuable under
Options granted under this Plan may be granted to any employee over
the ten-year term of this Plan, subject to adjustment in accordance
with Section 9.3 hereof.
(b) Option Price. The purchase price per share of Common
Stock under each Non-Qualified Option shall be determined by the
Committee but shall be not less than 90 percent of the Fair Market
Value per share of such Common Stock on the date such Non-Qualified
Option is granted. The Option price may be subject to adjustment
in accordance with the provisions of Section 9.3 hereof.
(c) Option Agreements. Options shall be evidenced by Option
Agreements in such form and containing such terms and conditions as
the Committee shall approve, which terms and conditions need not be
the same for all Options (each an "Option Agreement").
(d) Options Nontransferable. An Option granted under this
Plan shall by its terms be nontransferable by the Key Employee
otherwise than by will or the laws of descent and distribution, and
except, solely to the extent permitted by the Committee in an
Option Agreement, to such persons or entities that may be approved
by the Committee, in each case subject to the condition that the
Committee be satisfied that such transfer is being made for estate
or tax planning purposes or for gratuitous or donative purposes,
without consideration being received therefor. No transfer of an
Option by a Key Employee shall be effective to bind the Company
unless the Company shall have been furnished with written notice
thereof and a copy of such evidence as the Committee may determine
necessary to establish the validity of the transfer.
(e) Substitution and Cancellation. The Committee, in its
sole discretion, may grant to an Employee who has been granted an
Option under this Plan, in exchange for the surrender and
cancellation of such Option, a new Option having a purchase price
lower (or higher) than the purchase price provided in the Option so
4
<PAGE>
surrendered and cancelled and containing such other terms as the
Committee may deem appropriate.
5.2 Exercise of Options.
(a) Term of Options; Vesting. The term of each Option
granted under this Plan shall be ten (10) years from the date of
grant, except that a Non-Qualified Option with a per share Option
price that equals or exceeds Fair Market Value per share on the
date of grant shall have a term of ten (10) years and ten (10) days
from the date of grant. An Option granted under this Plan shall
become 100% vested at the earliest of the following times if the
Optionee is an Employee at such time: (i) the Employee's normal
retirement date (age 65 or later), (ii) the Employee's death or
Disability, or (iii) five years from the date of grant. Each
Option shall vest and become exercisable in cumulative installments
to the extent of 25% of the number of shares originally covered
thereby on and after the second, third, fourth and fifth
anniversaries of the grant of the Option, if the Optionee is an
Employee on such anniversary. In its sole discretion, the
Committee or the Special Compensation Committee, as the case may
be, may prescribe shorter installments or accelerate the
exercisability of any Option at any time.
(b) Payment on Exercise. No shares of Common Stock shall be
issued on the exercise of an Option unless paid for in full at the
time of purchase. Payment for shares of Common Stock purchased
upon the exercise of an Option shall be made in cash or, with the
consent of the Committee, in whole or in part in shares of Common
Stock valued at the then Fair Market Value thereof. Stock
certificates for the shares of Common Stock so paid for will be
issued and delivered to the person entitled thereto only at the
Company's office in New York, New York. No Key Employee shall have
any rights as a shareholder with respect to any share of Common
Stock covered by an Option unless and until such Employee shall
have become the holder of record of such share, and, except as
otherwise permitted in Section 9.3 hereof, no adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash,
securities or other property or distributions or other rights) in
respect of such share for which the record date is prior to the
date on which such Employee shall have become the holder of record
thereof.
(c) Exercise upon Dissolution, Liquidation or Winding Up. If
at any time after an Option has become exercisable and prior to its
exercise and expiration, a voluntary dissolution, liquidation
(other than a liquidation into another corporation which agrees to
continue this Plan) or winding up of the affairs of the Company
shall be proposed, the Company shall cause notice in writing to be
mailed to each person holding an Option under this Plan, which
notice shall be mailed not less than twenty days prior to the
closing of the transfer books of the Company or the record date for
5
<PAGE>
determination of the holders of Common Stock of the Company
entitled to participate in such dissolution, liquidation or winding
up, as the case may be, to the end that during such notice period
the holder of any Option, to the extent that the same is then
exercisable by such holder, may, subject to the terms of Article V
hereof, purchase Common Stock in accordance with the terms of the
Option and be entitled, in respect of the number of shares so
purchased, to all the rights of the other holders of Common Stock
of the Company with respect to such proposed dissolution,
liquidation or winding up of the affairs of the Company. Each
Option at the time outstanding shall terminate at the close of
business on the twentieth day after mailing of such notice to the
holder of such Option or on the record date for determination of
holders of Common Stock entitled to participate in such
dissolution, liquidation or winding up, whichever date is later.
ARTICLE VI
Termination of Employment and Death
6.1 Termination of Employment. Unless earlier terminated in
accordance with its terms, an Option shall terminate after 90 days
after any of the following:
(a) voluntary termination of employment by the Key Employee,
with or without consent of the Company,
(b) termination of employment of the Key Employee by the
Company or any of its Affiliates, with or without cause, or
(c) termination of employment of the Key Employee for any
other reason, including retirement under a retirement plan
maintained by the Company, or because the Affiliate employing
such Key Employee ceases to be an Affiliate of the Company and
such Employee does not, prior thereto or contemporaneously
therewith, become a Key Employee of the Company or of another
Affiliate.
6.2 Death or Disability of Optionee. If a Key Employee's
employment is terminated as a result of Disability or death, such
Employee or such Employee's legal representatives, shall be
entitled to exercise the Option in whole or in part at any time
within one year following the Disability or death of such Key
Employee.
6.3 Employment. For all purposes of this Plan, and any
Option granted hereunder, "employment" shall be defined in
accordance with the provisions of Section 1.421-7(h) of the Income
Tax Regulations (or any successor regulations).
6
<PAGE>
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Committee. This Plan shall be administered by a
Committee of three or more persons, all of whom shall be members of
the Board and shall be appointed by, and serve at the pleasure of,
the Board. Solely to the extent deemed necessary or advisable by
the Board to satisfy the requirements of Rule 16b-3 of the Exchange
Act, each Committee member shall meet the definition of a "Non-
employee Director" for purposes of such Rule 16b-3. A majority of
the Committee shall constitute a quorum thereof and the actions of
a majority of the Committee at a meeting at which a quorum is
present, or actions unanimously approved in writing by all members
of the Committee, shall be the actions of the Committee. Vacancies
occurring on the Committee shall be filled by the Board. The
Committee shall have full and final authority to interpret this
Plan and the Option Agreements (which agreements need not be
identical), to prescribe, amend and rescind rules and regulations,
if any, relating to this Plan and to make all determinations
necessary or advisable for the administration of this Plan. The
Committee's determination in all matters referred to herein shall
be conclusive and binding for all purposes and upon all persons
including, but without limitation, the Company, the shareholders of
the Company, the Committee and each of the members thereof, and
Employees of the Company, and their respective successors in
interest.
7.2 Liability of Committee. No member of the Committee shall
be liable for anything done or omitted to be done by such member or
by any other member of the Committee in connection with this Plan,
except for the willful misconduct or gross negligence of such
member. The Committee shall have power to engage outside
consultants, auditors or other professional help to assist in the
fulfillment of the Committee's duties under this Plan at the
Company's expense.
7.3 Determinations of the Committee. In making its
determinations concerning the Key Employees who shall receive
Options, as well as the number of shares to be covered thereby and
time or times at which they shall be granted, the Committee shall
take into account the nature of the services rendered by the
respective Key Employees, their past, present and potential
contribution to the Company's success and such other factors as the
Committee may deem relevant. The Committee shall also determine
the form of Option Agreements to be issued under this Plan and the
terms and conditions to be included therein, provided such terms
7
<PAGE>
and conditions are not inconsistent with the terms of this Plan.
The Committee may, in its discretion or in accordance with a
direction from the Board, waive any provisions of any Option
Agreement, provided such waiver is not inconsistent with the terms
of this Plan as then in effect.
7.4 Plan Sponsors; Expenses. The Committee shall act on
behalf of the Company as sponsor of the Plan. All expenses
associated with the Plan shall be borne by the Company.
ARTICLE VIII
Amendment and Termination of Plan
8.1 Amendment of Plan. This Plan may be amended at any time
and from time to time by the Board of Directors of the Company.
Solely to the extent deemed necessary or advisable by the Board,
for purposes of complying with Section 162(m) of the Code or the
rules of any securities exchange or for any other reason, the Board
of Directors of the Company may seek the approval of any such
amendment by the Company's stockholders. No termination or
amendment of this Plan, without the consent of the holder of any
Option then existing, may terminate such holder's Option or
materially and adversely affect such holder's rights thereunder.
8.2 Termination. The Board of Directors of the Company may
at any time terminate this Plan as of any date specified in a
resolution adopted by the Board. If not earlier terminated, this
Plan shall terminate on the tenth anniversary of the effective date
of the Plan. No Options may be granted after this Plan has
terminated. After this Plan shall terminate, the function of the
Committee will be limited to supervising the administration of
Options previously granted.
ARTICLE IX
Miscellaneous Provisions
9.1 Restrictions Upon Grant of Options. The listing upon the
New York Stock Exchange or the registration or qualification under
any Federal or State law of any shares of Common Stock to be
granted pursuant to this Plan (whether to permit the grant of
Options or the resale or other disposition of any such shares of
Common Stock by or on behalf of the Employees receiving such
shares) may be necessary or desirable and, in any such event,
delivery of the certificates for such shares of Common Stock shall,
if the Board of Directors, in its sole discretion, shall determine,
not be made until such listing, registration or qualification shall
have been completed. In such connection, the Company agrees that
it will use its best efforts to effect any such listing,
8
<PAGE>
registration or qualification, provided, however, that the Company
shall not be required to use its best efforts to effect such
registration under the Securities Act of 1933, as amended ("1933
Act"), other than on Form S-8, as presently in effect, or such
other forms as may be in effect from time to time calling for
information comparable to that presently required to be furnished
under Form S-8.
9.2 Restrictions upon Resale of Unregistered Stock. If the
shares of Common Stock that have been transferred to a Key Employee
pursuant to the terms of this Plan are not registered under the
1933 Act, pursuant to an effective registration statement, such Key
Employee, if the Committee shall deem it advisable, may be required
to represent and agree in writing (i) that any shares of Common
Stock acquired by such Key Employee pursuant to this Plan will not
be sold except pursuant to an effective registration statement
under the 1933 Act, or pursuant to an exemption from registration
under the 1933 Act and (ii) that such Key Employee is acquiring
such shares of Common Stock for such Employee's own account and not
with a view to the distribution thereof.
9.3 Adjustments. In the event of any change (through
recapitalization, merger, consolidation, stock dividend, split-up,
combination or exchanges of shares or otherwise) in the character
or amount of the Company's capital stock (or any other transaction
described in Section 424(a) of the Code) after any Option is
granted hereunder and prior to the exercise thereof, the Option, to
the extent that it has not been exercised, shall entitle the holder
to such number and kind of securities as such holder would have
been entitled to had such holder actually owned the stock subject
to the Option at the time of the occurrence of such change. If any
such event should occur, the number of shares subject to Options
which are authorized to be issued hereunder, but which have not
been issued, shall be similarly adjusted. If any other event shall
occur, prior to the exercise of an Option granted to a Key Employee
hereunder, which shall increase or decrease the amount of capital
stock outstanding and which the Committee, in its sole discretion,
shall determine equitably requires an adjustment in the number of
shares which the holder should be permitted to acquire, such
adjustment as the Committee shall determine may be made, and when
so made shall be effective and binding for all purposes of this
Plan.
9.4 Withholding of Taxes. Each Key Employee who exercises an
Option to purchase Common Stock shall agree to pay to the Company,
or make arrangements satisfactory to the Committee regarding
payment of, any taxes of any kind required by law to be withheld
with respect to the transfer to such Employee of such shares of
Common Stock.
9.5 Use of Proceeds. The proceeds from the sale of Common
Stock pursuant to Options granted under this Plan shall constitute
9
<PAGE>
general funds of the Company and may be used for such corporate
purposes as the Company may determine.
9.6 Other Grants. Options may be granted under this Plan
from time to time in substitution for stock options and/or stock
appreciation rights held by employees of other corporations who are
or are about to become employees of the Company as the result of a
merger or consolidation of the employing corporation with the
Company, or the acquisition by the Company of the assets of the
employing corporation, or the acquisition by the Company of stock
of the employing corporation as the result of which it becomes an
Affiliate of the Company. The terms and conditions of the
substituted Options so granted may vary from the terms and
conditions set forth in Part II to such extent as the Committee may
deem appropriate to conform, in whole or in part, to the provisions
of the substituted stock incentives.
9.7 Other Benefits. Nothing contained herein shall prevent
the Company from establishing other incentive plans in which Key
Employees in the Plan may also participate. No award under this
Plan shall be considered as compensation in calculating any
insurance, pension or other benefit for which the recipient is
eligible unless any such insurance, pension or other benefit is
granted under a plan which expressly provides that compensation
under this Plan (and specifying the type of such compensation)
shall be considered as compensation under such plan.
PART IV
PROVISIONS RELATING TO CERTAIN KEY EMPLOYEES
ARTICLE X
Limitation on Grants; Applicability of Other Provisions
10.1 Limitations With Respect To Executive Officers.
Notwithstanding any other provision contained in the Plan, the
Special Compensation Committee shall have the exclusive right to
grant Options to the executive officers of the Company. Solely to
the extent deemed necessary or advisable by the Board to satisfy
the requirements of Section 162(m) of the Code, each Special
Committee member shall meet the definition of a "outside director"
for purposes of such Section 162(m). Any Options so granted in any
year, shall be granted, in the case of the persons who are the
Chairman and the four other most highly compensated executive
officers, at not less than Fair Market Value.
10.2 Applicability of Other Provisions. Grants of Options to
any executive officer of the Company in exchange for the surrender
and cancellation of any Option pursuant to Section 5.1(e) shall be
made only if the purchase price of the newly granted Option is at
10
<PAGE>
least the Fair Market Value of the Common Stock on the date such
Option is granted. Any Option granted to an executive officer of
the Company that is cancelled pursuant to Section 5.1(e), shall
continue to be counted against the maximum number of shares that
may be granted to any Key Employee in accordance with Section
5.1(a). The provisions of Article VII shall be incorporated herein
as if included herein, except that "Special Compensation Committee"
shall replace "Committee" whenever it appears therein.
11
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of
Operations and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 2,588,352
<DEBT-CARRYING-VALUE> 802,585
<DEBT-MARKET-VALUE> 814,335
<EQUITIES> 719,923
<MORTGAGE> 0
<REAL-ESTATE> 273,372
<TOTAL-INVEST> 4,558,662
<CASH> 46,807
<RECOVER-REINSURE> 3,944,321
<DEFERRED-ACQUISITION> 230,643
<TOTAL-ASSETS> 11,057,339
<POLICY-LOSSES> 6,738,987
<UNEARNED-PREMIUMS> 1,659,426
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 904,907
0
0
<COMMON> 11,470
<OTHER-SE> 727,932
<TOTAL-LIABILITY-AND-EQUITY> 11,057,339
1,332,124
<INVESTMENT-INCOME> 144,923
<INVESTMENT-GAINS> 28,735
<OTHER-INCOME> 115,725
<BENEFITS> 645,262
<UNDERWRITING-AMORTIZATION> 689,128
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 105,044
<INCOME-TAX> 33,500
<INCOME-CONTINUING> 75,448
<DISCONTINUED> (7,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,948
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
