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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) February 27, 1998
Reliance Group Holdings, Inc.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-8278 13-3082071
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
Park Avenue Plaza, New York, New York 10055
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 212-909-1100
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(Former Name or Former Address, if Changed Since Last Report)
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This Current Report on Form 8-K is being filed by Reliance Group
Holdings, Inc., a Delaware corporation (the "Company").
Item 2. Acquisition or Disposition of Assets.
On February 27, 1998, the Company's subsidiary, Reliance Insurance
Company ("RIC"), sold (the "Sale") to LandAmerica Financial Group, Inc., a
corporation organized under the laws of the Commonwealth of Virginia
("LandAmerica"), all of the outstanding shares of Commonwealth Land Title
Insurance Company and Transnation Title Insurance Company, the Company's title
insurance operations, for (a) cash in the aggregate amount of $266.6 million,
(b) 4,039,473 shares of Common Stock of LandAmerica (approximately 26.8% of the
shares of LandAmerica's outstanding Common Stock) and (c) $110,000,000
aggregate liquidation preference (2,200,000 million shares) of 7% Series B
Cumulative Convertible Preferred Stock of LandAmerica (the "Series B Preferred
Stock"). The amount of consideration was determined by arms-length negotiation
between the parties. The Series B Preferred Stock is initially convertible,
except by RIC and its affiliates as described below, into 4,824,561 shares of
Common Stock. The Sale was completed pursuant to the terms of an Amended and
Restated Stock Purchase Agreement, dated as of December 11, 1997 by and among,
RIC, the Company, LandAmerica and LandAmerica's subsidiary, Lawyers Title
Insurance Corporation (the "Stock Purchase Agreement").
In connection with the Sale, the following agreements were executed and
delivered:
(a) Stock Purchase Agreement described above.
(b) Voting and Standstill Agreement (the "Voting and Standstill
Agreement"), dated February 27, 1998, among LandAmerica, RIC and the
Company which (i) gives RIC the right to designate three directors to
LandAmerica's Board of Directors; (ii) prohibits RIC and its affiliates
from acquiring additional shares of Common Stock or Series B Preferred
Stock (except as provided in the Voting and Standstill Agreement);
(iii) requires RIC to vote the Common Stock in certain manners
depending upon the matter that is subject to a vote of LandAmerica's
shareholders; (iv) requires the sale of all 4,039,473 shares of Common
Stock received by RIC from LandAmerica pursuant to the Stock Purchase
Agreement within 6 1/2 years after February 27, 1998 (subject to
extension as provided in the Voting and Standstill Agreement); (v)
requires RIC, with respect to the Series B Preferred Stock received by
RIC from LandAmerica and any shares of Common Stock received upon
conversion of such shares of Series B Preferred Stock, to sell so many
of the shares of Series B Preferred Stock or shares of Common Stock
received upon conversion thereof held by it or its affiliates as is
necessary to reduce the RIC ownership percentage to less than 20% of
LandAmerica's outstanding shares by not later than 8 1/2 years after
February 27, 1998 (subject to extension as provided in the Voting and
Standstill Agreement); (vi) restricts the ability of RIC and its
affiliates to convert the shares of Series B Preferred Stock then held
by them until all of the 4,039,473 shares of Common Stock (and certain
additional shares that may be issued with respect to such shares) have
been sold to persons that are not, at the time of the sale, conveyance
or transfer, an affiliate of RIC, provided that such restriction shall
not apply upon the occurrence of certain specified events set forth in
the Voting and Standstill Agreement; and (vii) prohibits the knowing
transfer of the Common Stock and Series B Preferred Stock to any person
or group if, as a result of such transfer,
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such person or group would have beneficial ownership of Common Stock
representing in the aggregate more than 9.9% of the issued and
outstanding shares of Common Stock of LandAmerica (subject to
exceptions set forth in the Voting and Standstill Agreement).
(c) Registration Rights Agreement, dated as of February 27, 1998, between
LandAmerica and RIC pursuant to which LandAmerica registered with the
Securities and Exchange Commission the resale by RIC of the Common
Stock and Series B Preferred Stock under the Securities Act of 1933, as
amended, and agreed to use its best efforts to maintain the
effectiveness of such registration for specified time periods.
In addition to the foregoing, LandAmerica's Articles of Incorporation were
amended to create the Series B Preferred Stock. Shares of Series B Preferred are
convertible at any time at the option of the holder (other than RIC and its
affiliates as described in clause (b) above) into shares of Common Stock at an
initial conversion price of $22.80 per share of Common Stock (approximately
2.193 shares of Common Stock for each share of Series B Preferred Stock) or
4,824,561 shares of Common Stock in the aggregate. The provisions of the Series
B Preferred Stock contain covenants that will entitle RIC to certain rights in
specific default situations. Upon the occurrence of certain events, RIC will be
entitled to additional seats on LandAmerica's Board of Directors, and RIC and
its affiliates will no longer be subject to certain restrictions under the
Voting and Standstill Agreement. Such events include the following: (i)
LandAmerica's combined ratio exceeds the weighted average of the combined ratios
of certain predetermined comparable title insurance companies by more than five
percentage points for any twelve month period and LandAmerica's claims-paying
ability rating is downgraded by two ratings agencies to or below a rating of
"BBB-"; (ii) LandAmerica fails to pay a dividend on the Series B Preferred Stock
on one occasion, on two occasions, whether or not consecutive, and on three
occasions, whether or not consecutive; and (iii) LandAmerica defaults on any of
its material debt obligations in excess of $15.0 million (individually or at any
one time in aggregate).
Item 7. Financial Statements and Exhibits.
(b) Pro forma financial information.
The pro forma financial information relating to the Sale is set forth
below:
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(In thousands, except per-share amounts)
The following unaudited pro forma condensed consolidated statement of income of
the Company and its subsidiaries for the year ended December 31, 1997, gives
effect to the sale of the Company's title insurance operations to LandAmerica,
assuming such sale took place as of January 1, 1997. The pro forma information
is based upon the historical financial statements of the Company and the pro
forma adjustments as described in the accompanying notes.
<TABLE>
<CAPTION>
Less: Title Pro Forma
Insurance -----------------------------------
Historical Operations Adjustments Adjusted
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<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................................ $ 2,810,762 $ (863,746) $ - $ 1,947,016
Net investment income.................................. 294,971 (30,990) 7,700 (2) 271,681
Gain on sales of investments........................... 73,097 (1,596) - 71,501
Other.................................................. 263,806 - - 263,806
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3,442,636 (896,332) 7,700 2,554,004
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Claims and expenses:
Policy claims and settlement expenses.................. 1,304,559 (41,473) - 1,263,086
Policy acquisition costs and other
insurance expenses................................ 1,496,983 (789,853) - 707,130
Interest............................................... 88,663 (43) - 88,620
Other operating expenses............................... 311,210 - (328)(2) 310,882
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3,201,415 (831,369) (328) 2,369,718
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Income before income taxes and
equity in investee company........................ 241,221 (64,963) 8,028 184,286
Provision for income taxes............................. (74,400) 22,729 (862)(2) (52,533)
Equity in investee company............................. 7,675 - 8,370 (2) 16,045
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Income from continuing operations...................... $ 174,496 $ (42,234) $ 15,536 $ 147,798
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Basic per share information:
Income from continuing operations................. $ 1.52 $ 1.29
======== =======
Diluted per share information:
Income from continuing operations................. $ 1.47 $ 1.25
======== =======
</TABLE>
See notes and assumptions to pro forma condensed consolidated
statement of income and balance sheet.
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(In thousands)
The following unaudited pro forma condensed consolidated balance
sheet of the Company as of December 31, 1997, gives effect to the
sale of the Company's title insurance operations to LandAmerica,
assuming such sale took place as of December 31, 1997. This pro
forma information is based upon the historical financial
statements of the Company and the pro forma adjustments as
described in the accompanying notes.
<TABLE>
<CAPTION>
Pro Forma
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ASSETS Historical Adjustments Adjusted
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<S> <C> <C> <C>
Investments..................................................... $ 4,149,969 $ 266,615 (1) $ 4,416,584
Premiums and other receivables.................................. 1,460,426 - 1,460,426
Reinsurance recoverables........................................ 4,241,015 - 4,241,015
Investment in investee companies................................ 166,673 395,512 (1) 562,185
Other assets.................................................... 1,025,784 54,009 (1) 1,079,793
Net assets of title insurance operations........................ 288,619 (288,619)(1) -
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$ 11,332,486 $ 427,517 $ 11,760,003
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Unearned premiums............................................... $ 1,722,258 $ - $ 1,722,258
Unpaid claims and related expenses.............................. 6,669,508 - 6,669,508
Term loans and short-term debt.................................. 253,083 - 253,083
Debentures and notes............................................ 650,000 - 650,000
Accounts payable, accrued expenses and other.................... 1,075,122 297,919 (3) 1,373,041
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10,369,971 297,919 10,667,890
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Shareholders' equity:
Common stock............................................... 11,486 - 11,486
Additional paid-in capital................................. 542,049 - 542,049
Retained earnings.......................................... 142,701 136,756 (3) 279,457
Net unrealized gain on investments......................... 292,081 (7,158)(3) 284,923
Net unrealized loss on foreign currency translation........ (25,802) - (25,802)
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962,515 129,598 1,092,113
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$ 11,332,486 $ 427,517 $ 11,760,003
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</TABLE>
See notes and assumptions to pro forma condensed consolidated
statement of income and balance sheet (unaudited).
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RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES AND ASSUMPTIONS TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND BALANCE SHEET (UNAUDITED)
(1) The unaudited pro forma condensed consolidated statement of income
and balance sheet give effect to the sale of the Company's title
insurance operations to LandAmerica for $266.6 million of cash, 4.039
million shares of LandAmerica common stock with a market value of
$175.2 million, and LandAmerica's 7% preferred stock with a stated
value of $110.0 million and an estimated market value of $220.3
million, and which is initially convertible into 4.825 million common
shares. The estimated gain on sale is as follows:
(in thousands)
Total proceeds.................................... $ 662,127
Expenses.......................................... 12,000
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Net proceeds...................................... 650,127
Net assets of the title insurance operations...... 288,619
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361,508
Reversal of unrealized gain on title insurance
investments held as available for sale........ 7,158
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368,666
Taxes on sale..................................... 120,019
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After-tax gain on sale............................ 248,647
After-tax deferred portion of gain................ 111,891
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After-tax gain recognized at closing.............. $ 136,756
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The after-tax gain of $136.8 million has not been reflected in the
accompanying unaudited pro forma condensed consolidated statement of
income.
The after-tax deferred gain is comprised of the following:
(in thousands)
Pre-tax deferred gain............................. $ 165,900
Deferred tax asset................................ (54,009)
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After-tax deferred gain on sale................... $ 111,891
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The after-tax deferred gain on sale will be recognized as the equity
securities of LandAmerica are sold.
The Company owns approximately 26.8% of LandAmerica's outstanding common
stock and 45% of LandAmerica common stock on a diluted basis.
Accordingly, the Company will account for its investment in LandAmerica
by the equity method of accounting for periods subsequent to the sale
date.
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(2) The pro forma adjustments to the unaudited 1997 condensed consolidated
statement of income assume (i) a $7.7 million increase in net investment
income resulting from the recognition of dividend income from the 7%
convertible preferred stock of LandAmerica; taxed at 35%, after taking
into consideration a dividend received deduction from the 7% convertible
preferred stock dividends, resulting in pro forma tax expense of $.9
million, and (ii) a $.3 million reduction in other operating expenses
resulting from lower goodwill amortization due to the elimination of
goodwill attributable to the title insurance operations. No adjustment
has been included in the unaudited pro forma condensed consolidated
statement of income for the anticipated increased investment income
resulting from the $139.6 million increase in the Company's investment
portfolio (net of taxes and selling expenses).
The pro forma adjustments also assume $8.4 million of equity earnings
resulting from the Company's ownership of LandAmerica's outstanding
common stock. These equity earnings were derived from LandAmerica's 1997
unaudited pro forma statement of income. LandAmerica has identified $40
million of future expense savings which it believes will be achieved
through reduction in staff, consolidation of data processing and
elimination of certain duplicate or excess facilities. No adjustment has
been included in the unaudited pro forma condensed consolidated income
statement and balance sheet for the anticipated expense savings.
(3) The shareholders' equity section of the unaudited pro forma condensed
consolidated balance sheet reflects an estimated after-tax gain on the
sale of the Company's title insurance operations of $136.8 million and
reversal of the title insurance operations' net unrealized gain on
investments held as available for sale, of $7.2 million. The pretax
deferred gain of $165.9 million, taxes payable from the sale of $120.0
million, and accrued expenses related to the sale of $12.0 million, are
included in the "accounts payable, accrued expenses and other" line in
the accompanying unaudited pro forma condensed consolidated balance
sheet.
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(c) Exhibits.
1. Amended and Restated Stock Purchase Agreement, dated as of December 11,
1997 by and among, RIC, the Company, LandAmerica and Lawyers Title
Insurance Corporation (incorporated by reference to Appendix A to
LandAmerica's definitive Proxy Statement filed with the Securities and
Exchange Commission on January 29, 1998).
2. Voting and Standstill Agreement, dated as of February 27, 1998, by and
among LandAmerica, the Company and RIC (incorporated by reference to
Exhibit B to Appendix A to LandAmerica's definitive Proxy Statement
filed with the Securities and Exchange Commission on January 29, 1998).
3. Registration Rights Agreement, dated as of February 27, 1998, by and
between LandAmerica and RIC (incorporated by reference to Exhibit A to
Appendix A to LandAmerica's definitive Proxy Statement filed with the
Securities and Exchange Commission on January 29, 1998).
4. Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Appendix B to LandAmerica's definitive Proxy
Statement filed with the Securities and Exchange Commission on January 29,
1998).
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SIGNATURE
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 hereunto duly authorized.
Dated: March 13, 1998
RELIANCE GROUP HOLDINGS, INC.
By /s/ James E. Yacobucci
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James E. Yacobucci
Senior Vice President-Investments
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EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
1 Amended and Restated Stock Purchase Agreement, dated as of
December 11, 1997 by and among, RIC, the Company, LandAmerica and
Lawyers Title Insurance Corporation (incorporated by
reference to Appendix A to LandAmerica's definitive Proxy
Statement filed with the Securities and Exchange Commission
on January 29, 1998).
2 Voting and Standstill Agreement, dated as of February 27,
1998, by and among LandAmerica, the Company and RIC
(incorporated by reference to Exhibit B to Appendix A to
LandAmerica's Definitive Proxy Statement filed with the Securities
and Exchange Commission on January 29, 1998).
3 Registration Rights Agreement, dated as of February 27, 1998,
by and between LandAmerica and RIC (incorporated by reference
to Exhibit A to Appendix A to LandAmerica's definitive Proxy
Statement filed with the Securities and Exchange Commission
on January 29, 1998).
4 Articles of Amendment to LandAmerica's Articles of
Incorporation (incorporated by reference to Appendix B to
LandAmerica's definitive Proxy Statement filed with the
Securities and Exchange Commission on January 29, 1998).
