<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
FILE NO. 1-13995
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10/A
(Amendment No. 2)
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
CHICAGO TITLE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-4217886
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
171 North Clark Street
Chicago, Illinois 60601-3294
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (888) 431-4288
Securities to be registered pursuant to Section 12(b) of the Act:
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<S> <C>
Title of each class Name of each exchange on which
to be so registered each class is to be registered
--------------- ----------------------------
Common Stock, $1.00 par value per share New York Stock Exchange
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
None
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
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<S> <C>
Aileen C. Meehan, Esq. Paul T. Sands, Jr., Esq.
Dewey Ballantine LLP Executive Vice President and
1301 Avenue of the Americas General Counsel
New York, New York 10019-6092 Chicago Title Corporation
(212) 259-8000 171 North Clark Street
Chicago, Illinois 60601-3294
(312) 223-2000
</TABLE>
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CHICAGO TITLE CORPORATION
Information Included in Information Statement and Incorporated in Form 10
By Reference
Cross-Reference Sheet Between Information Statement and Items of Form 10
<TABLE>
<CAPTION>
ITEM ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------ ---------------------------------
<C> <S> <C>
1 Business................................... Summary; Management's Discussion And
Analysis Of Financial Condition And Results
Of Operations; Business.
2 Financial Information...................... Summary; Pro Forma Consolidated Financial
Data; Selected Financial Data; Management's
Discussion And Analysis Of Financial
Condition And Results Of Operations.
3 Properties................................. Business -- Properties.
4 Security Ownership of Certain Beneficial
Owners and Management...................... Securities Ownership of Directors and
Executive Officers; Principal Stockholders.
5 Directors and Executive Officers........... Management; Description of Capital Stock --
Limited Liability And Indemnification
Provisions.
6 Executive Compensation..................... Management.
7 Certain Relationships and Related
Transactions............................... Summary; The Spin-Off; Arrangements Between
Alleghany And Chicago Title Relating To The
Spin-Off.
8 Legal Proceedings.......................... Business -- Legal Proceedings.
9 Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................ Summary; Market Uncertainties With Respect
to Chicago Title Common Stock; Market for
Chicago Title Common Stock; Dividend
Policy.
10 Recent Sales of Unregistered Securities.... Not Applicable.
11 Description of Registrant's Securities to
be Registered.............................. Description of Capital Stock; Market for
Chicago Title Common Stock.
12 Indemnification of Directors and
Officers................................... Description of Capital Stock -- Limited
Liability And Indemnification Provisions.
13 Financial Statements and Supplementary
Data....................................... Summary; Pro Forma Consolidated Financial
Data; Selected Financial Data; Management's
Discussion And Analysis Of Financial
Condition And Results Of Operations;
Chicago Title Corporation And Subsidiaries
Index To Financial Statements.
14 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. Not Applicable.
15 Financial Statements and Exhibits.......... Chicago Title Corporation And Subsidiaries
Index To Financial Statements; Index to
Exhibits.
</TABLE>
i
<PAGE> 3
ALLEGHANY CORPORATION
------------------------
SPIN-OFF OF CHICAGO TITLE CORPORATION
THROUGH A COMMON STOCK DISTRIBUTION
------------------------
To Our Stockholders:
In December 1997, the Board of Directors of Alleghany Corporation announced
that it intended to establish the title insurance and real estate-related
services business conducted by its wholly owned subsidiary, Chicago Title and
Trust Company ("CT&T"), as an independent, publicly traded company through a
spin-off to Alleghany stockholders of shares of Chicago Title Corporation, a
newly formed Delaware holding corporation for CT&T. We are pleased to announce
that the Spin-Off will be effective on June , 1998. The financial services
business conducted through CT&T's former subsidiary, Alleghany Asset Management,
Inc., is not part of the distribution and will remain with Alleghany.
If you own Alleghany common stock as of the close of business on June ,
1998, you will receive three shares of Chicago Title common stock for each share
of Alleghany common stock that you own. You should receive these Chicago Title
shares shortly after June , 1998. The Internal Revenue Service has ruled that
the Spin-Off will be tax-free to Alleghany's stockholders.
No Alleghany stockholder action is required, and you do not need to
surrender your shares of Alleghany common stock to receive such shares of
Chicago Title common stock. You will continue to hold the same number of shares
of Alleghany common stock after the Spin-Off. The Chicago Title common stock has
been authorized for listing on the New York Stock Exchange, and will trade under
the symbol "CTZ."
This information statement contains detailed information about Chicago
Title and the Spin-Off, which we encourage you to read carefully.
Yours Sincerely,
President Chairman of the Board
June , 1998
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................................... 5
Introduction................................................ 5
Questions and Answers About Chicago Title and the
Spin-Off.................................................. 5
What is the business of Chicago Title?.................... 5
What do I have to do to participate in the Spin-Off?...... 5
Please explain the Distribution Ratio..................... 5
Will my dividends change?................................. 6
What are the risks involved in owning Chicago Title Common
Stock?................................................. 6
Will shares trade any differently as a result of the
Spin-Off?.............................................. 6
Is the Spin-Off Taxable for United States Federal income
tax purposes?.......................................... 7
Will Alleghany and Chicago Title be related in any way
after the Spin-Off?.................................... 7
What We Have Done to Prepare for the Spin-Off............... 8
Board Appointments........................................ 8
Senior Management......................................... 8
United States Federal Income Tax Ruling................... 8
New York Stock Exchange Listing........................... 8
Regulatory Approvals...................................... 8
Key Terms of the Spin-Off Transaction....................... 8
No Stockholder Action Required............................ 8
Record Date............................................... 9
Distribution Ratio........................................ 9
Shares to be Distributed.................................. 9
Mailing Date.............................................. 9
Information Regarding the Spin-Off and Chicago Title........ 9
Chicago Title Corporation................................... 10
Business.................................................. 10
Financial Highlights...................................... 10
Alleghany Corporation....................................... 10
Selected Financial Data..................................... 11
Risk Factors................................................ 12
Competition............................................... 12
Interest Rate Levels; Seasonality......................... 12
Reserve for Title Losses.................................. 12
Regulation................................................ 12
Holding Company Structure................................. 13
Tax Treatment of the Spin-Off............................. 13
Market Uncertainties With Respect to Chicago Title Common
Stock.................................................. 13
Anti-Takeover Provisions.................................. 14
Forward-Looking Information................................. 14
The Spin-Off................................................ 15
Background and Purposes of the Spin-Off................... 15
Manner of Effecting the Spin-Off.......................... 15
Results of the Spin-Off................................... 15
Certain Federal Income Tax Consequences................... 16
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C>
Regulatory Approvals...................................................................................... 16
Market for Chicago Title Common Stock..................................................................... 16
Conditions Precedent to the Spin-Off...................................................................... 17
Arrangements Between Alleghany and Chicago Title Relating to the Spin-Off................................... 17
Distribution Agreement.................................................................................... 18
Tax Sharing Agreement..................................................................................... 18
Agreements Between Alleghany Asset Management and Chicago Title........................................... 19
Investment Management Agreement........................................................................ 19
Transitional Services Agreement........................................................................ 19
Sublease............................................................................................... 19
Reasons for Furnishing this Information Statement........................................................... 19
Selected Financial Data..................................................................................... 20
Pro Forma Consolidated Financial Data....................................................................... 22
Pro Forma Results of Operations............................................................................. 22
Pro Forma Consolidated Balance Sheet and Capitalization..................................................... 22
Dividend Policy............................................................................................. 25
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26
General................................................................................................... 26
Forward Looking Statements............................................................................. 26
Overview............................................................................................... 26
Operating Revenues..................................................................................... 27
Investment Income...................................................................................... 27
Operating Expenses..................................................................................... 27
Provision for Title Losses............................................................................. 27
Income Taxes........................................................................................... 28
Seasonality............................................................................................ 28
Contingencies.......................................................................................... 28
New Accounting Standards............................................................................... 29
Year 2000 Issues....................................................................................... 29
Results Of Operations..................................................................................... 30
Comparison of Three Months Ended March 31, 1998 and March 31, 1997........................................ 30
Net Income............................................................................................. 30
Operating Revenues..................................................................................... 30
Investment Income...................................................................................... 30
Expenses............................................................................................... 30
Comparison of Years Ended December 31, 1997, December 31, 1996 and December 31, 1995...................... 31
Net Income............................................................................................. 31
Operating Revenues..................................................................................... 32
Investment Income...................................................................................... 32
Expenses............................................................................................... 32
Liquidity and Capital Resources........................................................................... 33
Quarterly Financial Information (Unaudited)............................................................... 35
Business.................................................................................................... 36
Chicago Title............................................................................................. 36
The Title Insurance Industry.............................................................................. 36
Strategy.................................................................................................. 37
Financial Ratings......................................................................................... 38
</TABLE>
3
<PAGE> 6
<TABLE>
<S> <C>
Investment Operations..................................................................................... 38
Reserve for Title Losses.................................................................................. 40
Business Conditions; Seasonality.......................................................................... 41
Competition............................................................................................... 42
Regulation................................................................................................ 42
Employees................................................................................................. 43
Properties................................................................................................ 43
Legal Proceedings......................................................................................... 43
Management.................................................................................................. 44
Directors................................................................................................. 44
Compensation of Directors................................................................................. 46
Executive Officers........................................................................................ 47
Executive Compensation.................................................................................... 48
Summary Compensation Table............................................................................. 48
Long-Term Incentive Plan -- Awards In Last Fiscal Year................................................. 50
Chicago Title Compensation Arrangements................................................................... 51
The 1998 Long-Term Incentive Plan...................................................................... 51
New Plan Benefits under the 1998 Plan.................................................................. 55
Annual Bonus Plan...................................................................................... 55
Employment Contracts, Termination of Employment and Change-in-Control Agreements....................... 56
Pension Plan Table..................................................................................... 57
Executive Salary Continuation Plan..................................................................... 58
Compensation Committee Interlocks and Insider Participation............................................ 58
Securities Ownership of Directors and Executive Officers.................................................... 58
Principal Stockholders...................................................................................... 59
Description of Capital Stock................................................................................ 62
Introduction.............................................................................................. 62
Comparison of Rights of Stockholders of Alleghany and Chicago Title....................................... 62
Authorized and Outstanding Capital Stock.................................................................. 62
Chicago Title Common Stock; Delaware Anti-Takeover Provisions............................................. 62
Preferred Stock........................................................................................... 63
Certain Anti-Takeover Provisions -- Chicago Title Certificate and By-Laws................................. 63
Classified Board of Directors.......................................................................... 63
Number of Directors; Removal of Directors; Vacancies................................................... 64
Business Conducted at Meetings; Director Nominations................................................... 64
Special Meeting of Stockholders........................................................................ 65
No Stockholder Action by Written Consent; Stockholder Action at Meetings............................... 65
Supermajority Voting................................................................................... 65
Stockholder Rights Plans and related matters........................................................... 66
Other Constituencies................................................................................... 66
Limited Liability And Indemnification Provisions.......................................................... 66
Shares Eligible for Future Sale............................................................................. 67
Additional Information...................................................................................... 67
Chicago Title and Trust Company and Subsidiaries Index to Consolidated Financial Statements............... F-1
</TABLE>
4
<PAGE> 7
SUMMARY
This summary highlights selected information from this document, but does
not contain all details concerning the Spin-Off, including information that may
be important to you. To better understand the Spin-Off and Chicago Title, you
should carefully review this entire document. References in this document to
"we," "us," "our" or "Chicago Title" mean Chicago Title Corporation and its
subsidiaries. References in this document to "Alleghany" mean Alleghany
Corporation and its subsidiaries and division. References in this document to
Alleghany Stock mean Alleghany common stock.
INTRODUCTION
In December 1997, Alleghany announced its intention to establish the title
insurance and real estate-related services business conducted by Chicago Title
and Trust Company ("CT&T") as an independent, publicly traded company. This will
be accomplished by the Spin-Off. The title insurance industry is undergoing a
period of consolidation and rapid change, and Alleghany believes that
establishing Chicago Title as an independent company will enhance its ability to
focus on operating efficiencies and strategic initiatives that are required to
respond to a changing marketplace. Also, in the current competitive environment,
it is more important than ever to foster development of an entrepreneurial
culture at Chicago Title. As an independent public company, Chicago Title will
be able to provide equity-based compensation and incentives that should enable
it to retain and recruit senior management and motivate employees throughout the
organization. After the Spin-Off, Chicago Title will continue under the current
management of CT&T. The Alleghany Board of Directors believes that this action
is in the best interest of Alleghany stockholders.
This summary includes cross-references to other portions of the document to
help you find more detailed information about the Spin-Off and Chicago Title. We
encourage you to read the entire document.
QUESTIONS AND ANSWERS ABOUT CHICAGO TITLE AND THE SPIN-OFF
What is the business of
Chicago Title?............. Chicago Title is one of the nation's largest
providers of title insurance and other related
services for residential and commercial real
estate transactions. One of the pioneers of the
title insurance industry over a century ago,
Chicago Title currently has more than 300 full
service offices and 3,800 policy-issuing agents
in 49 states, Puerto Rico, the Virgin Islands,
Guam, and Canada. Chicago Title believes that its
brand name, national distribution network,
financial position and experienced management
have enabled it to become one of the premier
companies participating in the title insurance
and real estate-related services industry.
What do I have to do to
participate in the
Spin-Off?.................. Nothing. No proxy or vote is necessary for the
Spin-Off. If you own Alleghany Stock as of the
close of business on June , 1998 (the "Record
Date"), Chicago Title Common Stock will be mailed
to you or credited to your brokerage account
shortly after June , 1998. You need not mail in
Alleghany Stock certificates to receive Chicago
Title Common Stock certificates. You will not
receive new Alleghany Stock certificates.
Please explain the
Distribution Ratio......... Three shares of Chicago Title Common Stock will be
distributed in the Spin-Off for every share of
Alleghany Stock you own on the Record Date. For
example, if you own 100 shares of Alleghany Stock
as of the close of business on June , 1998, you
will receive 300 shares of Chicago Title Common
Stock through the Spin-Off.
5
<PAGE> 8
Will my dividends
change?.................... Because of the Spin-Off, Alleghany has determined
not to pay a stock dividend in 1998. Since 1987,
Alleghany had paid an annual two-percent stock
dividend. Alleghany has not determined whether it
will resume paying stock dividends after 1998. In
anticipation of the Spin-Off, Chicago Title has
adopted a policy with regard to the payment of
dividends. Under this policy, Chicago Title
currently intends to pay a regular quarterly cash
dividend of $0.34 per share of Chicago Title
Common Stock. The first regular quarterly cash
dividend is expected to be paid in the third
quarter of 1998. The actual timing and amount of
dividends, if any, will depend on various factors
and are subject to change at the discretion of
the Chicago Title Board of Directors (the
"Chicago Title Board").
What are the risks involved
in owning Chicago Title
Common Stock?.............. The Chicago Title business is subject to risks
related to competition in the title insurance
industry and to fluctuations in interest rates
and their effect on the real estate market.
Chicago Title's separation from Alleghany
presents certain additional risks because there
is no existing market for Chicago Title Common
Stock (although the Chicago Title Common Stock
has been authorized for listing on the New York
Stock Exchange ("NYSE")) and a large number of
shares could be sold into the market at any given
time. Chicago Title also has anti-takeover
provisions in place that could discourage or make
more expensive a takeover attempt that is opposed
by the Chicago Title Board. In addition, the
Insurance Holding Company System Regulatory Acts
of California, Missouri and Oregon, to which
Chicago Title is subject, prohibit any person
from directly or indirectly acquiring 10% or more
of the outstanding shares of Chicago Title Common
Stock without the prior approval of the insurance
authorities in those jurisdictions. See "Risk
Factors" and "Regulation" for a more complete
discussion of certain matters which should be
considered with respect to your ownership of
Chicago Title Common Stock.
Will shares trade any
differently as a result of
the Spin-Off?.............. Yes, during part of June 1998. We expect that a
temporary form of interim trading called
"when-issued" trading will likely occur for
Chicago Title Common Stock on or shortly before
the Record Date and will continue through the
date that the Alleghany Board of Directors (the
"Alleghany Board") has determined will be the
effective date of the Spin-Off, which is June ,
1998 (the "Spin-Off Date"). A when-issued listing
can be identified by the "wi" letters next to
Chicago Title Common Stock on the NYSE. If
when-issued trading develops, you may buy Chicago
Title Common Stock in advance of the Spin-Off
Date. You may also sell Chicago Title Common
Stock in advance of the Spin-Off Date on a
when-issued basis. During this time, Alleghany
Stock will continue to trade on a "regular-way"
basis and may also trade on a when-issued basis,
reflecting an assumed post-Spin-Off value for
Alleghany Stock. Alleghany Stock when-issued
trading, if available, could begin on or shortly
before the Record Date and continue through the
Spin-Off Date. If this occurs, an additional
listing for Alleghany Stock, followed by the
letters "wi", will appear on the NYSE.
When-issued trading occurs in order to develop an
orderly market and trading price for
6
<PAGE> 9
Chicago Title Common Stock (and possibly
Alleghany Stock) after the Spin-Off. There may be
temporary slight differences between the combined
value of when-issued Chicago Title Common Stock
and when-issued Alleghany Stock as compared to
the regular-way price of Alleghany Stock during
this period. Chicago Title and Alleghany
understand that if Alleghany Stock when-issued
trading is not available, the NYSE will require
that shares of Alleghany Stock that are sold or
purchased from the period beginning on June ,
1998, and ending on the Spin-Off Date, be
accompanied by due-bills representing the Chicago
Title Common Stock distributable with respect to
such shares, and that during such period neither
the Alleghany Stock nor the due bills may be
purchased or sold separately.
Is the Spin-Off taxable for
United States Federal
income tax purposes?....... The Internal Revenue Service (the "IRS") has ruled
that the Spin-Off will be tax-free to Alleghany
stockholders and to Alleghany. The IRS ruling is
based upon the accuracy of numerous
representations made by Alleghany and Chicago
Title. In July of 1998, Alleghany will send a
letter to stockholders that will explain the way
to allocate your tax basis between Alleghany
Stock and the shares of Chicago Title Common
Stock received in the Spin-Off based upon the
average trading values of Alleghany Stock and
Chicago Title Common Stock on the Spin-Off Date.
See "Risk Factors -- Tax Treatment of the
Spin-Off" and "The Spin-Off -- Certain Federal
Income Tax Consequences" for more complete
discussions of the United States Federal income
tax consequences of the Spin-Off to holders of
Alleghany Stock.
Will Alleghany and Chicago
Title be related in any way
after the Spin-Off?........ After the Spin-Off, Alleghany will no longer own
any Chicago Title Common Stock. However, the
identity of the stockholders of Chicago Title
immediately after the Spin-Off will be
substantially the same as those of Alleghany. In
addition, the fourteen member Chicago Title Board
will include four persons who are directors
and/or senior executive officers of Alleghany,
and one person who is a senior executive officer
of Alleghany Asset Management, Inc., ("Alleghany
Asset Management") which on the Spin-Off Date
will be a subsidiary of Alleghany. See
"Management -- Directors" for information
regarding the Chicago Title Board and "Principal
Stockholders" for information regarding the
projected ownership of Chicago Title Common Stock
by Chicago Title's principal stockholders. In
addition, Alleghany and Chicago Title have
entered into certain agreements to define their
ongoing relationship and to allocate
responsibility for past obligations and certain
obligations that might arise in the future. See
"Arrangements Between Alleghany and Chicago Title
Relating to the Spin-Off" for a more complete
discussion of the ongoing relationship between
Alleghany and Chicago Title.
7
<PAGE> 10
WHAT WE HAVE DONE TO PREPARE FOR THE SPIN-OFF
Board Appointments......... After the Spin-Off, the Chicago Title Board will
consist of fourteen directors, eight of whom
previously served on the board of directors of
CT&T. See "Management -- Directors."
Senior Management.......... John Rau, who joined CT&T as Chief Executive
Officer on January 1, 1997, has been appointed as
President and Chief Executive Officer of Chicago
Title. Mr. Rau will be supported by a management
group which includes the senior executives
currently responsible for CT&T's operations. See
"Management -- Executive Officers."
United States Federal
Income Tax Ruling.......... Alleghany has received a tax ruling (the "Tax
Ruling") from the IRS concerning the United
States Federal income tax consequences of the
Spin-Off. The Tax Ruling states that the
distribution of Chicago Title Common Stock in the
Spin-Off will be tax-free to Alleghany
stockholders and to Alleghany for United States
Federal income tax purposes. The IRS ruling is
based upon the accuracy of numerous
representations made by Alleghany and Chicago
Title. Furthermore, the occurrence of certain
transactions involving Chicago Title within two
years after the Spin-Off could cause the Spin-Off
to become taxable.
The Tax Ruling provides that Alleghany stockholders
should apportion their tax basis in Alleghany
Stock held immediately before the Spin-Off
between Alleghany Stock and the Chicago Title
Common Stock received in the Spin-Off. In July of
1998, Alleghany will send a letter to
stockholders that explains how to allocate your
tax basis between Alleghany Stock and the shares
of Chicago Title Common Stock received in the
Spin-Off based upon the average trading values of
Alleghany Stock and of Chicago Title Common Stock
on the Spin-Off Date.
New York Stock Exchange
Listing.................... The Chicago Title Common Stock has been authorized
for listing on the NYSE and we expect that it
will begin trading on the NYSE in June 1998.
There is not currently a public market for
Chicago Title Common Stock, although a
when-issued trading market is expected to develop
on or shortly before June , 1998. The Chicago
Title Common Stock will be traded on the NYSE
under the symbol "CTZ," and regular-way trading
of Chicago Title Common Stock is expected to
begin on June , 1998.
Regulatory Approvals....... Alleghany has provided appropriate notifications
regarding the Spin-Off to, and prior to the
Spin-Off Date expects that it will have received
all required approvals from, the state regulatory
authorities in Arizona, California, Illinois,
Missouri, Oregon and Texas. See "The Spin-
Off -- Regulatory Approvals."
KEY TERMS OF THE SPIN-OFF TRANSACTION
No Stockholder Action
Required................... No action is required by Alleghany stockholders to
receive Chicago Title Common Stock in the
Spin-Off.
8
<PAGE> 11
You do not need to surrender Alleghany Stock to
receive Chicago Title Common Stock in the
Spin-Off.
The number of shares of Alleghany Stock you own
will not change as a result of the Spin-Off.
Record Date................ If you are a holder of record of Alleghany Stock as
of the close of business on the Record Date (June
, 1998), you will be entitled to receive
Chicago Title Common Stock in the Spin-Off.
Distribution Ratio......... You will receive three shares of Chicago Title
Common Stock for every share of Alleghany Stock
you own as of the close of business on June ,
1998.
Shares to be Distributed... All Chicago Title Common Stock owned by Alleghany
will be distributed in the Spin-Off. Based on
7,171,957 shares of Alleghany Stock outstanding
as of April 28, 1998, 21,515,871 shares of
Chicago Title Common Stock will be distributed in
the Spin-Off. Immediately prior to the Spin-Off,
an additional 364,746 shares of Chicago Title
Common Stock will be issued as shares of
restricted stock to senior management of Chicago
Title and its subsidiaries, and immediately after
the Spin-Off an additional 16,000 shares will be
issued to the non-employee directors of Chicago
Title.
Mailing Date............... The distribution agent will mail Chicago Title
Common Stock certificates to Alleghany
stockholders beginning on June , 1998.
INFORMATION REGARDING THE SPIN-OFF AND CHICAGO TITLE
Before the Spin-Off, inquiries relating to the Spin-Off should be directed
to:
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<S> <C>
Harris Trust and Savings Bank Alleghany Corporation
Shareholder Services Division Secretary
311 West Monroe Street 375 Park Avenue
P.O. Box A3504 New York, New York 10152
Chicago, Illinois 60690-9502 (212) 752-1356
(800) 461-6001
</TABLE>
After the Spin-Off, inquiries relating to an investment in Chicago Title
Common Stock should be directed to:
Chicago Title Corporation
Investor Relations Department
171 North Clark Street
Chicago, Illinois 60601-3294
(888) 431-4288
The distribution agent for the distribution of Chicago Title Common Stock
and, after the Spin-Off, the transfer agent and registrar for Chicago Title
Common Stock is:
Harris Trust and Savings Bank
Shareholder Services Division
311 West Monroe Street
P.O. Box A3504
Chicago, Illinois 60690-9502
(800) 461-6001
9
<PAGE> 12
CHICAGO TITLE CORPORATION
Business................... Chicago Title is one of the nation's largest
providers of title insurance and other related
services for residential and commercial real estate
transactions. One of the pioneers of the title
insurance industry over a century ago, Chicago
Title currently has more than 300 full service
offices and 3,800 policy-issuing agents in 49
states, Puerto Rico, the Virgin Islands, Guam, and
Canada. Chicago Title believes that its brand name,
national distribution network, financial position
and experienced management have enabled it to
become one of the premier companies participating
in the title insurance and real estate-related
services industry. Chicago Title's strategy is to
improve its market share and earnings growth by:
(i) focusing its marketing efforts to serve three
distinct customer sectors -- Institutional
Partners, Core Local Operations, and National
Commercial & Industrial; (ii) pursuing growth
opportunities, including through select acquisition
opportunities; and (iii) generating operating
efficiencies and cost improvements through
promotion of "best practices" throughout the
organization and development of an "electronic
spine" that will fully integrate Chicago Title's
services and offices.
Financial Highlights....... Prior to the Spin-Off Date, Alleghany will
contribute the Stock of CT&T to Chicago Title. The
title insurance and real estate-related services
business which will be included in the ongoing
operations of Chicago Title had pre-tax earnings of
$32.0 million on revenues of $401.0 million for the
first quarter of 1998, compared with pre-tax
earnings of $8.4 million on revenues of $310.3
million for the first quarter of 1997, and pre-tax
earnings of $83.6 million on revenues of $1.47
billion for the year ended December 31, 1997,
compared with pre-tax earnings of $69.7 million on
revenues of $1.33 billion for the year ended
December 31, 1996. In 1997, a dividend of $32.1
million was paid to Alleghany, and in 1996 a
payment of $30.0 million was made to Alleghany to
redeem shares of CT&T stock. On April 28, 1998, the
CT&T Board of Directors declared as a dividend to
Alleghany a promissory note payable in the amount
of $9.0 million on December 31, 1998.
ALLEGHANY CORPORATION
After the Spin-Off, Alleghany will continue to engage in the property and
casualty reinsurance and insurance, industrial minerals and financial services
businesses conducted by its subsidiaries Underwriters Re Group, Inc. (the
"Underwriters Re Group"), World Minerals Inc. ("World Minerals") and Alleghany
Asset Management. (Alleghany Asset Management is currently a subsidiary of CT&T;
however, prior to the Spin-Off, all of the outstanding stock of Alleghany Asset
Management will be distributed by CT&T to Alleghany (the "AAM Distribution")).
Alleghany also will continue to operate a steel fastener importing and
distribution business through its Heads and Threads division.
As of March 31, 1998, Alleghany beneficially owned approximately 7.43
million shares, or 4.7 percent, of Burlington Northern Santa Fe Corporation,
which owns one of the largest railroad networks in North America, with 34,000
route miles covering 28 states and two Canadian provinces.
10
<PAGE> 13
SELECTED FINANCIAL DATA
The following table sets forth a summary of selected financial data for
Chicago Title. The historical financial information below may not necessarily be
indicative of the results of operations or financial position that would have
been obtained if Chicago Title had been a separate, independent company during
the periods shown or of Chicago Title's future performance as an independent
company. The financial data set forth below should be read in conjunction with
CT&T's Consolidated Financial Statements and the notes thereto found elsewhere
in this Information Statement. See "Selected Financial Data," "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and CT&T's Consolidated Financial
Statements and notes thereto. Earnings per share data are presented elsewhere in
this Information Statement on a pro forma basis only. See "Pro Forma
Consolidated Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (IN 000S)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA:
Revenues:
Title, escrow, trust
and other
revenue............ $ 385,804 298,408 1,411,496 1,278,590 1,082,008 1,283,970 1,359,955
Investment income.... 14,805 11,762 52,266 47,658 46,661 44,913 49,290
Net realized
investment gains
(losses)........... 371 155 3,684 1,436 3,697 (5,447) 7,058
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues..... 400,980 310,325 1,467,446 1,327,684 1,132,366 1,323,436 1,416,303
Expenses:
Salaries and other
employee
benefits........... 127,603 100,477 454,648 411,815 344,767 368,097 393,418
Commissions paid to
agents............. 131,490 114,400 526,324 484,351 420,555 549,990 545,552
Provision for title
losses............. 26,279 21,772 102,324 83,023 81,385 94,845 121,865
Interest expense..... 1,295 1,156 4,644 5,566 6,456 6,859 9,572
Other operating and
administrative
expenses........... 82,273 64,118 295,903 273,236 242,380 244,655 263,057
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses..... 368,940 301,923 1,383,843 1,257,991 1,095,543 1,264,446 1,333,464
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income from
continuing operations
before income
taxes................ 32,040 8,402 83,603 69,693 36,823 58,990 82,839
Income taxes........... 10,799 2,474 27,894 23,115 11,889 18,854 26,329
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income from
continuing
operations........... $ 21,241 5,928 55,709 46,578 24,934 40,136 56,510
=========== =========== =========== =========== =========== =========== ===========
Dividends paid to
Alleghany(1)......... $ 0(2) 0 32,105 30,000(3) 29,515 66,527 235,470
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets........... $ 1,812,464 1,428,542 1,702,207 1,482,697 1,447,351 1,389,700 1,500,390
Notes payable and other
obligations.......... 32,851 43,282 32,443 43,282 55,043 64,441 74,966
Basic and diluted
earnings per share
from continuing
operations(4):....... $ 0.97 0.27 2.54 2.13 1.14 1.83 2.58
Average number of
shares
outstanding(4):...... 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617
</TABLE>
- ---------------
(1) Historical dividends and distributions to Alleghany may not be indicative of
future dividends to common stockholders. See "Dividend Policy." Most of the
$235.5 million dividend paid by CT&T to Alleghany in 1993 was used by
Alleghany for acquisition purposes. Dividends per share would not be
meaningful and, accordingly, are not presented herein.
(2) In April 1998, the CT&T Board of Directors declared as a dividend to
Alleghany a promissory note payable in the amount of $9.0 million on
December 31, 1998. This dividend represents a distribution by CT&T of a
portion of its earnings for the period during 1998 that it was held as a
subsidiary of Alleghany.
(3) Includes the repurchase of common stock from Alleghany in 1996 for $30
million.
(4) See Note 17 included within the notes to CT&T's Consolidated Financial
Statements presented elsewhere in this Information Statement.
11
<PAGE> 14
RISK FACTORS
Holders of shares of Chicago Title Common Stock should carefully consider
all information contained in this Information Statement, especially the matters
described or referred to in the following paragraphs.
COMPETITION
The title insurance industry is competitive throughout the United States,
with large title insurance firms such as the title insurance subsidiaries of
Chicago Title competing on a national basis, while smaller firms have
significant market shares on a regional basis. Chicago Title's title insurance
subsidiaries also compete with abstractors, attorneys issuing opinions and, in
some areas, state land registration systems. The removal of regulatory barriers
in the future might result in new competitors, including financial institutions,
entering the title insurance business. Chicago Title believes that competition
in the title insurance industry is primarily on the basis of expertise, service
and price. In addition, the financial strength of the insurer has become an
increasingly important factor in decisions relating to the purchase of title
insurance, particularly in multi-site transactions and in situations involving
real estate-related investment vehicles such as real estate investment trusts
and real estate mortgage investment conduits.
INTEREST RATE LEVELS; SEASONALITY
The title insurance industry is highly dependent upon the volume of real
estate transactions occurring within the market. In turn, the volume of real
estate transactions is highly sensitive to interest rate levels and general
economic conditions. Because these factors can be volatile, revenue levels for
the title industry also can be volatile. In addition, the title insurance
business is seasonal, since real estate activity is seasonal. The first calendar
quarter is typically the weakest quarter in terms of revenue due to the
generally low volume of home sales during the winter. The fourth calendar
quarter is typically the strongest in terms of revenue due to the desire of
commercial entities to complete transactions by year end. These traditional
seasonal patterns can be altered if there is a significant change in the level
of mortgage refinancing, since refinancing activity is correlated with movements
in the level of interest rates and is not tied to a seasonal pattern.
RESERVE FOR TITLE LOSSES
The largest single liability of Chicago Title is the reserve for title
losses, which also covers losses arising from the escrow, closing and
disbursement functions due to fraud or operational error, and includes costs of
external legal defense. The establishment of appropriate loss reserves is an
inherently uncertain process, particularly due to the long-term nature of most
title insurance business. Loss reserves represent Chicago Title's estimates, at
a given point in time, of the ultimate settlement and legal costs of losses
incurred (including incurred but not reported losses). Chicago Title's reserves
are reviewed regularly by management and are certified by an independent actuary
on an annual basis. Whenever Chicago Title determines that any existing loss
reserves are inadequate, Chicago Title is required to increase its loss reserves
with a corresponding reduction, which could be material, in Chicago Title's
operating results in the period in which the deficiency is identified. The
establishment of new reserves, or the adjustment of reserves could have a
material effect on Chicago Title's financial condition and results of operations
in any particular period and would reduce the amount of earnings (if any)
available for dividends. See "Business -- Reserve for Title Losses."
REGULATION
Chicago Title and its title insurance subsidiaries are subject to state
insurance regulations in the states in which they do business. Such regulations,
among other things, affect statutory reserves, limit the amount of dividends and
other payments that can be made by Chicago Title's title insurance subsidiaries
without prior regulatory approval, and impose restrictions on the amount and
type of investments they may hold. Certain states also regulate the rates
charged for various title insurance products. Chicago Title cannot predict the
effect that any proposed or future regulations may have on the financial
condition or operations of Chicago Title. See "Business -- Regulation."
12
<PAGE> 15
HOLDING COMPANY STRUCTURE
Chicago Title is a holding company that conducts no operations of its own.
After the Spin-Off, the assets of Chicago Title will essentially consist of its
equity interest in CT&T. Chicago Title will rely on cash dividends and other
permitted payments from CT&T to pay cash dividends, if any, to the holders of
Chicago Title Common Stock. The payment of dividends by CT&T to Chicago Title
and by CT&T's title insurance subsidiaries to CT&T is limited by state insurance
regulations in the states in which they do business. See "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," and "Business -- Regulation."
TAX TREATMENT OF THE SPIN-OFF
Alleghany has received the Tax Ruling from the IRS concerning the United
States Federal income tax consequences of the Spin-Off. The Tax Ruling states
that, because the Spin-Off will qualify under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), the distribution is tax-free to
Alleghany's stockholders and to Alleghany. The Tax Ruling also states that the
AAM Distribution is tax-free to Alleghany. Nevertheless, the Tax Ruling is based
upon the accuracy of representations made by Alleghany and Chicago Title as to
numerous factual matters and as to the intention to take (or to refrain from
taking) certain future action. The inaccuracy of any of those factual
representations or the failure to take the intended action (or the taking of
action which was represented as not intended to be taken) could cause the IRS to
revoke the Tax Ruling retroactively. In that event, the IRS might assert that
the Spin-Off was taxable, in which case both Alleghany and its stockholders
could be subject to tax on the Spin-Off, which tax could be material. The Tax
Sharing Agreement between Alleghany and Chicago Title provides that if Alleghany
is subject to any tax attributable to the Spin-Off, including by reason of the
Spin-Off's failure to qualify under Section 355 of the Code as a tax-free
distribution, then Chicago Title is obligated to indemnify and to hold Alleghany
harmless from any such tax unless such tax arises solely by reason of certain
actions taken, or certain misrepresentations made, by Alleghany or by Alleghany
Asset Management. Any such obligation of Chicago Title would have a material
adverse effect on Chicago Title. The Tax Sharing Agreement further obligates
Chicago Title to indemnify and to hold Alleghany harmless from any tax
attributable to the AAM Distribution if the AAM Distribution does not qualify as
a tax-free distribution under Section 355 of the Code because of any
misrepresentations made by Chicago Title upon which the Tax Ruling is based or
because of any actions taken by Chicago Title which are inconsistent with the
treatment of the AAM Distribution as a tax-free distribution. In the Tax Sharing
Agreement, Chicago Title also has agreed not to take certain actions which might
adversely affect the tax-free status of the Spin-Off or the AAM Distribution.
Among other things, Chicago Title has agreed that during the two-year period
after the Spin-Off Date, Chicago Title will not liquidate or merge with another
corporation; issue more than 20% of its capital stock in one or more
transactions; redeem, purchase or otherwise reacquire more than 5% of its
capital stock in one or more transactions (except for acquisitions of stock
related to employee benefit plans); or sell or otherwise dispose of the assets
constituting, or discontinue the active conduct of, certain businesses of CT&T.
See "Arrangements Between Alleghany and Chicago Title Relating to the
Spin-Off -- Tax Sharing Agreement" and "Certain Federal Income Tax
Consequences."
MARKET UNCERTAINTIES WITH RESPECT TO CHICAGO TITLE COMMON STOCK
There is no existing market for Chicago Title Common Stock. Although the
Chicago Title Common Stock has been authorized for listing on the NYSE, we
cannot predict, estimate or give assurances about the trading prices for Chicago
Title Common Stock before or after the Spin-Off Date. Until the Chicago Title
Common Stock is fully distributed and an orderly market develops, the trading
prices for Chicago Title Common Stock may fluctuate significantly. Prices for
the Chicago Title Common Stock will be determined in the trading markets and may
be influenced by many factors, including the depth and liquidity of the market
for Chicago Title Common Stock, investor perceptions of Chicago Title and its
business, changes in interest rates and the level of activity in real estate
markets, Chicago Title's results, Chicago Title's dividend policy, and general
economic and market conditions. The Chicago Title Common Stock distributed to
Alleghany stockholders in the Spin-Off generally will be freely transferable
under the Securities Act of 1933, as amended
13
<PAGE> 16
(the "Securities Act"), and the sale of a substantial number of shares of
Chicago Title Common Stock after the Spin-Off could adversely affect the market
price of the Chicago Title Common Stock. See "The Spin-Off -- Market for Chicago
Title Common Stock."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Chicago Title's Certificate of Incorporation (the
"Chicago Title Certificate") and By-Laws may have the effect of delaying,
deferring, or preventing a change of control of Chicago Title without further
action by the stockholders, may discourage bids for Chicago Title Common Stock
at a premium over the market price of Chicago Title Common Stock, and may
adversely affect the market price of, and the voting and other rights of, the
holders of Chicago Title Common Stock. These provisions, which are substantially
the same as provisions contained in Alleghany's Restated Certificate of
Incorporation and By-Laws, include, for example, terms in the Chicago Title
Certificate providing for (i) the issuance of blank check preferred stock by the
Chicago Title Board without stockholder approval, (ii) higher stockholder voting
requirements for certain transactions such as business combinations, (iii)
classification of the Chicago Title Board into three classes and (iv) the
removal only for cause of directors by a vote of 75% of Chicago Title's
outstanding voting power. In addition, certain "anti-takeover" provisions of the
Delaware General Corporation Law, including Section 203, may restrict the
ability of stockholders to effect a merger or business combination or obtain
control of Chicago Title, and may be considered disadvantageous by a
stockholder. See "Description of Capital Stock -- Chicago Title Common Stock;
Delaware Anti-Takeover Provisions" and "Certain Anti-Takeover
Provisions -- Chicago Title Certificate and By-Laws."
In addition, provisions in the Tax Sharing Agreement, which are intended to
preserve the tax-free status of the Spin-Off and the AAM Distribution for
Federal income tax purposes, could discourage certain takeover proposals or make
them more expensive. See "Arrangements Between Alleghany and Chicago Title
Relating to the Spin-Off -- Tax Sharing Agreement."
FORWARD-LOOKING INFORMATION
This document contains, and other materials filed or to be filed by Chicago
Title with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
Chicago Title) contain or will contain, disclosures which are forward-looking
statements. Forward looking statements include all statements that do not relate
solely to historical or current facts, and can be identified by the use of words
such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements address, among other things,
strategic initiatives and the anticipated effects of the Spin-Off. See
"Summary -- Introduction,-- Questions and Answers About Chicago Title and the
Spin-Off," "The Spin-Off -- Background and Purposes of the Spin-Off,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy." These forward-looking statements are
based upon Chicago Title's current plans or expectations and are subject to a
number of uncertainties and risks that could significantly affect current plans
and anticipated actions and Chicago Title's future financial condition and
results. These uncertainties and risks include, but are not limited to, those
relating to conducting operations in a competitive environment; the effect of
fluctuations in the volume of, and the seasonal nature of, real estate
transactions; acquisition activities (including uncertainties associated with
anticipating the use of Chicago Title Common Stock as consideration for
acquisitions when there has been no historic trading market for such stock);
general economic conditions; the relatively high costs of producing title
evidence when premiums are subject to regulatory and competitive restraints; the
effect of interest rate levels and general economic conditions on the volume of
real estate transactions occurring within the market and on Chicago Title's
investment portfolio; the effect of state regulations requiring maintenance of
minimum levels of capital and surplus and restricting the payment of dividends;
and the risk of substantial claims by large classes of claimants, such as
aboriginal title claims of Native Americans. As a consequence, current plans,
anticipated actions and future financial condition and results may differ from
those expressed in any forward-looking statements made by or on behalf of
Chicago Title.
14
<PAGE> 17
THE SPIN-OFF
BACKGROUND AND PURPOSES OF THE SPIN-OFF
In December 1997, Alleghany announced its intention to establish the title
insurance and real estate-related services business conducted by CT&T as an
independent, publicly traded company. This will be accomplished by the Spin-Off.
The title insurance industry is undergoing a period of consolidation and rapid
change, and Alleghany believes that establishing Chicago Title as an independent
company will enhance its ability to focus on operating efficiencies and
strategic initiatives that are required to respond to a changing marketplace.
Also, in the current competitive environment, it is more important than ever to
foster development of an entrepreneurial culture at Chicago Title. As an
independent public company, Chicago Title will be able to provide equity-based
compensation and incentives that should enable it to retain and recruit senior
management and to motivate employees throughout the organization. After the
Spin-Off, Chicago Title will continue under the current management of CT&T. The
Alleghany Board of Directors believes that this action is in the best interest
of stockholders.
MANNER OF EFFECTING THE SPIN-OFF
The general terms and conditions relating to the Spin-Off are set forth in
a Distribution Agreement (the "Distribution Agreement") between Alleghany and
Chicago Title. See "Arrangements Between Alleghany and Chicago Title Relating to
the Spin-Off -- Distribution Agreement."
On the Spin-Off Date, Alleghany will effect the Spin-Off by delivering all
of the outstanding shares of Chicago Title Common Stock owned by Alleghany to
Harris Trust and Savings Bank, as distribution agent (the "Distribution Agent"),
for distribution to the holders of record of Alleghany Stock as of the close of
business on the Record Date. The Spin-Off will be made on the basis of three
shares of Chicago Title Common Stock for every share of Alleghany Stock held as
of the close of business on the Record Date. The actual total number of shares
of Chicago Title Common Stock to be distributed will depend on the number of
shares of Alleghany Stock outstanding on the Record Date. The shares to be
distributed to Alleghany stockholders do not include an additional 364,746
shares of Chicago Title Common Stock to be issued immediately prior to the
Spin-Off as restricted stock to senior management of Chicago Title and its
subsidiaries, and an additional 16,000 shares to be issued immediately after the
Spin-Off as restricted stock to non-employee directors of Chicago Title. The
shares of Chicago Title Common Stock will be fully paid and nonassessable, and
the holders of Chicago Title Common Stock will not be entitled to preemptive
rights. See "Description of Capital Stock." It is expected that certificates
representing shares of Chicago Title Common Stock will be mailed to Alleghany
stockholders in early June 1998.
RESULTS OF THE SPIN-OFF
After the Spin-Off, Chicago Title will be a separate public company. The
number and identity of stockholders of Chicago Title immediately after the
Spin-Off will be the same as the number and identity of stockholders of
Alleghany on the Record Date (except in respect of the additional shares of
Chicago Title Common Stock to be issued as restricted stock to senior management
of Chicago Title and its subsidiaries and to non-employee directors of Chicago
Title). Immediately after the Spin-Off, Chicago Title expects to have
approximately 2,000 holders of record of Chicago Title Common Stock and
approximately 21,896,617 shares of Chicago Title Common Stock outstanding, based
on the number of record stockholders and issued and outstanding shares of
Alleghany Stock as of the close of business on April 28, 1998, the distribution
ratio of three shares of Chicago Title Common Stock for every share of Alleghany
Stock, and the additional shares of Chicago Title Common Stock to be issued as
restricted stock to senior management of Chicago Title and its subsidiaries and
to non-employee directors of Chicago Title. The actual number of shares of
Chicago Title Common Stock to be distributed will be determined as of the Record
Date. The Spin-Off will not affect the number of outstanding shares of Alleghany
Stock or the rights of Alleghany stockholders.
15
<PAGE> 18
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Alleghany has received the Tax Ruling from the IRS to the effect, among
other things, that, as the Spin-Off will qualify as a tax-free spin-off under
Section 355 of the Code, for Federal income tax purposes:
1. No gain or loss will be recognized by Alleghany upon the
distribution of the Chicago Title Common Stock to Alleghany's stockholders.
2. No gain or loss will be recognized (and no amount will be included
in income) by the Alleghany stockholders as a result of their receipt of
Chicago Title Common Stock in the Spin-Off.
3. As a result of the Spin-Off, a stockholder's tax basis in Alleghany
Stock will be apportioned between Alleghany Stock and Chicago Title Common
Stock received in the Spin-Off in accordance with relative fair market
values of such shares at the time of the Spin-Off.
4. The holding period of the Chicago Title Common Stock received in
the Spin-Off will include the holding period of the Alleghany Stock with
respect to which the Chicago Title Common Stock will be distributed,
provided the Alleghany Stock is held as a capital asset on the Spin-Off
Date.
5. No gain or loss will be recognized by CT&T upon the distribution of
Alleghany Asset Management to Alleghany.
6. No gain or loss will be recognized (and no amount will be included
in income) by Alleghany as a result of the AAM Distribution.
The Tax Ruling is based upon the accuracy of representations made by
Alleghany and Chicago Title as to numerous factual matters and as to the
intention to take (or to refrain from taking) certain future action. The
inaccuracy of any of those factual representations or the failure to take the
intended action (or the taking of action which was represented as not intended
to be taken) could cause the IRS to revoke the Tax Ruling retroactively. In that
event, the IRS might assert that the Spin-Off was taxable. See "Risk
Factors -- Tax Treatment of the Spin-Off" and "Arrangements Between Alleghany
and Chicago Title Relating to the Spin-Off -- Tax Sharing Agreement."
The foregoing is a general description of the material United States
Federal income tax consequences associated with the Spin-Off. It is not intended
to address every stockholder's tax consequences and does not purport to address
all tax consequences applying to every Alleghany stockholder. In particular,
this summary description does not cover state, local, or foreign income and
other tax consequences. Consequently, stockholders are strongly encouraged to
consult their individual tax advisors for relevant particular tax consequences
concerning the Spin-Off. In addition, stockholders residing outside of the
United States are encouraged to seek tax advice regarding tax implications of
the Spin-Off.
REGULATORY APPROVALS
Alleghany has provided appropriate notifications regarding the Spin-Off to,
and prior to the Spin-Off Date expects that it will have received all required
approvals from, the state regulatory authorities in Arizona, California,
Illinois, Missouri, Oregon and Texas.
MARKET FOR CHICAGO TITLE COMMON STOCK
There is no existing market for Chicago Title Common Stock. Although the
Chicago Title Common Stock has been authorized for listing on the NYSE, we
cannot predict, estimate or give assurances about the trading prices for Chicago
Title Common Stock before or after the Spin-Off Date. A when-issued trading
market for Chicago Title Common Stock is expected to develop on or shortly
before the Record Date. The term "when-issued" means that shares can be traded
prior to the time certificates are actually available or issued. Until the
Chicago Title Common Stock is fully distributed and an orderly market develops,
the trading prices for Chicago Title Common Stock may fluctuate significantly.
Prices for the Chicago Title Common Stock will be determined in the trading
markets and may be influenced by many factors, including the depth and liquidity
of the market for Chicago Title Common Stock, investor perceptions of Chicago
Title and its
16
<PAGE> 19
business, changes in interest rates and the level of activity in real estate
markets, Chicago Title's results, Chicago Title's dividend policy, and general
economic and market conditions. It is anticipated that Chicago Title Common
Stock will be publicly traded on the NYSE under the symbol "CTZ."
Alleghany Stock will continue to trade on a regular-way basis and may also
trade on a when-issued basis, reflecting an assumed post-Spin-Off value for
Alleghany Stock. Alleghany Stock when-issued trading, if available, could last
from shortly before the Record Date through the Spin-Off Date. Chicago Title and
Alleghany understand that if Alleghany Stock when-issued trading is not
available, the NYSE will require that shares of Alleghany Stock that are sold or
purchased from the period beginning on June , 1998, and ending on the Spin-Off
Date, be accompanied by due-bills representing the Chicago Title Common Stock
distributable with respect to such shares, and that during such period neither
the Alleghany Stock nor the due bills may be purchased or sold separately.
The Transfer Agent and Registrar for the Chicago Title Common Stock will be
Harris Trust and Savings Bank.
For certain information regarding awards of restricted shares of Chicago
Title Common Stock and options to purchase Chicago Title Common Stock that will
be granted in connection with the Spin-Off, see "Chicago Title Compensation
Arrangements -- The 1998 Long-Term Incentive Plan."
Shares of Chicago Title Common Stock distributed to Alleghany stockholders
in the Spin-Off will be freely transferable under the Securities Act, except for
shares received by persons who may be deemed to be affiliates of Chicago Title.
After Chicago Title becomes a publicly traded company, shares of Chicago Title
Common Stock held by persons who are affiliates of Chicago Title (generally,
individuals or entities that control, are controlled by, or are under common
control with Chicago Title) will be subject to resale restrictions under the
Securities Act. Such affiliates are permitted to sell their shares of Chicago
Title Common Stock only pursuant to an effective registration statement or an
exemption from the registration requirements of the Securities Act, such as the
exemption afforded by Rule 144 under the Securities Act.
CONDITIONS PRECEDENT TO THE SPIN-OFF
It is expected that the Spin-Off will be effective on the Spin-Off Date,
provided that:
1. all necessary permits, registrations and consents required under
the insurance, securities or blue sky laws of states or other political
subdivisions of the United States in connection with the Spin-Off shall
have been received or become effective;
2. the Chicago Title Common Stock shall have been approved for listing
on the NYSE, subject to official notice of issuance;
3. CT&T shall have distributed all of the outstanding stock of
Alleghany Asset Management to Alleghany; and
4. the Tax Ruling shall not have been revoked or modified in any
material respect.
ARRANGEMENTS BETWEEN ALLEGHANY AND CHICAGO TITLE
RELATING TO THE SPIN-OFF
Immediately prior to the Spin-Off, Alleghany and Chicago Title will enter
into certain agreements to define their ongoing relationship after the Spin-Off.
These agreements are summarized below and have been filed as exhibits to the
Registration Statement on Form 10 (the "Form 10 Registration Statement") filed
by Chicago Title with the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
following descriptions include a summary of all material terms of these
agreements but do not purport to be complete and are qualified in their entirety
by reference to the filed agreements.
17
<PAGE> 20
DISTRIBUTION AGREEMENT
Chicago Title and Alleghany will enter into the Distribution Agreement
which will provide for, among other things, cooperation regarding past matters
and the allocation of responsibility for past obligations and certain
obligations that may arise in the future. The Distribution Agreement provides
that each of Alleghany and Chicago Title will indemnify the other party and its
affiliates from and against any and all damage, loss, liability and expense
arising out of or due to the failure of the indemnitor or any of its
subsidiaries to pay, perform or otherwise discharge any of the liabilities or
obligations for which it is responsible under the terms of the Distribution
Agreement, which include, subject to certain exceptions, all liabilities and
obligations arising out of the conduct or operation of their respective
businesses before, on or after the Spin-Off Date. The Distribution Agreement
also provides that Chicago Title will bear the expenses incurred in connection
with the Spin-Off, including fees, costs and expenses related to the preparation
and filing of the Form 10 Registration Statement and the mailing of this
Information Statement, compliance with the securities and insurance laws, the
listing of the Chicago Title Common Stock on the NYSE, and the preparation and
negotiation of all of the documentation related to the Spin-Off, except that
Alleghany will bear certain identified legal fees and expenses (including all
fees and expenses incurred in connection with the Tax Ruling), and Alleghany
also will bear the fees and expenses incurred as a result of the engagement of
Merrill Lynch & Co. as financial advisor to Alleghany in connection with the
Spin-Off. The Distribution Agreement includes procedures for notice and payment
of indemnification claims and provides that the indemnifying party may assume
the defense of the claim or suit brought by a third party.
TAX SHARING AGREEMENT
Chicago Title and Alleghany will enter into a Tax Sharing Agreement (the
"Tax Sharing Agreement") to allocate certain tax liabilities between Chicago
Title and Alleghany and their respective subsidiaries and to allocate
responsibilities with respect to tax returns. Under the Tax Sharing Agreement,
Chicago Title will bear (i) its separately computed share of Alleghany's
consolidated Federal income tax liability for each taxable period for which
Chicago Title or any of its subsidiaries was a member of the Alleghany
consolidated group for Federal income tax purposes (except that Chicago Title is
not liable for taxes in respect of Alleghany Asset Management and its
subsidiaries for any period) and (ii) the appropriate part of any state or local
tax imposed based on receipts, income, capital or net worth and computed on a
consolidated, unitary or combined basis by reference to the assets and/or
activities of Chicago Title. Chicago Title is also responsible for any tax
liability resulting from any action necessary to implement the Spin-Off and its
associated events, including the AAM Distribution and the transfer of a business
previously conducted by a subsidiary of Alleghany Asset Management to Chicago
Title. All other taxes are allocated between Chicago Title and Alleghany based
on the legal entity on which the tax is imposed.
The Tax Sharing Agreement provides that if Alleghany is subject to any tax
attributable to the Spin-Off, including by reason of the Spin-Off's failure to
qualify under Section 355 of the Code as a tax-free distribution, then Chicago
Title is obligated to indemnify and to hold Alleghany harmless from any such tax
unless such tax arises solely by reason of certain actions taken, or certain
misrepresentations made, by Alleghany. Any such obligation of Chicago Title
would have a material adverse effect on Chicago Title. The Tax Sharing Agreement
further obligates Chicago Title to indemnify and to hold Alleghany harmless from
any tax attributable to the AAM Distribution if the AAM Distribution does not
qualify as a tax-free distribution under Section 355 of the Code because of any
misrepresentations made by Chicago Title upon which the Tax Ruling will be based
or because of any actions taken by Chicago Title which are inconsistent with the
treatment of the AAM Distribution as a tax-free distribution. In the Tax Sharing
Agreement, Chicago Title also has agreed not to take certain specified actions
which might adversely affect the tax-free status of the Spin-Off or the AAM
Distribution. Among other things, Chicago Title has agreed that during the
two-year period after the Spin-Off Date, Chicago Title will not liquidate or
merge with another corporation; issue more than 20% of its capital stock in one
or more transactions; redeem, purchase or otherwise reacquire more than 5% of
its capital stock in one or more transactions (except for acquisitions of stock
related to employee benefits plans); or sell or otherwise dispose of the assets
constituting, or discontinue the active
18
<PAGE> 21
conduct of, certain businesses of CT&T. See "Arrangements Between Alleghany and
Chicago Title Relating to the Spin-Off -- Tax Sharing Agreement."
AGREEMENTS BETWEEN ALLEGHANY ASSET MANAGEMENT AND CHICAGO TITLE
Prior to the Spin-Off Date, certain agreements will be entered into between
Chicago Title (or Chicago Title's subsidiary CT&T) and Alleghany Asset
Management (or Alleghany Asset Management's subsidiary The Chicago Trust
Company) in connection with the AAM Distribution.
Investment Management Agreement. Chicago Title and The Chicago Trust
Company will enter into an Investment Management Agreement providing for the
management by The Chicago Trust Company of substantially all of the long-term
investable assets and certain of the short-term investable assets of CT&T and
its subsidiaries. The term of the agreement will be five years, with automatic
one year renewals unless either party terminates within three months of the end
of any such term. The agreement also may be terminated by Chicago Title in the
event that investment performance is unsatisfactory. The investment management
fees to be charged under the Investment Management Agreement generally will be
based on market rates and, based on the level of assets under management at
March 31, 1998, would be approximately $1.2 million per year.
Transitional Services Agreement. CT&T and Alleghany Asset Management will
enter into an agreement pursuant to which CT&T will continue to furnish various
administrative services to Alleghany Asset Management. The initial term of the
agreement will end on December 31, 1998, and is subject to renewal thereafter by
mutual agreement. Fees payable by Alleghany Asset Management to CT&T for
performance of such services are expected to be at the annual rate of
approximately $1.1 million.
Sublease. The Chicago Trust Company will sublease space at the principal
headquarters building of Chicago Title from CT&T at a rent and on such other
terms as are currently applicable to CT&T for such space. Total charges related
to this sublease are expected to be at the annual rate of approximately $1.5
million.
REASONS FOR FURNISHING THIS INFORMATION STATEMENT
This Information Statement is being furnished by Alleghany solely to
provide information to Alleghany stockholders who will receive Chicago Title
Common Stock in the Spin-Off. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Alleghany or
Chicago Title. Chicago Title believes that the information presented herein is
accurate as of the date hereof. Changes will occur after the date hereof, and
neither Alleghany nor Chicago Title will update the information except to the
extent required in the normal course of their respective public disclosure
practices.
19
<PAGE> 22
SELECTED FINANCIAL DATA
The following table sets forth a summary of selected financial data for
Chicago Title. The historical financial information below may not necessarily be
indicative of the results of operations or financial position that would have
been obtained if Chicago Title had been a separate, independent company during
the periods shown or of Chicago Title's future performance as an independent
company. The financial data set forth below should be read in conjunction with
CT&T's Consolidated Financial Statements and the notes thereto found elsewhere
in this Information Statement. See "Selected Financial Data," "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and CT&T's Consolidated Financial
Statements and notes thereto. Earnings per share data are presented elsewhere in
this Information Statement on a pro forma basis only. See "Pro Forma
Consolidated Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (IN 000S)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA:
Revenues:
Title, escrow, trust
and other
revenue............ $ 385,804 298,408 1,411,496 1,278,590 1,082,008 1,283,970 1,359,955
Investment income.... 14,805 11,762 52,266 47,658 46,661 44,913 49,290
Net realized
investment gains
(losses)........... 371 155 3,684 1,436 3,697 (5,447) 7,058
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues..... 400,980 310,325 1,467,446 1,327,684 1,132,366 1,323,436 1,416,303
Expenses:
Salaries and other
employee
benefits........... 127,603 100,477 454,648 411,815 344,767 368,097 393,418
Commissions paid to
agents............. 131,490 114,400 526,324 484,351 420,555 549,990 545,552
Provision for title
losses............. 26,279 21,772 102,324 83,023 81,385 94,845 121,865
Interest expense..... 1,295 1,156 4,644 5,566 6,456 6,859 9,572
Other operating and
administrative
expenses........... 82,273 64,118 295,903 273,236 242,380 244,655 263,057
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses..... 368,940 301,923 1,383,843 1,257,991 1,095,543 1,264,446 1,333,464
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income from
continuing operations
before income
taxes................ 32,040 8,402 83,603 69,693 36,823 58,990 82,839
Income taxes........... 10,799 2,474 27,894 23,115 11,889 18,854 26,329
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income from
continuing
operations........... $ 21,241 5,928 55,709 46,578 24,934 40,136 56,510
=========== =========== =========== =========== =========== =========== ===========
Dividends paid to
Alleghany(1)......... $ 0(2) 0 32,105 30,000(3) 29,515 66,527 235,470
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets........... $ 1,812,464 1,428,542 1,702,207 1,482,697 1,447,351 1,389,700 1,500,390
Notes payable and other
obligations.......... 32,851 43,282 32,443 43,282 55,043 64,441 74,966
Basic and diluted
earnings per share
from continuing
operations(4)........ 0.97 0.27 2.54 2.13 1.14 1.83 2.58
Average number of
shares
outstanding(4)....... 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617 21,896,617
</TABLE>
20
<PAGE> 23
- ---------------
(1) Historical dividends and distributions to Alleghany may not be indicative of
future dividends to common stockholders. See "Dividend Policy." Most of the
$235.5 million dividend paid by CT&T to Alleghany in 1993 was used by
Alleghany for acquisition purposes. Dividends per share would not be
meaningful and, therefore, are not presented herein.
(2) In April 1998, the CT&T Board of Directors declared as a dividend to
Alleghany a promissory note payable in the amount of $9.0 million on
December 31, 1998. This dividend represents a distribution by CT&T of a
portion of its earnings for the period during 1998 that it was held as a
subsidiary of Alleghany.
(3) Includes the repurchase of common stock from Alleghany in 1996 for $30
million.
(4) See Note 17 included within the notes to CT&T's Consolidated Financial
Statements presented elsewhere in this Information Statement.
21
<PAGE> 24
PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial data set forth below should
be read in conjunction with the historical consolidated financial data presented
elsewhere herein. The pro forma consolidated financial data is presented for
informational purposes only and may not reflect the future results of operations
or financial position of Chicago Title or what the results of operations would
have been had Chicago Title been operated as an independent, public company
during 1997 and the first quarter of 1998.
PRO FORMA RESULTS OF OPERATIONS
During 1997 and the three months ended March 31, 1998, Chicago Title
operated on a separate, stand-alone basis in terms of capital funding and did
not receive any material services from its parent or affiliates. As a result,
the unaudited 1997 and first quarter 1998 pro forma consolidated results of
operations would be reflective of the historical based results.
PRO FORMA CONSOLIDATED BALANCE SHEET AND CAPITALIZATION
The following tables set forth the unaudited pro forma consolidated balance
sheet and capitalization of Chicago Title at March 31, 1998. The tables should
be read in conjunction with the introduction to the pro forma financial
statements above. The pro forma capitalization table has been derived from the
historical financial statements and reflects certain pro forma adjustments as if
the Spin-Off had been consummated as of March 31, 1998. The pro forma
information may not reflect the capitalization of Chicago Title in the future or
as it would have been had Chicago Title been an independent, public company at
March 31, 1998.
22
<PAGE> 25
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN 000s)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash on hand and in banks........................... $ 35,887 -- 35,887
Cash pledged to secure trust and escrow deposits.... 263,199 -- 263,199
Total marketable securities......................... 975,899 -- 975,899
Receivables......................................... 71,412 -- 71,412
Deferred Federal income taxes....................... 81,204 -- 81,204
Fixed assets, net................................... 97,357 -- 97,357
Title plants........................................ 150,771 -- 150,771
Net assets from discontinued operations............. 19,825 (19,825)(1) --
Other assets........................................ 116,910 -- 116,910
---------- ------- ---------
Total assets................................... $1,812,464 (19,825) 1,792,639
========== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................... $ 120,366 -- 120,366
Accrued expenses and other liabilities.............. 101,208 17,000(2) 118,208
Dividend payable to Alleghany (promissory note)..... -- 9,000(4) 9,000
Notes payable and other obligations................. 32,851 -- 32,851
Reserve for title losses............................ 569,829 -- 569,829
Trust and escrow deposits secured by pledged
assets............................................ 558,403 -- 558,403
---------- ------- ---------
Total liabilities.............................. 1,382,657 26,000 1,408,657
---------- ------- ---------
Stockholders' equity:
Preferred stock................................... -- -- --
Common stock...................................... 13,676 8,221(3) 21,897
Additional paid-in capital........................ 117,381 (8,221)(3) 109,160
Retained earnings................................. 287,645 (45,825)(1)(2)(4) 241,820
Accumulated other comprehensive income(5)......... 11,105 -- 11,105
---------- ------- ---------
Total stockholders' equity..................... 429,807 (45,825) 383,982
---------- ------- ---------
Total liabilities and stockholders'
equity.................................. $1,812,464 (19,825) 1,792,639
========== ======= =========
</TABLE>
- ---------------
(1) Net assets of Alleghany Asset Management aggregating $19.8 million to be
distributed to Alleghany immediately prior to the Spin-Off.
(2) To record $17.0 million in estimated after-tax direct costs associated with
the Spin-Off consisting of $13.0 million in executive compensation
(including $4.1 million attributable to the repurchase of an option that had
been granted to John Rau in connection with the commencement of his
employment as President and Chief Executive Officer of CT&T in January 1997)
and $4.0 million in professional fees, printing costs, listing fees, and
other expenses.
(3) To record the par value of shares of Chicago Title Common Stock distributed
to holders of Alleghany Stock and to record the recapitalization of Chicago
Title based upon the par value of the newly issued shares. The pro forma
amounts assume that the Spin-Off had taken place on March 31, 1998. The
number of shares used to compute stockholders' equity-common stock is based
upon the assumed distribution of 21,515,871 shares of Chicago Title Common
Stock to Alleghany stockholders (based upon the distribution ratio of three
shares of Chicago Title Common Stock for every share of Alleghany Stock) and
the issuance of an additional 380,746 shares of Chicago Title Common Stock
to senior management of Chicago Title and its subsidiaries and to the
non-employee directors of Chicago Title.
(4) To record the $9.0 million dividend declared by CT&T payable to Alleghany in
the form of a promissory note which represents a distribution by CT&T of a
portion of its earnings for the period in 1998 during which it was held as a
subsidiary of Alleghany.
(5) For information on the change in the description for this line item from the
year end financial statements, see "Notes to Consolidated Quarterly
Financial Statements."
23
<PAGE> 26
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CAPITALIZATION
MARCH 31, 1998
(IN 000s, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Notes payable and other obligations..................... $ 32,851 -- 32,851
Stockholders' equity
Preferred stock, par value $1.00, authorized 8,000,000
shares, none issued and outstanding................ -- -- --
Common stock, par value $1.00, authorized 66,000,000
shares, 21,896,617 issued and outstanding shares... 13,676 8,221(1) 21,897
Additional paid in capital............................ 117,381 (8,221)(1) 109,160
Retained earnings..................................... 287,645 (45,825)(2) 241,820
Accumulated other comprehensive income(3)............. 11,105 -- 11,105
-------- ------- -------
Total pro forma consolidated capitalization... $462,658 (45,825) 416,833
======== ======= =======
</TABLE>
- ---------------
(1) To record the par value of shares of Chicago Title Common Stock distributed
to holders of Alleghany Stock and to record the recapitalization of Chicago
Title based upon the par value of the newly issued shares. The pro forma
amounts assume that the Spin-Off had taken place on March 31, 1998. The
number of shares used to compute stockholders' equity-common stock is based
upon the assumed distribution of 21,515,871 shares of Chicago Title Common
Stock to Alleghany stockholders (based upon the distribution ratio of three
shares of Chicago Title Common Stock for every share of Alleghany Stock) and
the issuance of an additional 380,746 shares of Chicago Title Common Stock
to senior management of Chicago Title and its subsidiaries and to the
non-employee directors of Chicago Title.
(2) To record $17.0 million in estimated after-tax direct costs associated with
the Spin-Off, including professional fees, printing costs, listing fees and
executive compensation (tax effected), net assets of Alleghany Asset
Management aggregating $19.8 million to be distributed to Alleghany, and the
$9.0 million dividend declared by CT&T payable to Alleghany in the form of a
promissory note which represents a distribution by CT&T of a portion of its
earnings for the period in 1998 during which it was held as a subsidiary of
Alleghany. The $17.0 million in estimated after-tax direct costs associated
with the Spin-Off consists of $13.0 million in executive compensation
(including $4.1 million attributable to the repurchase of an option that had
been granted to John Rau in connection with the commencement of his
employment as President and Chief Executive Officer of CT&T in January 1997)
and $4.0 million in professional fees, printing costs, listing fees, and
other expenses.
(3) For information on the change in the description for this line item from the
year end financial statements, see "Notes to Consolidated Quarterly
Financial Statements."
24
<PAGE> 27
DIVIDEND POLICY
CT&T has regularly paid cash dividends and has made certain other cash
distributions to Alleghany. In 1997, a dividend of $32.1 million was paid to
Alleghany, and in 1996 a payment of $30.0 million was made to Alleghany to
redeem shares of CT&T stock. On April 28, 1998, the CT&T Board of Directors
declared as a dividend to Alleghany a promissory note payable in the amount of
$9.0 million on December 31, 1998. The $9.0 million promissory note paid to
Alleghany as a dividend represents a distribution by CT&T of a portion of its
earnings for the period during 1998 that it was held as a subsidiary of
Alleghany. At maturity, the principal amount of the promissory note will be paid
out of internally generated cash flow.
In anticipation of the Spin-Off, Chicago Title has adopted a policy with
regard to the payment of dividends. Under this policy, Chicago Title currently
intends to pay a regular quarterly cash dividend of $0.34 per share of Chicago
Title Common Stock. This dividend policy is consistent with the aggregate amount
of distributions generally paid to Alleghany in recent years. See "Selected
Financial Data." The first regular quarterly cash dividend is expected to be
paid to stockholders of Chicago Title in the third quarter of 1998. The actual
timing and amount of dividends, if any, will depend on various factors as
described in the following paragraph and are subject to change at the discretion
of the Chicago Title Board from time to time.
Notwithstanding the dividend policy described above, dividends will be paid
only when, as and if determined by the Chicago Title Board out of funds legally
available for the payment of dividends. The actual amount and timing of
dividends, if any, will depend on Chicago Title's financial condition, results
of operations, business prospects and such other matters as the Chicago Title
Board may deem relevant. Even if earnings are available for dividends, the
Chicago Title Board could determine that such earnings should be retained for an
extended period of time in order to replenish Chicago Title's capital base, to
expand its business, to enhance its competitive position, or for any other
purpose deemed appropriate by the Chicago Title Board. In addition, in order to
pay cash dividends, Chicago Title, as a holding company, will depend on payment
of dividends by CT&T to Chicago Title and by CT&T's title insurance subsidiaries
to CT&T. The payment of dividends by CT&T to Chicago Title and by CT&T's title
insurance subsidiaries to CT&T is limited by state insurance regulations in the
states in which they do business. Consequently, there can be no assurance as to
the amount or timing of dividend payments, and Chicago Title's dividend policy
is subject to change. See "Risk Factors -- Reserve for Title Losses" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion and analysis of financial results should be read together
with the selected financial data and the Consolidated Financial Statements and
Notes of CT&T included elsewhere herein.
Forward Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are forward-looking
statements. Forward looking statements include all statements that do not relate
solely to historical or current facts, and can be identified by the use of words
such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements are based upon Chicago Title's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans and anticipated actions and
Chicago Title's future financial condition and results. These uncertainties and
risks include, but are not limited to, those relating to conducting operations
in a competitive environment; the effect of fluctuations in the volume of, and
the seasonal nature of, real estate transactions; acquisition activities
(including uncertainties associated with anticipating the use of Chicago Title
Common Stock as consideration for acquisitions when there has been no historic
trading market for such stock); general economic conditions; the relatively high
costs of producing title evidence when premiums are subject to regulatory and
competitive restraints; the effect of interest rate levels and general economic
conditions on the volume of real estate transactions occurring within the market
and on Chicago Title's investment portfolio; the effect of state regulations
requiring maintenance of minimum levels of capital and surplus and restricting
the payment of dividends; and the risk of substantial claims by large classes of
claimants, such as aboriginal title claims of Native Americans. As a
consequence, current plans, anticipated actions and future financial condition
and results may differ from those expressed in any forward-looking statements
made by or on behalf of Chicago Title.
Overview
In December 1997, Alleghany announced its intention to establish the title
insurance and real estate-related services business now conducted by CT&T as an
independent, publicly traded company. This will be accomplished by the Spin-Off.
The title insurance industry is undergoing a period of consolidation and rapid
change, and Alleghany believes that establishing Chicago Title (sometimes herein
referred to as the "Company") as an independent company will enhance its ability
to focus on operating efficiencies and strategic initiatives that are required
to respond to a changing marketplace. Also, in the current competitive
environment, it is more important than ever to foster development of an
entrepreneurial culture at Chicago Title. As an independent public company,
Chicago Title will be able to provide equity-based compensation and incentives
that should enable it to retain and recruit senior management and to motivate
employees throughout the organization. After the Spin-Off, Chicago Title will
continue under the current management of CT&T.
The financial services business conducted through Alleghany Asset
Management, currently a subsidiary of CT&T, will not be part of the
distribution. Prior to the Spin-Off, all of the outstanding stock of Alleghany
Asset Management will be distributed by CT&T to Alleghany. Therefore, the
operating results of the financial services business are classified as a
"discontinued operation" in the financial statements included elsewhere herein.
Chicago Title reported net income from continuing operations of $55.7
million in 1997, $46.6 million in 1996 and $24.9 million in 1995. Chicago
Title's results of operations during this three-year period benefited from
healthy economic conditions that positively influenced real estate markets. In
particular, residential refinancing activity and commercial transactions have
shown strong growth during this three-year period. Along with the growth in
total revenue, pre-tax income as a percentage of revenues has also improved.
26
<PAGE> 29
Operating Revenues
Chicago Title's business is highly dependent upon the volume of real estate
transactions occurring within the market. In turn, the volume of real estate
transactions is highly sensitive to interest rate levels and general economic
conditions. Because these factors can be volatile, revenue levels for Chicago
Title are also volatile.
Premiums and related fees are determined by competitive factors and in many
states are also subject to regulation. Title insurance premiums are recognized
as revenues principally at the time of the real estate closing and escrow fees
principally when billed. As a result, there is typically a lag of about two
months between the time that a title insurance order is placed, at which time
work commences, and the time that Chicago Title recognizes the revenues
associated with the order. Revenues from title policies issued by independent
agents are generally recorded when notice of issuance is received from the
agent.
Investment Income
In addition to income from title insurance premiums and related fees,
Chicago Title earns dividends and interest income from its portfolio of fixed
maturity and equity securities. Chicago Title's current investment policy is (i)
to minimize the cyclical volatility of the portfolio, (ii) to maintain stability
of principal, (iii) to maintain consistency of cash flow and liquidity and (iv)
to earn a favorable total return. See "Business -- Investment Operations" for
more detailed information regarding Chicago Title's investment portfolio.
Operating Expenses
Chicago Title's profit margins are affected by several factors, including
the volume, size and mix of real estate transactions. Volume is an important
determinant of profitability because Chicago Title, like any other title
insurance company, has a significant level of fixed costs arising from
personnel, occupancy costs and maintenance of title plants.
Chicago Title's principal variable expense is commissions paid to agents.
Chicago Title regularly reviews the performance of its agents, adjusting
commission levels or canceling agents that do not meet objectives.
Chicago Title's next largest category of expense is salaries and other
employee benefits. Due to the volatility of real estate transaction volumes
driving Chicago Title's revenue, proper management of staff levels and other
components of labor expense is critical to the optimization of operating
results. To increase the sensitivity of employee-related costs to changing
business conditions, Chicago Title strives to emphasize variable forms of
compensation such as commissions, bonuses and incentive compensation programs
for large segments of the employee population.
The most significant components of other operating and administrative
expenses are occupancy, purchased property information, computer-related
expenses, telecommunications and supplies.
Provision for Title Losses
Generally, title insurance claim rates are lower than for other types of
insurance because title insurance policies generally insure against prior events
affecting the quality of real estate titles, rather than against unforeseen, and
therefore less predictable, future events. A provision is made for estimated
future claim payments at the time revenue is recognized. Initial reserve
provisions are derived directly from premium revenues, based upon anticipated
loss ratios. Claims payments generally result from either judgment errors or
mistakes made in the title search and examination process or the escrow process,
or from other problems such as fraud or incapacity of persons transferring
property rights.
When a claim is reported, Chicago Title establishes a "case" reserve, based
upon the best estimate of the total amount necessary to settle the claim and to
provide for allocated loss adjustment expenses, including legal defense costs
("LAE"). These reserves are periodically adjusted by Chicago Title based on its
evaluation of subsequent developments regarding the reported claim.
In addition to "case" reserves, Chicago Title also maintains reserves for
title losses that are incurred but not yet reported ("IBNR reserves"). These
reserves are particularly significant in long tail lines of insurance,
27
<PAGE> 30
such as title insurance, for which the claim and the circumstances causing the
claim may be separated by a long period of time. Unlike most other types of
insurance, the event giving rise to a possible future claim under a title
insurance policy, the defect in the title, occurred before issuance of the
policy but may not be discovered, if ever, until a future date.
Chicago Title establishes IBNR reserves by using actuarial principles and
procedures commonly used in the title insurance industry to estimate the
ultimate liability for losses and LAE. The actuarial procedures use historic
patterns of claims to predict likely future claims. Projections are analyzed in
the context of changing economic conditions, and the projections and related
reserves are modified when appropriate.
IBNR reserves are also established for very large or unusual claims which
might fall outside the normal distribution of expected claims experience.
Reserves for these claims are based on an analysis of the experience of both
Chicago Title and the title insurance industry.
Chicago Title's reserves are reviewed regularly by management and are
certified by an independent actuary on an annual basis. Chicago Title does not
discount its reserves for anticipated investment income.
Because of the long-term nature of most title insurance business exposures,
there is inherent uncertainty in estimating reserves. Actual losses may deviate,
perhaps substantially, from reserves on Chicago Title's financial statements,
which could have a material effect on Chicago Title's financial condition and
results of operations. Based on current information, Chicago Title management
believes the reserve for losses at March 31, 1998 is adequate.
Income Taxes
Chicago Title pays United States Federal and state income taxes based on
laws in the jurisdictions in which it operates. The effective Federal tax rates
reflected in the statement of income for continuing operations amounted to 32.4%
in 1997, 32.8% in 1996, and 31.6% in 1995. The effective Federal tax rates are
lower than the United States Federal statutory rate of 35% principally due to
tax-exempt income received from the holding of state and municipal securities.
At December 31, 1997 Chicago Title had recorded net deferred tax assets of
$76.0 million related primarily to the reserve for title losses. Chicago Title
reassesses the realization of net deferred tax assets quarterly and, if
necessary, adjusts its valuation allowance accordingly. Substantially all of the
net deferred tax asset balance could be realized in the future through the
reversal of existing temporary taxable differences. Accordingly, it is more
likely than not that the income tax benefits will be realized for all the
temporary deductible differences existing at December 31, 1997, and as of that
date there was no valuation allowance.
Seasonality
The title insurance industry is highly dependent upon the volume of real
estate transactions occurring within the market. In turn, the volume of real
estate transactions is highly sensitive to interest rate levels and general
economic conditions. Because these factors can be volatile, revenue levels for
the title industry also can be volatile. In addition, the title insurance
business is seasonal, since real estate activity is seasonal. The first calendar
quarter is typically the weakest quarter in terms of revenue due to the
generally low volume of home sales during the winter. The fourth calendar
quarter is typically the strongest in terms of revenue due to the desire of
commercial entities to complete transactions by year end. These traditional
seasonal patterns can be altered if there is a significant change in the level
of mortgage refinancing, since refinancing activity is correlated with movements
in the level of interest rates and is not tied to a seasonal pattern.
Contingencies
Chicago Title is a party to pending litigation and claims in connection
with the ordinary course of its business. Provision is made on its books, in
accordance with generally accepted accounting principles, for estimated losses
to be incurred in such litigation and claims, including legal costs. In the
opinion of management, such provision is adequate.
28
<PAGE> 31
Alleghany has received the Tax Ruling from the IRS concerning the United
States Federal income tax consequences of the Spin-Off. The Tax Ruling states
that, because the Spin-Off will qualify under Section 355 of the Code, the
distribution is tax-free to Alleghany's stockholders and to Alleghany. The Tax
Ruling also states that the AAM Distribution is tax-free to Alleghany.
Nevertheless, the Tax Ruling is based upon the accuracy of representations made
by Alleghany and Chicago Title as to numerous factual matters and as to the
intention to take (or to refrain from taking) certain future action. The
inaccuracy of any of those factual representations or the failure to take the
intended action (or the taking of action which was represented as not intended
to be taken) could cause the IRS to revoke the Tax Ruling retroactively. In that
event, the IRS might assert that the Spin-Off was taxable, in which case both
Alleghany and its stockholders could be subject to tax on the Spin-Off, which
tax could be material. The Tax Sharing Agreement between Alleghany and Chicago
Title provides that if Alleghany is subject to any tax attributable to the
Spin-Off, including by reason of the Spin-Off's failure to qualify under Section
355 of the Code as a tax-free distribution, then Chicago Title is obligated to
indemnify and to hold Alleghany harmless from any such tax, unless such tax
arises solely by reason of certain actions taken, or certain misrepresentations
made, by Alleghany or by Alleghany Asset Management. Any such obligation of
Chicago Title would have a material adverse effect on Chicago Title. The Tax
Sharing Agreement further obligates Chicago Title to indemnify and to hold
Alleghany harmless from any tax attributable to the AAM Distribution if the AAM
Distribution does not qualify as a tax-free distribution under Section 355 of
the Code because of any misrepresentations made by Chicago Title upon which the
Tax Ruling is based or because of any actions taken by Chicago Title which are
inconsistent with the treatment of the AAM Distribution as a tax-free
distribution. In the Tax Sharing Agreement, Chicago Title also has agreed not to
take certain actions which might adversely affect the tax-free status of the
Spin-Off or the AAM Distribution. See "Arrangements Between Alleghany and
Chicago Title Relating to the Spin-Off -- Tax Sharing Agreement."
New Accounting Standards
Note 2 to the Consolidated Financial Statements included elsewhere herein
describes several new accounting standards which Chicago Title either has
adopted in 1997 or intends to adopt in 1998. Adoption of these new accounting
standards has not had, or is not expected to have, as the case may be, a
material effect on Chicago Title's financial reporting.
Year 2000 Issues
Many computer programs utilized by Chicago Title use only two digits to
identify a year in the date field. Failure to correct this situation could
result in a significant disruption to business operations. Chicago Title has
undertaken a program to determine the extent of "Year 2000" compliance issues
within each of its significant computer systems and to take appropriate remedial
action. Included within the scope of this review are systems utilized on a
Company-wide basis in title plants, title production units, claim processing,
human resources, financial management and company-wide infrastructure. Costs of
approximately $1.0 million were incurred in 1997 and another $2.2 million is
expected to be spent in 1998 in performing this review and all related remedial
work on these centralized systems. By the end of 1998, it is expected that each
of the significant Company-wide systems will have been reviewed and remedied for
Year 2000 issues, thus allowing sufficient time in 1999 for further testing.
In addition to the company-wide systems, there are various other computer
systems used by Chicago Title's business units on a local basis. Regional
managers report on the status of Year 2000 compliance activities within their
area of responsibility to Chicago Title's senior management on a regular basis.
To assist in their compliance programs, a comprehensive questionnaire which
incorporates recommendations of the American Land Title Association has been
developed by Chicago Title's Information Services Division. Due to the diverse
nature of the computer systems used on a local basis, it is difficult to
estimate the total costs to be incurred in performing the necessary review and
remediation activity for Year 2000 issues. However, based upon the results of
reviews that have taken place to date, Chicago Title's management believes that
such costs will not exceed $5.0 million in total over the years 1998 and 1999.
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<PAGE> 32
In addition to the review of internal systems, Chicago Title is also in
contact with third parties with which it does business to coordinate action with
respect to Year 2000 issues and to receive confirmation that plans are being
developed to address Year 2000 compliance. Failure by third parties with which
Chicago Title has important business relationships to resolve their Year 2000
issues could have a significant adverse effect on Chicago Title's operations.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Net Income
Chicago Title reported record earnings of $21.2 million from continuing
operations in the first quarter of 1998. This compares to net income from
continuing operations of $5.9 million in the same period in 1997. Total revenue
amounted to $401.0 million, an increase of 29.2% over the prior year.
Exceptionally strong mortgage refinance activity, along with high levels of new
and existing home sales and commercial transactions, fueled the increase in
revenue in what is normally the title industry's seasonal low period. The surge
in revenue allowed pre-tax income from continuing operations as a percentage of
revenue to improve to 8.0% in 1998 from 2.7% in 1997.
Net income from discontinued operations amounted to $5.0 million in the
first quarter of 1998 and $2.2 million in the first quarter of 1997. The
increase in net income from discontinued operations in the first quarter of 1998
as compared to the first quarter of 1997 reflects the continued strength of
financial markets and the corresponding growth of assets under management.
Chicago Title's net income, including income from discontinued operations,
totaled $26.2 million in the first quarter of 1998 and $8.1 million in the first
quarter of 1997.
Operating Revenues
Real estate markets in the first quarter of 1998 benefited from favorable
economic conditions marked by low levels of unemployment and benign inflationary
pressures. The resulting combination of low interest rates and high consumer
confidence led to an increase in residential refinance transactions and promoted
healthy increases in residential purchases and commercial transactions.
Title, escrow, trust and other revenue increased $87.4 million from the
first quarter of 1997 to the first quarter of 1998. Approximately 25% of this
increase was attributable to an increase in gross agent revenues, 24% was due to
an increase in direct residential refinance title premiums, 14% was due to
higher escrow and closing fees, 10% was attributable to higher commercial title
premiums, and the remainder was due to various other items. In the first
quarters of 1998 and 1997, approximately 64% and 60%, respectively, of Chicago
Title's direct title premiums were attributable to residential transactions; in
each period the remainder was related to commercial transactions.
Investment Income
Pre-tax investment income totaled $14.8 million in the first quarter of
1998 compared to $11.8 million for the same period in 1997. The increased level
of income was attributable to higher levels of investment assets. The average
duration of the portfolio as of March 31, 1998 was 2.5 years as compared to
2.2 years at December 31, 1997.
Expenses
COMMISSIONS PAID TO AGENTS. Payment of commissions to title insurance
agents constitutes the largest single expense incurred by Chicago Title. The
commission rate varies by geographic area, primarily due to competitive factors,
in which the commission is earned. The percentage of premiums retained by agents
amounted to 75.9% in the first quarter of 1998, as compared to 75.7% in the
first quarter of 1997. Chicago Title reports amounts retained by agents as
commissions paid to agents, along with amounts paid to approved attorneys, in
the consolidated statements of income.
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<PAGE> 33
SALARIES AND OTHER EMPLOYEE BENEFITS. This category of expense represents
the cost of salaries, incentive compensation and benefits paid to employees. One
key ratio monitored by management is the amount of these expenses as a
percentage of revenue, net of commissions paid to agents. The following table
summarizes this ratio for the first quarter:
<TABLE>
<CAPTION>
FIRST QUARTER
------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
---------------------- --------------- ---------------
<S> <C> <C>
Total revenue........................................ $ 400,980 $ 310,325
Commissions paid to agents........................... (131,490) (114,400)
--------------- ---------------
Net revenue.......................................... 269,490 195,925
Total salaries and other employee benefits........... 127,603 100,477
Percentage........................................... 47.3% 51.3%
</TABLE>
The level of total salaries and other employee benefits as a percentage of
net revenue decreased in the first quarter of 1998 from the same period a year
earlier because the significant increase in revenue earned in the 1998 period
allowed greater leveraging of fixed cost components of labor expense. In
addition, management is maintaining an increased focus on controlling this
expense.
PROVISIONS FOR TITLE LOSSES. The following table summarizes key
information pertaining to Chicago Title's provisions for title losses:
<TABLE>
<CAPTION>
FIRST QUARTER
------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
---------------------- --------------- ---------------
<S> <C> <C>
Provision for title losses - current period.......... $ 26,279 $ 21,772
Title, escrow, trust and other revenue............... 385,804 298,408
Ratio................................................ 6.8% 7.3%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
Reserve for title losses at period-end.............. $ 569,829 $ 564,334
Paid losses, net of recoveries - trailing 12
months............................................ 70,796 70,913
Reserve coverage of paid losses - trailing 12
months............................................ 8.0 8.0
</TABLE>
The provision for title losses as a percentage of operating revenue was
reduced in the first quarter of 1998 from the prior year level in recognition of
a continued downward trend in claims paid.
OTHER OPERATING AND ADMINISTRATIVE EXPENSES. Other operating and
administrative expense increased $18.2 million from the first quarter of 1997 to
the first quarter of 1998. The increased level of expenses are primarily
attributable to variable expenses such as property information expense, contract
labor, premium taxes, and supplies rising to support the significantly higher
business volumes in the first quarter of 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1996 AND DECEMBER 31,
1995
Net Income
Chicago Title reported a strong increase in net income from continuing
operations in 1997, rising 19.6% from the prior year level on an increase in
total revenue of 10.5%. Net income from continuing operations recorded in 1996
increased by 86.8% over Chicago Title's depressed results in 1995 on an increase
in total revenue of 17.2%. As noted above, results in 1995 were negatively
impacted by the rising interest rate environment, which prevailed throughout
1994 and early 1995. For both 1997 and 1996, the improved operating results were
primarily attributable to higher revenue levels resulting from improved real
estate markets. Residential refinancing activity and commercial transactions
showed considerable strength as a result of favorable economic conditions
highlighted by low interest rates and low levels of unemployment. Improved
expense levels relative to revenue also bolstered profitability in both 1997 and
1996. Pre-tax income from continuing operations, as a percentage of revenue,
amounted to 5.7% in 1997, 5.2% in 1996 and 3.3% in 1995.
Chicago Title's 1996 results from continuing operations were adversely
impacted by a $4.2 million pre-tax charge associated with a write down of the
carrying value of title plants and goodwill in connection with the
implementation of Statement of Financial Accounting Standards No. 121. Operating
results for 1996 were
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<PAGE> 34
favorably impacted by an increase in pre-tax income of $8.0 million resulting
from a reduction in the reserve for title losses for prior years. The reduction
in the reserve for title losses was due to a downward trend in claims paid and
an assessment that the mix of business written between 1993 and 1995 presented a
lower level of risk than previously anticipated.
Operating Revenues
The year 1995 marked a trough for real estate markets, reflecting the
impact of actions to increase interest rates begun by the Federal Reserve Board
in 1994. Beginning in the second half of 1995, economic conditions improved and
interest rates began to decline, resulting in exceptional growth in the
commercial and industrial ("C&I") real estate business and providing a strong
boost to residential refinance transactions.
Title, escrow, trust and other revenue increased $132.9 million from 1996
to 1997 and $196.6 million from 1995 to 1996. With regard to the 1997 increase,
approximately 38% was attributable to an increase in gross agent revenues, 26%
was due to an increase in direct commercial title premiums, 11% was related to
higher direct residential title premiums, 10% was attributable to higher real
estate related service fees, 9% was due to higher escrow and closing fees, and
the remainder was due to various other items. With regard to the 1996 increase,
approximately 42% was due to an increase in gross agent revenues, 16% was due to
higher residential title premiums, 12% was due to higher commercial title
premiums, 12% was due to higher escrow and closing fees, 9% was due to higher
real estate related service fees, and the remainder was due to various other
items. In 1997, 1996 and 1995, approximately 62%, 65% and 66%, respectively, of
Chicago Title's direct title premiums were attributable to residential
transactions; in each year, the remainder was attributable to commercial
transactions.
Investment Income
Pre-tax investment income totaled $52.3 million in 1997, compared with
$47.7 million in 1996 and $46.7 million in 1995. These increases were due
principally to higher levels of investment assets. Chicago Title also recorded a
pre-tax gain of $3.7 million on investment transactions in 1997, compared with
pre-tax gains of $1.4 million in 1996 and $3.7 million in 1995.
Expenses
Commissions Paid to Agents. Payment of commissions to title insurance
agents constitutes the largest single expense incurred by Chicago Title.
Commission rates vary by geographic area, primarily due to competitive factors,
in which the commission is earned. The percentage of premiums retained by agents
amounted to 76.2% in 1997, 75.7% in 1996 and 75.3% in 1995. Chicago Title
reports amounts retained by agents as commissions paid to agents, along with
amounts paid to approved attorneys, in the consolidated statements of income.
Salaries and Other Employee Benefits. This category of expense represents
the cost of salaries, incentive compensation and benefits paid to employees. One
key ratio monitored by Company management is the level of these expenses as of
percentage of revenue, net of commissions paid to agents. The following table
summarizes this ratio for the past three years:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total revenue.......................... $1,467,446 $1,327,684 $1,132,366
Commissions paid to agents............. (526,324) (484,351) (420,555)
---------- ---------- ----------
Net revenue............................ 941,122 843,333 711,811
Total salaries and other employee
benefits............................. 454,648 411,815 344,767
Ratio.................................. 48.3% 48.8% 48.4%
</TABLE>
The level of total salaries and other employee benefits as a percentage of
net revenue increased slightly in 1996 as compared to 1995 because many of
Chicago Title's variable compensation programs are tied in some way to Chicago
Title's net income performance. In 1997, the level of total salaries and other
employee benefits
32
<PAGE> 35
as a percentage of net revenue was reduced due to several factors including an
improved mix of higher margin business, increased leveraging of fixed cost
components of labor expense with higher volumes of business, and increased
management focus on controlling expenses.
Management intends to seek to reduce the ratio of labor expense to revenue
through the transfer of best practices throughout Chicago Title, increased
automation, and continued consolidation of title plants, production centers and
staff functions.
Provision for Title Losses. The following table summarizes key information
pertaining to Chicago Title's provision for title losses:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Provision for title losses -- current
year................................. $ 102,324 $ 91,023 $ 81,385
Title, escrow, trust and other
revenue.............................. 1,411,496 1,278,590 1,082,008
Ratio.................................. 7.2% 7.1% 7.5%
Reserve for title losses at year-end... $ 564,334 $ 532,923 $ 529,915
Paid losses, net of recoveries......... 70,913 80,015 87,538
Reserve coverage of paid losses........ 8.0x 6.7x 6.1x
</TABLE>
As previously discussed, Chicago Title's 1996 results include an $8.0
million reduction in the provision for title losses for prior years. This
reduction in title loss reserves was due to a downward trend in claims paid and
an assessment that the mix of business written between 1993 and 1995 presented a
lower level of risk.
Interest Expense. Interest expense amounted to $4.6 million in 1997
compared to $5.6 million in 1996 and $6.5 million in 1995. The year-to-year
declines are primarily associated with principal payments on Chicago Title's
long-term debt.
Other Operating and Administrative Expenses. Other operating and
administrative expenses increased $22.7 million from 1996 to 1997 and increased
$30.9 million from 1995 to 1996. Slightly over half of the increase in 1997 was
due to an increase in property information expense. Of the 1996 increase,
property information expense was slightly less than half of the increase and
contract labor represented slightly more than one third of the increase. In each
year, the higher expense levels were primarily due to increased business
volumes.
LIQUIDITY AND CAPITAL RESOURCES
Cash utilized by continuing operations amounted to $61.0 million in the
first quarter of 1998 and $57.6 million for the same period in 1997. Cash flow
in the first quarter typically is negatively impacted by the disbursement of
annual incentive payments to employees. In the first quarter of 1998, cash flow
from operations was also negatively impacted by period-end fluctuations in the
level of escrow deposits and related short-term investment programs.
Cash provided by continuing operations amounted to $260.9 million, $87.7
million and $21.0 million for the fiscal years ended December 31, 1997, 1996 and
1995, respectively.
At March 31, 1998, CT&T (on a stand-alone basis excluding subsidiaries) had
total cash and marketable securities of $586.9 million, $558.9 million of which
were pledged to secure escrow and other liabilities. At December 31, 1997, CT&T
(on a stand-alone basis excluding subsidiaries) had total cash and marketable
securities of $511.9 million, $476.2 million of which were pledged to secure
escrow and other liabilities.
As described in Note 5 to the Consolidated Financial Statements, included
elsewhere herein, CT&T's title insurance subsidiaries are restricted as to the
amount of dividends that may be paid without prior regulatory approval. The
maximum amount of dividends that these subsidiaries may pay to CT&T in 1998
without prior regulatory approval is $65.4 million. The primary sources of cash
inflow to CT&T other than dividends paid by subsidiaries are investment earnings
and fees paid by subsidiaries for services provided by
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<PAGE> 36
the parent company. The primary obligations requiring the use of parent company
cash are dividends paid to shareholders, debt service, funding for acquisitions,
capital expenditures and corporate operating expenses.
It is not anticipated that there will be any material restrictions on the
ability of CT&T to pay dividends to Chicago Title. In anticipation of the
Spin-Off, Chicago Title has adopted a policy with regard to the payment of
dividends. Under this policy, Chicago Title currently intends to pay a regular
quarterly cash dividend of $0.33 per share of Chicago Title Common Stock. The
first regular quarterly cash dividend is expected to be paid in the third
quarter of 1998. The actual timing and amount of dividends, if any, will depend
on various factors and are subject to change at the discretion of the Chicago
Title Board from time to time. In April 1998, the CT&T Board of Directors
declared as a dividend to Alleghany a promissory note payable in the amount of
$9.0 million on December 31, 1998. See "Dividend Policy."
Chicago Title spent $7.5 million and $12.0 million for capital expenditures
in the first quarter of 1998 and 1997, respectively. In addition, Chicago Title
spent an aggregate of approximately $13.1 million in the first quarter of 1998
related to the acquisition of several businesses.
Chicago Title estimates that it will incur approximately $17.0 million in
after-tax direct costs associated with the Spin-Off, consisting of $13.0 million
in executive compensation (including $4.1 million attributable to the repurchase
of an option that had been granted to John Rau in connection with the
commencement of his employment as President and Chief Executive Officer of CT&T
in January 1997) and $4.0 million in professional fees, printing costs, listing
fees, and other expenses.
Chicago Title had outstanding long-term debt of $32.9 million and $32.4
million at March 31, 1998 and at December 31, 1997, respectively. Of such each
amount, $29.0 million was the outstanding balance borrowed under a credit
agreement entered into by CT&T and the banks party thereto in connection with
the acquisition of two of CT&T's title insurance subsidiaries, Security Union
Title Insurance Company ("Security Union") and Ticor Title Insurance Company
("Ticor Title"). This credit agreement provides for payments of principal of
$9.7 million annually in the years 1998 through 2000. Interest is payable
quarterly at variable rates. The credit agreement requires CT&T to meet certain
financial tests and includes certain restrictive covenants, including a
limitation on the amount of additional indebtedness that may be incurred. Among
the financial tests imposed by the credit agreement is a requirement that CT&T
maintain a consolidated net worth (excluding unrealized appreciation of
marketable securities, net of deferred taxes) of not less than $200 million. At
March 31, 1998 and December 31, 1997, CT&T satisfied all applicable financial
tests imposed by the credit agreement.
CT&T currently has two arrangements in place with banking institutions for
lines of credit for $15.0 million and $10.0 million. The two lines of credit are
scheduled to expire on May 31, 1998 and June 10, 1998, respectively. CT&T
expects to negotiate extensions of both of these lines of credit. Amounts may be
drawn under these lines of credit for general corporate purposes. No amounts
were drawn under these lines of credit during the first quarter of 1998, or
during 1997 or 1996, and no amounts were outstanding under such lines as of
March 31, 1998 and December 31, 1997.
CT&T is currently negotiating a new bank credit agreement which is expected
to provide for maximum borrowings of $50.0 million on a revolving basis.
Indebtedness under this revolving credit agreement will bear interest at a
floating rate, and will require CT&T to meet certain financial tests. The
revolving credit agreement also is expected to include customary restrictive
covenants. Borrowings under the revolving credit agreement will be available to
fund acquisitions and for general corporate purposes.
One element of Chicago Title's strategy to increase its market share and
earnings growth is the pursuit of selected acquisition opportunities intended
either to broaden Chicago Title's array of product offerings or to bolster
Chicago Title's presence in certain higher growth title insurance markets. The
scope of this acquisition program, which is expected to involve primarily
smaller companies, will be limited, and acquisition costs will be funded from
internally generated cash flow and by borrowings under the new revolving credit
agreement described above.
Another aspect of Chicago Title's strategy is to improve workflow and
productivity through the development of an electronic spine that will fully
integrate Chicago Title's services and offices. Management
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<PAGE> 37
currently estimates that costs aggregating approximately $15 million to $25
million will be incurred in connection with construction of the electronic
spine. These costs are expected to be incurred over a three-year period and will
be funded from internally generated cash flow.
Management believes cash generated from operations, investments, and cash
available from financing activities will provide sufficient liquidity to meet
Chicago Title's anticipated needs over the next twelve to twenty-four months.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly revenues and net income included in the results of operations for
the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT 30 DEC 31 TOTAL
---- -------- -------- -------- -------- ----------
(IN 000S)
<S> <C> <C> <C> <C> <C>
Revenue:
Title, escrow, trust and other
revenue....................... $298,408 339,888 357,430 415,770 1,411,496
Investment income................ 11,762 12,222 13,236 15,046 52,266
Net realized investment gains.... 155 141 2,509 879 3,684
-------- -------- -------- -------- ----------
Total revenues................ 310,325 352,251 373,175 431,695 1,467,446
-------- -------- -------- -------- ----------
Net income:
From continuing operations....... 5,827 16,746 15,851 14,889 53,313
From sales of marketable
securities.................... 101 92 1,632 571 2,396
From discontinued operations..... 2,196 3,123 3,752 3,091 12,162
-------- -------- -------- -------- ----------
Total net income................... $ 8,124 19,961 21,235 18,551 67,871
======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPT 30 DEC 31 TOTAL
---- -------- -------- -------- -------- ----------
(IN 000S)
<S> <C> <C> <C> <C> <C>
Revenue:
Title, escrow, trust and other
revenue....................... $283,357 323,049 332,747 339,437 1,278,590
Investment income................ 11,328 11,627 11,852 12,851 47,658
Net realized investment gains.... 369 851 1 215 1,436
-------- -------- -------- -------- ----------
Total revenues................ 295,054 335,527 344,600 352,503 1,327,684
-------- -------- -------- -------- ----------
Net income:
From continuing operations....... 8,138 13,697 10,048 13,762 45,645
From sales of marketable
securities.................... 240 553 1 139 933
From discontinued operations..... 1,263 1,803 1,679 717 5,462
-------- -------- -------- -------- ----------
Total net income.............. $ 9,641 16,053 11,728 14,618 52,040
======== ======== ======== ======== ==========
</TABLE>
35
<PAGE> 38
BUSINESS
CHICAGO TITLE
Chicago Title is one of the nation's largest providers of title insurance
and other related services for residential and commercial real estate
transactions. One of the pioneers of the title insurance industry over a century
ago, Chicago Title currently has more than 300 full service offices and 3,800
policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands, Guam, and
Canada. Chicago Title believes that its brand name, national distribution
network, financial position and experienced management have enabled it to become
one of the premier companies participating in the title insurance and real
estate-related services industry. Chicago Title's strategy is to improve its
market share and earnings growth by: (i) focusing its marketing efforts to serve
three distinct customer sectors -- Institutional Partners, Core Local
Operations, and National C&I; (ii) pursuing growth opportunities, including
through select acquisition opportunities; and (iii) generating operating
efficiencies and cost improvements through promotion of "best practices"
throughout the organization and development of an "electronic spine" that will
fully integrate Chicago Title's services and offices.
Chicago Title was organized as a Delaware corporation in 1998, to serve as
the public holding company for CT&T and its subsidiaries. CT&T was organized as
an Illinois corporation in 1912 and was acquired, along with its wholly-owned
subsidiary Chicago Title Insurance Company ("CTI"), by Alleghany in June 1985.
CTI, a Missouri corporation incorporated in 1961, succeeded to businesses
conducted by predecessor corporations since 1847, and is headquartered in
Chicago. Security Union (acquired in 1987) and Ticor Title (acquired in 1991)
were incorporated in California in 1962 and 1965, respectively. Both Security
Union and Ticor Title were parts of business organizations that had succeeded to
businesses conducted since around the turn of the century. Security Union and
Ticor Title are headquartered in Pasadena, California.
Through its subsidiaries, primarily CTI, Ticor Title and Security Union,
Chicago Title conducts title searches and issues title insurance policies in
residential and commercial real estate transactions. Policies are issued by
Chicago Title directly through branch offices, as well as through independent
agents and approved attorneys working as independent contractors. Chicago Title
manages its risk exposure through an underwriting approval system that entails
higher levels of approval for larger commitments, as well as by placing
liability caps on loss occurrences and purchasing reinsurance protection. In
addition, Chicago Title maintains a significant claims reserve against losses.
See "Business -- Reserve for Title Losses."
In addition to title production and risk assumption, Chicago Title offers
associated escrow and closing services, including managing escrow accounts;
prorating and adjusting insurance, tax and rents; preparing, reviewing and
recording documents such as deeds; clearing liens; disbursing funds and
transmitting final documents to the parties.
Chicago Title also provides other information management-based real
estate-related services. Chicago Title Flood Services, Inc., acquired in 1995,
determines flood zone status for lenders, who are required by Federal law to
determine whether real property pledged to secure a loan is in an area prone to
flooding. Chicago Title Credit Services, Inc., also acquired in 1995, uses a
state-of-the-art proprietary system that orders and prepares credit information
reports for lending institutions. Chicago Title -- Market Intelligence, Inc.,
acquired in 1996, provides detailed real estate property evaluation services to
lending institutions, utilizing artificial intelligence software, detailed real
estate database statistical analysis and physical property inspections through a
network of 15,000 real estate agents and appraisers. Chicago Title -- Market
Intelligence, Inc. also offers property appraisal services through a network of
750 state-licensed contract appraisers. Chicago Title Field Services, Inc.,
acquired in 1998, performs on-site property inspections and personal interviews
for lenders through a nationwide network of field agents. Consolidated
Reconveyance Co., also acquired in 1998, furnishes foreclosure and reconveyance
services to institutional lenders.
THE TITLE INSURANCE INDUSTRY
Chicago Title's title insurance subsidiaries protect a variety of interests
in real property by issuing insurance policies to purchasers of residential and
commercial properties, mortgagees and others with interests in real property.
These policies protect against losses suffered as a result of liens,
encumbrances and other
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<PAGE> 39
defects to title. Prior to issuing a policy, an agent or employee of Chicago
Title conducts a title search and examination of the property. Such a search
requires review of various records providing a history of transfers of interests
in the real estate to be insured. These records are maintained by local
governmental entities, such as counties and municipalities. To facilitate
preparation of title reports, title records known as title plants are compiled
and owned by Chicago Title. These plants, which are continually updated, consist
of land title and deed information copies from public records dating back many
years.
While most other forms of insurance assume the risk of loss arising out of
unforeseen future events, title insurance protects the policy holder principally
from the risk of loss from events that predate the issuance of the policy. This
distinction explains the low claims loss experience of title insurers as
compared with other types of insurers. Losses generally result from errors made
in the title search and examination process or the escrow process, or from other
problems such as fraud or incapacity of persons transferring property rights.
Operating expenses, however, are relatively high for title insurers as compared
to other types of insurers. Considerable costs may be incurred relating to the
personnel required to process forms, search titles, collect information on
properties and prepare title insurance policies and commitments. Title insurers
also face costs associated with establishment, operation and maintenance of
title plants, or with gaining access to title plants owned by others.
In addition to title production and risk assumption, the industry provides
associated real estate closing, escrow and disbursement services such as
managing escrow accounts, clearing liens and preparing and filing closing
documents. More broadly defined, the title insurance industry also includes
other real estate-related services such as property valuation, credit reporting,
field inspection and foreclosure and reconveyance services.
STRATEGY
During 1997, Chicago Title undertook an in-depth analysis that assessed
changes within the title industry which resulted in the development of courses
of action that would enable it to succeed in a rapidly evolving environment. As
a result of this study, Chicago Title has developed a strategy to increase its
market share and earnings growth by: (i) focusing its marketing efforts to serve
three distinct customer sectors -- Institutional Partners, Core Local Operations
and National C&I; (ii) pursuing growth opportunities, including through select
acquisition opportunities; and (iii) generating operating efficiencies and cost
improvements through promotion of "best practices" throughout the organization
and development of an "electronic spine" that will fully integrate Chicago
Title's services and offices.
Marketing Focus. In the past, title insurance marketing has mainly
targeted local real estate agents, attorneys and lenders for residential real
estate transactions. While the model of the smaller, local client remains
important, large customers, such as national residential mortgage lenders, real
estate investment trusts and developers, are becoming increasingly significant.
For example, based on industry publications, the market share held by the ten
largest residential mortgage loan originators has grown from 18% in 1990 to 31%
in 1997. The buying criteria of locally based clients differ from those of
large, geographically diverse customers in that the former tend to emphasize
personal relationships and ease of transaction execution, while the latter may
place more emphasis on consistent product delivery and the ability of service
providers to meet their information systems requirements for electronic product
delivery.
Recognizing the trend toward an increasingly segmented customer base,
Chicago Title is focusing its marketing efforts and distribution network to
serve three distinct customer sectors -- Institutional Partners, Core Local
Operations and National C&I.
Institutional Partners. This sector markets its services to large
residential lenders, who emphasize cost and consistency. Toward this end, the
CastleLink sales organization was formed in 1997 to sell and deliver integrated
real estate services nationwide. Chicago Title has broadened its array of
product offerings for this customer sector, adding flood certification, credit
report and property valuation services to the traditional title, escrow and
closing services.
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<PAGE> 40
Core Local Operations. Chicago Title intends to continue its long history
of providing relationship-based high quality service to these customers.
National C&I. This sector specializes in meeting the needs of clients
involved in large commercial transactions. Success is dependent upon integrated
relationship management on a national basis, technical excellence, services
tailored to specific customer needs and seamless national service. To achieve
this, a network of 14 National Business Unit offices throughout the country
provide these customers with specialized services, including underwriters with
expertise in large, complex transactions.
Growth Opportunities. Chicago Title believes that important market
segments of the title insurance industry remain fragmented and that, for
example, much of the competition in the title production and escrow/closing
markets consists of numerous smaller players, including small title companies,
agents, attorneys and local escrow companies. Chicago Title also believes that
the trend toward a consolidating customer base which is demanding national
presence and electronic product delivery capabilities creates an opportunity for
large service providers, such as Chicago Title, to expand market share, both
through internal growth and acquisitions. Similar opportunities to expand market
share are believed to exist for the flood certification, credit reporting and
property valuation products. Acquisitions under this initiative will be directed
towards selective acquisitions of smaller companies intended either to broaden
Chicago Title's array of product offerings or to bolster Chicago Title's
presence in certain higher growth title insurance markets. The scope of this
acquisition program will be limited and funded from Chicago Title's internally
generated cash flow and by borrowings under a new $50 million revolving bank
credit agreement that is currently being negotiated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Operating Efficiencies and Cost Improvements. Opportunities exist among
relatively decentralized local offices to enhance performance and reduce
operating expenses. Chicago Title has thus started a "best practices" initiative
to promote the transfer of ideas and techniques used by high performing units of
Chicago Title with the goal of standardizing excellence throughout all its
offices.
Further operating efficiencies are expected to result from development of
an "electronic spine" that will enable Chicago Title to receive, track, produce,
deliver and bill an order for any product, anywhere. Integrating the company
electronically will improve customer service while enhancing Chicago Title's
ability to consolidate facilities and allocate staffing more efficiently.
Management currently estimates that costs aggregating approximately $15 million
to $25 million will be incurred in connection with construction of the
electronic spine. These costs are expected to be incurred over a three-year
period and will be funded from internally generated cash flow.
FINANCIAL RATINGS
Each of the principal title insurance subsidiaries -- CTI, Security Union
and Ticor Title -- carries a claims-paying ability rating of "A" from Standard &
Poor's Corp. and from Duff & Phelps Credit Rating Co. In addition, Moody's
Investors Service has assigned an insurance financial strength rating of "A2" to
CTI, "A3" to Ticor Title and "BAA1" to Security Union.
These ratings reflect the rating agencies' current opinions of the
claims-paying ability, financial strength and operating performance of the rated
subsidiary, as well as its ability to meet its obligations to policyholders, and
are not evaluations directed toward the protection of investors in Chicago Title
Common Stock. The factors addressed by these ratings are of concern to
policyholders, agents and intermediaries. Such ratings should not be relied on
when making an investment decision regarding Chicago Title Common Stock.
INVESTMENT OPERATIONS
Investments held by Chicago Title or any of its subsidiaries must comply
with the insurance laws of the state of incorporation of the company holding the
investment; relevant states are Missouri, California and Oregon. These laws
prescribe the kind, quality and concentration of investments which may be made
by insurance companies. In general, these laws permit investments, within
specified limits and subject to certain
38
<PAGE> 41
qualifications, in Federal, state and municipal obligations, corporate bonds,
preferred and common stocks and real estate mortgages.
Chicago Title's current investment policy is to minimize the cyclical
volatility of the portfolio (i) to maintain stability of principal, (ii) to
maintain consistency of cash flow and liquidity and (iii) to earn a favorable
total return.
The following table summarizes the investments of Chicago Title, excluding
cash, as of December 31, 1997, with all investments carried at fair value in its
financial statements prepared in accordance with generally accepted accounting
principles (dollars in thousands):
INVESTMENTS
<TABLE>
<CAPTION>
AMORTIZED
COST OR COST FAIR VALUE
------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments....................... $ 180,710 17.22% $ 180,710 16.94%
Corporate bonds.............................. 120,046 11.44% 122,037 11.44%
United States government and government
agency bonds............................... 243,173 23.17% 248,262 23.28%
Mortgage- and asset-backed securities........ 186,276 17.74% 189,508 17.77%
Municipal bonds.............................. 267,914 25.52% 272,182 25.52%
Foreign bonds................................ 2,714 .26% 2,777 .26%
Redeemable preferred stocks.................. 15,613 1.49% 16,613 1.56%
Equity securities............................ 33,232 3.16% 34,489 3.23%
---------- ------ ---------- ------
Total.............................. $1,049,678 100.00% $1,066,578 100.00%
========== ====== ========== ======
</TABLE>
The following table indicates the composition of the long-term fixed
maturity portfolio, including preferred stock, as of December 31, 1997 by the
rating system of the National Association of Insurance Commissioners ("NAIC")
(dollars in thousands):
LONG-TERM FIXED MATURITY PORTFOLIO BY NAIC RATING
<TABLE>
<CAPTION>
FAIR VALUE PERCENTAGE
---------- ----------
<S> <C> <C>
NAIC 1................................................. $784,938 92.20%
NAIC 2................................................. 42,724 5.07%
NAIC 3................................................. 4,570 .54%
NAIC 4................................................. 2,534 .30%
NAIC A, L & P3 (Redeemable preferred stocks)........... 16,613 1.95%
-------- ------
Total........................................ $851,379 100.00%
======== ======
</TABLE>
The following table indicates the composition of the fixed maturities
portfolio, including preferred stock, by years until contractual maturity as of
December 31, 1997 (dollars in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
39
<PAGE> 42
LONG-TERM FIXED MATURITY PORTFOLIO BY YEARS UNTIL MATURITY
<TABLE>
<CAPTION>
FAIR VALUE PERCENTAGE
---------- ----------
<S> <C> <C>
One year or less*........................................... $ 98,879 11.61%
Over one through five years................................. 399,362 46.91%
Over five through ten years................................. 57,022 6.70%
Over ten years.............................................. 106,608 12.52%
Mortgage- and asset-backed.................................. 189,508 22.26%
-------- ------
Total............................................. $851,379 100.00%
======== ======
</TABLE>
- ---------------
* Included in this category are $16,613 of preferred stock-redeemable.
The principal tangible asset of Chicago Title and its subsidiaries is the
investment portfolio. The entire investment portfolio is classified as available
for sale. Chicago Title has a conservative investment philosophy with respect to
both asset quality and maturity distribution. Chicago Title maintains a
short-term investment portfolio ranging from approximately $60 million to $250
million, consisting of top rated commercial paper (A-1/P-1), highest rated bank
certificates of deposit and institutional money market funds. The average
maturity period of securities in the short-term portfolio is typically less than
30 days. Chicago Title's long-term portfolio consists of top rated tax-exempt
bonds, United States Treasury securities, corporate bonds of United States
issuers, mortgage backed securities and a limited amount of publicly traded
common stocks. Average quality of the long-term portfolio is maintained at a
Moody's rating of Aa3 or higher, with over 98 percent of all securities rated
investment grade by Moody's and less than 1 percent in derivative instruments as
of 1997 year-end. The duration of the short term and fixed income securities in
Chicago Title's portfolio is approximately 2.2 years and is managed within a
duration range of 1.9 to 3.1 years. Duration measures a portfolio's sensitivity
to change in interest rates; a change within a range of plus or minus 1 percent
in interest rates would be expected to result in an inverse change of
approximately 2.2 percent in the value of Chicago Title's portfolio.
Chicago Title does not specifically match particular assets to related
liabilities, but instead holds the investment portfolio to a shorter maturity
than liabilities. This relatively short portfolio maturity structure is
maintained so that investment income responds to changes in the level of
interest rates, offsetting to some degree the cyclicality of title insurance
operations. However, Chicago Title regularly re-examines its portfolio
strategies and periodically modifies asset allocation and bond portfolio
maturity based on the market outlook, interest rates and/or title insurance
operating conditions.
RESERVE FOR TITLE LOSSES
The largest single liability of Chicago Title is the reserve for title
losses, which also covers losses arising from the escrow, closing and
disbursement functions due to fraud or operational error, and includes the costs
of external legal defense. Historical experience with respect to payments for
claims and external legal defense costs made under title insurance policies
indicates that, for policies issued in a given year, approximately two-thirds of
the total projected payments with respect to such policies are made within five
years of the issuance of such policies. The reserve also covers losses arising
from the escrow, closing and disbursement functions due to fraud or operational
error.
When a claim is reported, Chicago Title establishes a "case" reserve, based
upon the best estimate of the total amount necessary to settle the claim and to
provide for allocated loss adjustment expenses, including legal defense costs
("LAE"). These reserves are periodically adjusted by Chicago Title based on its
evaluation of subsequent reports regarding the reported claim.
In addition to "case" reserves, Chicago Title also maintains a reserve for
title losses that are incurred but not yet reported ("IBNR reserves"). These
reserves are particularly significant in long tail lines of insurance, such as
title insurance, for which the claim and the circumstances causing the claim may
be separated by a long period of time. Unlike most other types of insurance, the
event giving rise to a possible future claim under
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<PAGE> 43
a title insurance policy, the defect in the title, occurred before issuance of
the policy but may not be discovered, if ever, until a future date.
Chicago Title establishes IBNR reserves by using actuarial principles and
procedures commonly used in the title insurance industry to estimate the
ultimate liability for losses and LAE. The actuarial procedures use historic
patterns of claims to predict likely future claims. Projections are analyzed in
the context of changing economic conditions, and the projections and related
reserves are modified when appropriate.
IBNR reserves are also established for very large or unusual claims which
might fall outside the normal distribution of expected claims experience.
Reserves for these claims are based on an analysis of the experience of both
Chicago Title and the title insurance industry.
Chicago Title's reserves are reviewed regularly by management and are
certified by an independent actuary on an annual basis. Chicago Title does not
discount its reserves for anticipated investment income. Initial reserve
provisions are derived directly from premium revenues, based upon anticipated
loss ratios. There are inherent uncertainties in estimating reserves primarily
due to the long-term nature of most title insurance business. Actual losses may
deviate, perhaps substantially, from reserves on Chicago Title's financial
statements, which could have a material adverse effect on Chicago Title's
financial condition and results of operations. Based on current information,
Chicago Title believes the reserve for title losses at March 31, 1998 is
adequate.
CTI, Ticor Title and Security Union each have generally restricted the size
of any one risk of loss that they will retain to $70 million, $50 million and
$30 million, respectively. The title insurance subsidiaries of Chicago Title
reinsure risks with each other and with other title insurance companies in
excess of what they are willing to retain. In addition, the title insurers have
purchased excess of loss title reinsurance coverage for losses in excess of
$12.5 million, subject to certain exclusions. This coverage will pay 90 percent
of the loss amount exceeding $12.5 million, up to $50 million. However,
reinsurance arrangements do not relieve a title insurance company that issues a
policy from its legal liability to the holder of the policy and, thus, the risk
of nonperformance by the assuming reinsurer is borne by the issuer of the
policy.
In connection with the acquisition by Alleghany of CT&T and CTI in 1985,
Lincoln National Corporation ("Lincoln"), the former owner of CT&T and CTI,
agreed to indemnify Alleghany, CT&T and CTI and its subsidiaries, in respect of
certain title insurance liabilities, up to an aggregate amount of $128 million
(of which approximately $123 million remains available). Among other
liabilities, Lincoln agreed to indemnify for 50% of the first $10 million of
liabilities, costs and expenses (including awards of attorneys' fees and a
portion of attorneys' fees incurred by Alleghany, CT&T and CTI and its
subsidiaries in the defense of such claims), and 75% of such amounts in excess
of $10 million, arising out of or relating to aboriginal land claims which were
identified in the 1985 acquisition agreement or which are commenced prior to
July 1, 2015 under policies issued prior to the 1985 acquisition. Under the
terms of the Distribution Agreement, as of the Spin-Off Date Alleghany will
transfer the benefit of its rights in respect of such indemnification to Chicago
Title.
BUSINESS CONDITIONS; SEASONALITY
The title insurance industry is highly dependent upon the volume of real
estate transactions occurring within the market. In turn, the volume of real
estate transactions is highly sensitive to interest rate levels and general
economic conditions. Because these factors can be very volatile, revenue levels
for the title industry are also very volatile. As business volume for the real
estate-related business are correlated to mortgage loan origination volumes,
revenues for these business tend to be impacted by economic factors in a fashion
similar to the title industry.
High short-term interest rates reduced the volume of real estate
transactions in the first half of 1995. Lower interest rates in the second half
of 1995 prompted an increase in refinancing and commercial transactions. The
refinance volume remained strong in the first quarter of 1996 but diminished as
interest rates leveled off. Interest rates remained relatively stable for the
remainder of 1996 resulting in an increase in the volume of real estate
construction and resale activity. 1997, particularly the second half of the
year, was marked by low inflation, unemployment rates and interest rates in the
United States, resulting in exceptional
41
<PAGE> 44
growth in the commercial and industrial segment and a resurgence in the second
half of 1997 in residential resale and refinancing transactions.
The business of Chicago Title's title insurance subsidiaries is seasonal,
as real estate activity is seasonal. The fourth quarter is typically the
strongest in terms of revenue due to the desire of commercial entities to
complete transactions by year-end. The first calendar quarter is typically the
weakest quarter in terms of revenue as the volume of home sales are generally at
their low point in the winter. These traditional seasonal patterns can be
altered if there is a significant change in the level of mortgage refinance
volumes. This type of activity is correlated with movements in the level of
interest rates and is not tied to a seasonal pattern.
Title insurance premiums are recognized as revenues principally at the time
of the real estate closing and escrow fees principally when billed. As a result,
there is typically a lag of about two months between the time that a title
insurance order is placed, at which time work commences, and the time that
Chicago Title recognizes the revenues associated with the order. Revenues from
title policies issued by independent agents are generally recorded when notice
of issuance is received from the agent.
COMPETITION
The title insurance industry is competitive throughout the United States,
with large title insurance firms such as the title insurance subsidiaries of
Chicago Title competing on a national basis, while smaller firms have
significant market shares on a regional basis. Based on 1996 revenues reported
in statutory filings, CTI, Security Union, Ticor Title, First American Title
Insurance Company ("First American"), Reliance Group Holdings, Inc.
("Reliance"), Stewart Title Insurance Co., Fidelity National Title Insurance
Co., Lawyers Title Insurance Corporation ("Lawyers") and Old Republic Title
Insurance Group, Inc. together accounted for about 89% of all title insurance
revenues. Chicago Title's title insurance subsidiaries had statutory title
revenues representing in the aggregate 20.5% of the industry total, followed by
First American at 20.3% and Reliance at 13.2%. In February 1998, Lawyers
acquired Reliance's title insurance units and changed its name to Land America
Financial Group Inc. ("Land America"). On a pro forma basis, for 1996, Land
America would have had a market share of 22.0%. Chicago Title's title insurance
subsidiaries also compete with abstractors, attorneys issuing opinions and, in
some areas, state land registration systems. The removal of regulatory barriers
in the future might result in new competitors, including financial institutions,
entering the title insurance business.
Chicago Title believes that competition in the title insurance industry is
primarily on the basis of expertise, service and price. In addition, the
financial strength of the insurer has become an increasingly important factor in
decisions relating to the purchase of title insurance, particularly in
multi-site transactions and in situations involving real estate-related
investment vehicles such as real estate investment trusts and real estate
mortgage investment conduits.
Chicago Title's flood certification, credit reporting, property valuation
services, field inspection services and foreclosure and reconveyance services
businesses face significant competition from other similar real estate service
providers. Mortgage lenders may choose to produce these services internally
rather than purchasing them from outside vendors.
REGULATION
Title insurance companies are subject to regulation and supervision by
state insurance regulators under the insurance statutes and regulations of
states in which they are incorporated. CTI is incorporated in Missouri, Security
Union is incorporated in California and has a title insurance subsidiary
incorporated in Oregon, and Ticor Title is incorporated in California. Each of
these companies is also regulated in each jurisdiction in which it is authorized
to write title insurance. Regulation and supervision vary from state to state,
but generally cover such matters as the standards of solvency which must be met
and maintained, the nature of limitations on investments, the amount of
dividends which may be distributed, requirements regarding reserves for
statutory premiums, the licensing of insurers and their agents, the approval of
policy forms and premium rates, periodic examinations of title insurers and
annual and other reports required to be filed on the financial condition of
title insurance companies. In addition, the market behavior of all entities
42
<PAGE> 45
involved in real estate transactions is governed by the Real Estate Settlement
Practices Act and related regulation.
Chicago Title and CT&T are also subject to the insurance holding company
regulations of Missouri, California and Oregon. The acquisition of CTI, Security
Union and Ticor Title and their respective title insurance subsidiaries by
Alleghany and/or CT&T was subject to prior notification and/or approval from the
insurance regulatory authorities in the states in which such title insurance
companies are incorporated. The Spin-Off and/or certain related transactions
were subject to prior notification and/or approval in California, Missouri,
Oregon, Illinois and Texas. Chicago Title, CT&T and their other non-insurance
subsidiaries, however, are generally not subject to restrictions on their
business activities due to their affiliation with Chicago Title's title
insurance subsidiaries.
CT&T, in its capacity as a non-depository trust company, is regulated by
the State of Illinois Office of Banks and Real Estate. Regulation covers such
matters as the fiduciary's management capabilities, the investment of funds held
for its own account, the soundness of its policies and procedures, the quality
of the services it renders to the public and the effect of its trust activities
on its financial soundness.
Alleghany is subject to a consent agreement with the Federal Trade
Commission (the "FTC") effective July 22, 1991, which settled certain antitrust
objections raised by the FTC in respect of the acquisition of Ticor Title by
CT&T, which was amended in July 1996. We expect that, as of the Spin-Off Date,
Chicago Title will become, and its subsidiaries will continue to be, subject to
the consent agreement, and Alleghany and its subsidiaries will no longer be
subject to the consent agreement. The consent agreement provided for the
divestiture by CT&T after its acquisition of Ticor Title of certain title plants
serving overlapping geographical areas. Until July 2001, Chicago Title or any of
its subsidiaries is required to give prior notification to the FTC of any
acquisitions of an ownership interest in a title plant serving the same
geographic area as a plant in which Chicago Title or any of its subsidiaries
already has an ownership interest. Chicago Title is not, however, required to
provide notice with respect to any acquisition of a copy of title records or
other information from an entity which retains the ownership and control of the
original and where competition in the ordinary course between the parties is not
otherwise restrained. Chicago Title is also required to provide notification to
the FTC in advance of any change in corporate structure, such as the creation,
dissolution or sale of subsidiaries or any other change that may affect
compliance with the consent decree.
While Chicago Title Flood Services, Inc., Chicago Title Credit Services,
Inc., Chicago Title -- Market Intelligence, Inc., Chicago Title Field Services,
Inc. and Consolidated Reconveyance Company are not subject to direct regulatory
supervision, Federal and state laws governing real estate settlement practices,
credit reporting and flood zone determinations significantly impact their
businesses.
EMPLOYEES
At December 31, 1997, Chicago Title had approximately 8,100 employees,
including full-time and part-time employees.
PROPERTIES
CT&T leases about 282,000 square feet for its headquarters and operations
in the Chicago Title and Trust Center, a 49-story office complex at 171 North
Clark Street in Chicago, Illinois.
Ticor Title's and Security Union's headquarters are in leased premises of
about 45,000 square feet in Pasadena, California. Chicago Title and its
subsidiaries own or lease buildings or office space in approximately 550
locations throughout the United States, primarily for CTI, Security Union and
Ticor Title full-service and satellite branch office operations.
LEGAL PROCEEDINGS
Chicago Title's subsidiaries are parties to pending litigation and claims
in connection with the ordinary course of their businesses. Each such operating
unit makes a provision on its books, in accordance with generally accepted
accounting principles, for estimated losses to be incurred in such litigation
and claims, including legal costs. In the opinion of management, such provision
is adequate under generally accepted accounting principles as of December 31,
1997.
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<PAGE> 46
MANAGEMENT
DIRECTORS
On the Spin-Off Date, the directors of Chicago Title will consist of the
persons named below.
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS AGE
---- ------------------------------------------------------ ---
<S> <C> <C>
Richard P. Toft...................... Chairman of the Board of Directors, Chicago Title, as of 61
the Spin-Off Date; Chairman and Chief Executive Officer
of Alleghany Asset Management (financial services) since
October 1995; Chairman of CT&T since January 1994 and,
until July 1996, President and Chief Executive Officer
of CT&T; Senior Vice President, Alleghany, until October
1995; and President and Chief Executive Officer of
Chicago Title Insurance Company until January 1994. Mr.
Toft is a director of Peoples Energy Corporation and
Cologne Life Reinsurance Company.
Norman R Bobins...................... President and Chief Executive Officer, LaSalle National 55
Bank and LaSalle National Corporation (commercial
banking); Chairman, LaSalle N.A. Mr. Bobins also is a
director of Ambassador Apartments, Inc. and Center Point
Properties.
John J. Burns, Jr.................... President, chief executive officer and chief operating 66
officer, Alleghany. Mr. Burns is a director of Alleghany
and Burlington Northern Santa Fe Corporation.
Peter H. Dailey...................... Chairman, Enniskerry Financial (investments). Mr. Dailey 67
is a director of Krause Furniture Co., Pinkerton's,
Inc., Sizzler, Inc. and Wirthlin Worldwide.
Robert M. Hart....................... Senior Vice President and General Counsel since 53
September 1994 and Secretary since January 1995,
Alleghany; Partner, Donovan Leisure Newton & Irvine (law
firm), prior thereto.
Philip G. Heasley.................... Vice Chairman, U.S. Bancorp (banking). Mr. Heasley is a 48
director of SunAmerica Inc.
Allan P. Kirby, Jr................... President, Liberty Square, Inc. (investments); 66
management of family and personal affairs. Mr. Kirby is
a director of Alleghany.
M. Leanne Lachman.................... Managing Director, Schroder Real Estate Associates 55
(investment management-equity real estate); and Managing
Director, Schroder Mortgage Associates (investment
management -- commercial mortgages). Ms. Lachman is a
director of Lincoln National Corporation and Liberty
Property Trust.
William K. Lavin..................... Financial Consultant; Vice Chairman of the Board and 53
Chief Executive Officer of Woolworth Corporation
(retailing) until September 1994; Chairman of the Board
and Chief Executive Officer, Woolworth Corporation, from
June 1993 to May 1994 and Executive Vice
President -- Finance and Administration and Chief
Financial Officer, Woolworth Corporation, prior thereto.
Mr. Lavin is a director of Alleghany and Stratford
Acquisition Corporation.
Lawrence F. Levy..................... Chairman of the Board and Chief Executive Officer, The 54
Levy Organization (real estate, restaurants, and food
service).
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS AGE
---- ------------------------------------------------------ ---
<S> <C> <C>
Margaret MacKimm..................... Former Senior Vice President -- Communications of Kraft 64
Foods, Inc. (multinational marketer and processor of
food products) and its predecessor Kraft, Inc. Ms.
MacKimm is a director of Woolworth Corporation.
Langdon Neal......................... Attorney, Earl L. Neal and Associates. 40
Alan Prince.......................... Senior Executive Vice President, Title Operations, CTI, 59
from January 1995 until December 1997; Executive Vice
President, CTI, prior thereto.
John Rau............................. President and Chief Executive Officer, Chicago Title, as 49
of the Spin-Off Date, and President and Chief Executive
Officer, CT&T and CTI, since January 1997; Dean, School
of Business at Indiana University, from August 1993
until December 1996; President and chief executive
officer, LaSalle National Bank (banking), prior thereto.
Mr. Rau is a director of Borg-Warner Automotive, Inc.,
First Industrial Realty Trust, Inc. and LaSalle National
Bank.
</TABLE>
The Chicago Title Certificate and By-Laws provide that the Chicago Title
Board will be divided into three classes, with the classes to be as nearly equal
in number as possible and that, of the initial Chicago Title directors following
the Spin-Off, one-third will continue to serve until the 1999 Annual Meeting of
Stockholders, one-third will continue to serve until the 2000 Annual Meeting of
Stockholders, and one-third will continue to serve until the 2001 Annual Meeting
of Stockholders. Of the initial directors, Messrs. Bobins, Hart, Heasley and
Prince will serve until the 1999 Annual Meeting of Stockholders; Messrs. Lavin,
Neal, Rau, Toft and Ms. MacKimm will serve until the 2000 Annual Meeting of
Stockholders; and Messrs. Burns, Dailey, Kirby and Levy and Ms. Lachman will
serve until the 2001 Annual Meeting of Stockholders. Starting with the 1999
Annual Meeting of Stockholders, one class of directors will be elected each year
for a three-year term. See "Description of Capital Stock -- Certain
Anti-Takeover Provisions -- Chicago Title Certificate and By-Laws; Classified
Board of Directors."
The Chicago Title Board has a number of standing committees, including an
Executive Committee, an Audit Committee, a Compensation Committee, a Nominating
Committee and a Real Estate Committee. See "Description of Capital
Stock -- Certain Anti-Takeover Provisions -- Chicago Title Certificate and
By-Laws."
The Executive Committee may exercise certain powers of the Board of
Directors regarding the management and direction of the business and affairs of
Chicago Title when the Board of Directors is not in session. All action taken by
the Executive Committee is reported to and reviewed by the Chicago Title Board.
The members of the Executive Committee are Messrs. Burns, Lavin, Levy, Rau and
Toft, with Mr. Burns serving as Chair.
The Audit Committee of the Chicago Title Board reviews and makes reports
and recommendations to the Board of Directors with respect to the selection of
the independent auditors of Chicago Title and its subsidiaries, the arrangements
for and the scope of the audits to be performed by them and the internal audit
activities, accounting procedures and controls of Chicago Title and its
subsidiaries, and reviews the annual consolidated financial statements of
Chicago Title and its subsidiaries. The members of the Audit Committee are
Messrs. Bobins, Heasley, Kirby and Lavin and Ms. Lachman, with Mr. Lavin serving
as Chair.
The Compensation Committee of the Chicago Title Board reviews and makes
reports to the Board of Directors with respect to the compensation policies and
practices of Chicago Title. The Compensation Committee reviews the annual
recommendations of the Chief Executive Officer regarding the compensation of
officers of Chicago Title and its subsidiaries and reviews the annual
recommendation of the Chairman of the Executive Committee regarding the
compensation of the Chief Executive Officer of Chicago Title, and makes
recommendations to the Chicago Title Board with respect to such compensation. In
addition, the
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<PAGE> 48
Compensation Committee administers Chicago Title's 1998 Long-Term Incentive Plan
and Employee Stock Purchase Plan. The members of the Compensation Committee are
Messrs. Dailey, Hart, Heasley and Kirby and Ms. MacKimm, with Mr. Hart serving
as Chair.
The Nominating Committee of the Chicago Title Board screens candidates and
makes recommendations to the Chicago Title Board as to persons to be nominated
by the Chicago Title Board for election thereto by the stockholders or to be
chosen by the Chicago Title Board to fill newly created directorships or
vacancies on the Board of Directors. The members of the Nominating Committee are
Messrs. Burns, Lavin and Toft, with Mr. Burns serving as Chair.
The Real Estate Committee of the Chicago Title Board evaluates and reviews
any real estate transaction proposed to be entered into by Chicago Title or any
of its subsidiaries as principal which involves amounts in excess of $500,000.
The members of the Real Estate Committee are Ms. Lachman, and Messrs. Levy, Neal
and Prince, with Ms. Lachman serving as Chair.
COMPENSATION OF DIRECTORS
Each director of Chicago Title who is not an employee of Chicago Title
receives an annual retainer of $21,000, payable one-half in cash and one-half in
shares of Chicago Title Common Stock (as more fully explained below), as well as
$750 for each board meeting attended in person and $375 for each conference
telephone meeting attended. The Chairman of the Chicago Title Board receives an
additional annual fee of $100,000. In addition, the Chairman of the Executive
Committee receives an annual fee of $15,000, and each other member of the
Executive Committee who is not an officer of Chicago Title receives an annual
fee of $7,500. The Chairman of the Audit Committee receives an annual fee of
$7,500, and each other member of the Audit Committee receives an annual fee of
$4,500. The Chairman of the Compensation Committee receives an annual fee of
$4,000, and each other member of the Compensation Committee receives an annual
fee of $3,000. Each member of the Nominating Committee who is not an officer of
Chicago Title receives $1,000 for each meeting attended. The Chairman of the
Real Estate Committee receives an annual fee of $4,000, and each other member of
the Real Estate Committee receives an annual fee of $3,000. Pursuant to the
Directors' Deferred Compensation Plan, a director of Chicago Title may defer all
or part of the cash portion of the retainer and committee and per meeting fees.
Pursuant to the Directors' Equity Compensation Plan, each director of
Chicago Title who is not an employee of Chicago Title or any of its subsidiaries
will receive his retainer for the following twelve-months' service as a
director, exclusive of any per meeting fees, committee fees or expense
reimbursements, payable one-half in shares of Chicago Title Common Stock, based
on the market value (as defined in the Directors' Equity Compensation Plan) of
such shares, and one-half in cash.
On the Spin-Off Date, Mr. Toft, as Chairman of the Chicago Title Board,
will receive 5,000 shares of Chicago Title Common Stock as a restricted stock
award under the 1998 Long-Term Incentive Plan, and each other director of
Chicago Title who is not an employee of Chicago Title or any of its subsidiaries
will receive 1,000 shares of restricted stock. Such shares of restricted stock
may not be transferred until, and will vest on, the third anniversary of the
Spin-Off Date. See "Chicago Title Compensation Arrangements -- The 1998
Long-Term Incentive Plan." Pursuant to the Directors' Stock Option Plan, each
director of Chicago Title who is not an employee of Chicago Title or any of its
subsidiaries will receive on the day after the Spin-Off Date and on the day
following each Annual Meeting of Stockholders until and including the Annual
Meeting of Stockholders to be held in May 2002 an option to purchase 1,000
shares of Chicago Title Common Stock (subject to antidilution adjustments) at a
price equal to the fair market value (as defined in the plan) of such shares on
the date of grant. Such options will become exercisable as to one-third of such
shares on each of the first three anniversaries of the date of grant.
As Chairman of the Board of CT&T, Mr. Toft has received an annual fee of
$100,000. Mr. Toft received payments of $1,126,090 and $313,417 in 1997 and
1998, respectively, as payouts of long-term incentive awards granted prior to
his retirement in 1996 from his executive positions with CT&T. He also received
bonuses in the amounts of $248,963 and $209,813 in 1997 and 1998, respectively.
In addition, Mr. Toft receives annual
46
<PAGE> 49
payments of $38,166 under the CT&T Executive Salary Continuation Plan. Mr. Toft
serves as Chairman and Chief Executive Officer of Alleghany Asset Management,
for which he earned in 1997 a salary of $279,760.
Mr. Prince served in 1997 as Senior Executive Vice President of CT&T, for
which he received a salary of $290,000 and a bonus of $226,236, of which $56,559
will be deferred and paid in the manner described in Note (2) to the table
relating to long-term incentive awards in the last fiscal year. Mr. Prince
received a payout in 1997 of a long-term incentive award in the amount of
$228,055. Mr. Prince also received in 1997 matching and profit sharing
contributions to his Savings and Profit Sharing 401(k) account in the amount of
$9,500 and taxable life insurance benefits valued at $2,160.
Mr. Prince has an employment agreement with CT&T, with a term ending on
December 31, 1998. The agreement entitles Mr. Prince to receive a salary at an
annual rate of $200,000 for 1998, reimbursement for the cost of leasing an
apartment in Chicago (not to exceed $3,000 per month plus an amount equal to
income taxes imposed on the amount of such rental allowance), to be deemed to
receive credit for a salary at a rate of $290,000 for 1998 for purposes of
CT&T's Executive Salary Continuation Plan, Pension Plan and Excess Benefits
Plan, and to be eligible for a special incentive opportunity of $100,000, based
upon performance of personal objectives mutually agreed to by Messrs. Prince and
Rau. The agreement also provides that Mr. Prince will be entitled to certain
severance benefits in respect of his termination of employment by reason of
retirement or otherwise, and prohibits Mr. Prince for a period extending for two
years beyond the date of his termination of employment from being associated in
any capacity with any business that competes with CT&T.
EXECUTIVE OFFICERS
The executive officers of Chicago Title are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE
---- --- ------------------------------------
<S> <C> <C>
John Rau................ 49 President and Chief Executive Officer, Chicago Title, as of
the Spin-Off Date, and President and Chief Executive
Officer, CT&T and CTI, since January 1997; Dean, School of
Business at Indiana University, from August 1993 until
December 1996; President and chief executive officer,
LaSalle National Bank (banking), prior thereto.
Thomas H. Hodges........ 52 Executive Vice President, Chicago Title, as of the Spin-Off
Date, and Executive Vice President, CT&T since October 1997;
Executive Vice President, First Chicago NBD Corp. (banking),
from January 1995 until December 1996; Senior Vice
President, First Chicago NBD Corp., prior thereto.
Michael J. Keller....... 50 Executive Vice President, Chicago Title, since the Spin-Off
Date, and Executive Vice President, CT&T and CTI, since
February 1997; Executive Vice President of Mortgage Banking,
Norwest Mortgage Banking (mortgage banking), prior thereto.
Peter G. Leemputte...... 41 Executive Vice President, Chief Administrative Officer and
Chief Financial Officer, Chicago Title, as of the Spin-Off
Date, and Executive Vice President and Chief Administrative
Officer, CT&T, since January 1998, and Chief Financial
Officer, since March 1998, CT&T; Vice President, Mercer
Management Consulting, Inc. (management consulting), from
July 1996 until January 1998; Corporate Vice President and
Controller, Armco Inc. (steel manufacturing and metals
processing), prior thereto.
Paul T. Sands, Jr. ..... 55 Executive Vice President, General Counsel and Secretary,
Chicago Title, since the Spin-Off Date, and Executive Vice
President, General Counsel and Secretary, CT&T, and
Executive Vice President and General Counsel, CTI, since
January 1997; Senior Vice President, CTI and, from 1994,
CT&T, prior thereto.
Christopher Abbinante... 47 Senior Vice President and Manager, Eastern Division, Chicago
Title and CTI, as of the Spin-Off Date, and Senior Vice
President and Manager, Eastern Division, CTI, prior thereto.
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE
---- --- ------------------------------------
<S> <C> <C>
William Halvorsen....... 51 Senior Vice President and Manager, Western Division, Chicago
Title and CTI, as of the Spin-Off Date, and Senior Vice
President and Manager, Western Division, CTI, since December
1993; President, Chicago Title Technology Services Corp.,
prior thereto.
</TABLE>
EXECUTIVE COMPENSATION
The information under this heading relates to the chief executive officer
and the four other most highly compensated executive officers of Chicago Title
who served as executive officers of CT&T or a subsidiary of CT&T at the end of
1997. The information presented in the Summary Compensation Table below and in
the Long-Term Incentive Plan -- Awards in Last Fiscal Year table which follows
represents the historical compensation such persons received while CT&T was a
subsidiary of Alleghany. See "Management -- Chicago Title Compensation
Arrangements" for information regarding certain future compensation which will
be paid to such persons by Chicago Title as an independent public company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ---------------------
RESTRICTED
OTHER ANNUAL STOCK LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS($) PAYOUTS COMPENSATION
POSITION YEAR SALARY BONUS(1) (2) (3) (4) (5)
------------------ ---- -------- ---------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John Rau....................... 1997 $387,692 $357,199 $1,062,869 $1,356,800 -- $575,619
President, Chief Executive
Officer and a director of
Chicago Title, CT&T and CTI
Michael J. Keller.............. 1997 $189,519 $178,020 -- -- -- $ 53,149
Executive Vice President,
Chicago Title and CT&T, since
February 1997
Paul T. Sands, Jr.............. 1997 $179,423 $ 99,272 -- -- $239,219 $ 30,949
Executive Vice President,
General Counsel and
Secretary, Chicago Title and
CT&T; Executive Vice
President, and General
Counsel, CTI
Christopher Abbinante.......... 1997 $140,000 $318,941 -- -- $117,006 $ 27,722
Senior Vice President and
Manager, Eastern Division,
Chicago Title and CTI
William Halvorsen.............. 1997 $180,000 $118,636 -- -- $153,067 $ 12,192
Senior Vice President and
Manager, Western Division,
Chicago Title and CTI
</TABLE>
- ---------------
(1) Except for Mr. Abbinante, these amounts represent bonuses paid under the
Chicago Title and Trust Company Annual Incentive Plan (the "CT&T Annual
Plan"), which is a short term incentive plan designed to reward officers and
employees of CT&T for achieving specified corporate financial performance
and specified individual objectives, operating unit objectives, or both; the
amount reported for Mr. Abbinante represents a similar bonus paid under an
individual agreement. (For Messrs. Sands and Halvorsen, such amounts do not
include additional amounts earned, payment of which was deferred and is
subject to adjustment to reflect title insurance policy claims experience in
the year of the deferral and for three years thereafter, as more fully
explained in Note (2) to the table relating to long-term incentive plans;
the deferred amount for 1997 is reported below in such table).
(2) This amount represents payments for reimbursement of taxes incurred by Mr.
Rau as a result of the award of shares of Alleghany Stock as restricted
stock, as more fully explained in Note (3) below.
48
<PAGE> 51
(3) These amounts represent 6,400 restricted shares of Alleghany Stock granted
to Mr. Rau in connection with the commencement of his term of employment as
President and Chief Executive Officer of CT&T on January 1, 1997. The
restricted shares of Alleghany Stock are valued on the date of grant. Mr.
Rau held an aggregate of 6,400 restricted shares of Alleghany Stock on
December 31, 1997, with a value on that date of $1,822,400. Dividends will
be payable on the shares of restricted stock if and to the extent paid on
Alleghany Stock generally, regardless of whether the shares are vested at
the time the dividend is paid. Of the shares awarded to Mr. Rau, 2,800
shares vested upon commencement of his employment and the remaining 3,600
shares vest at the rate of 75 shares per month over the period from January
1997 through December 2000. The restricted shares of Alleghany Stock are not
transferable by Mr. Rau during his employment with Chicago Title or for two
years thereafter. Shares of Chicago Title Common Stock distributed in
respect of these restricted shares of Alleghany Stock will be subject to the
same restrictions and vesting schedule.
(4) These amounts represent payouts in settlement of performance units awarded
under CT&T's Executive Performance Unit Incentive Plan of 1992, a long-term
incentive plan which provided for payouts in cash based upon the amount of
CT&T's operating income, the achievement of specified levels of CT&T's
return on equity and the application of a multiplier relating to CT&T's
expense ratio in each year of the award period.
(5) These amounts represent (i) benefits of a group life insurance policy
maintained by CT&T on behalf of its employees, including Messrs. Rau,
Keller, Sands, Abbinante and Halvorsen, valued at $1,855, $843, $1,262,
$557, and $1,267, respectively, (ii) $10,925, $10,925, $10,925, $9,750, and
$10,925 credited to the accounts of Messrs. Rau, Keller, Sands, Abbinante
and Halvorsen, respectively, under the CT&T Savings and Profit Sharing Plan,
which is a 401(k) plan offering CT&T employees an opportunity to save a
portion of their income on a deferred basis, and providing for matching CT&T
contributions of $0.25 for every $1.00, up to 6 percent, of salary that such
an employee contributes to the plan (within Internal Revenue Service
limits), and up to an additional $1.25 for every such $1.00, depending on
the profitability of CT&T, (iii) $31,302, $17,607, $18,762 and $17,415
accrued in respect of Messrs. Rau, Keller, Sands, and Abbinante,
respectively, under the CT&T Executive Salary Continuation Plan, which is a
retirement plan designed to encourage key employees to remain with CT&T
until retirement and which provides post-retirement monthly income of 2
percent of final monthly income at retirement multiplied by the number of
years of participation in the plan, up to a maximum of 10 percent of final
monthly salary, (iv) in the case of Mr. Rau, $47,384 contributed to an
excess benefits savings plan maintained for certain employees, representing
the amount by which CT&T's contribution to a defined contribution plan
maintained for such employees was limited by the application of certain
provisions of the Code, (v) in the case of Mr. Rau, a bonus of $360,000 paid
in connection with the commencement of his employment as President and Chief
Executive Officer of CT&T, and (vi) in the case of Messrs. Rau and Keller,
$124,153 and $23,774, respectively, in reimbursement of various costs
incurred in relocation.
49
<PAGE> 52
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE ESTIMATED FUTURE PAYOUTS
NUMBER OF OR OTHER UNDER NON-STOCK
SHARES, UNITS PERIOD UNTIL PRICE-BASED PLANS
OR OTHER MATURATION -------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD TARGET MAXIMUM
---- ------------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
John Rau............................... 2,500(1) 1995-1998 -- $726,450 --
5,000(1) 1997-2000 -- -- --
Michael J. Keller...................... 750(1) 1995-1998 -- $217,935 --
1,500(1) 1997-2000 -- $309,585 --
Paul T. Sands, Jr...................... 1,100(1) 1997-2000 -- $227,029 --
$24,818(2) 1997-2000 -- $ 81,170 $ 81,170
Christopher Abbinante.................. 1,000 1997-2000 -- $206,390 --
William Halvorsen...................... 1,600 1997-2000 -- $330,224 --
$39,545(2) 1997-2000 -- $129,337 $129,337
</TABLE>
- ---------------
(1) These amounts represent performance units awarded under the CT&T Executive
Performance Unit Plan of 1995, as such awards have been amended in
connection with the Spin-Off (the "1995 Plan"). The 1995 Plan provides for
payouts of performance units for the award period in cash based upon CT&T's
return on equity and the application of multipliers relating to dividends
paid and an expense ratio, in each year of the award period. The formula for
determining the base value of each performance unit (before the application
of the multipliers) is as follows:
<TABLE>
<CAPTION>
BASE VALUE PER $1 MILLION OF
RETURN ON EQUITY ADJUSTED NET OPERATING INCOME FOR
ANNUAL AVERAGE PERFORMANCE CYCLE
---------------- ---------------------------------
<S> <C> <C>
Below Threshold................ 6.99 or less $ 0
Threshold...................... 7.0 to 12.99 $2.00
Maximum Rate................... 13.0 or more $4.50
</TABLE>
The base value of a performance unit is increased or decreased (i) by the
application of a multiplier based on dividends paid, ranging from a maximum
of 130% for average dividends paid during the performance cycle, expressed
as a percentage of Chicago Title's stockholders' equity, of 12% or more to a
minimum of 70% for average dividends paid at a rate of 6% or less, and then
(ii) by the application of a multiplier based on the expense ratio, ranging
from a maximum of 130% for an expense ratio of 76 % or less to a minimum of
75% for an expense ratio of 81% or more. The total value of a performance
unit is the sum of its annual values (as so increased or decreased) for the
award period. The values of the performance units will be fixed at year-end
1998, unless a participant elects otherwise, in which case the values of the
performance units will be based on the actual results of Chicago Title
during the performance period. Unless a participant has made such an
election, for 1998, benefits will be calculated on the assumption that
Alleghany Asset Management had remained a subsidiary of CT&T throughout 1998
and had achieved 100% of its post-separation planned results for 1998 (i.e.,
benefits will take into account (x) actual CT&T results through December 31,
1997 and actual Chicago Title results through December 31, 1998, plus (y)
Alleghany Asset Management planned results for such portions of 1998 during
which Alleghany Asset Management is not a subsidiary of CT&T). Participants
for whom the value of their performance units is fixed at year-end 1998 also
will receive a grant of restricted stock and are expected to receive a grant
of stock options, described in the table relating to new plan benefits. See
"Management -- Chicago Title Compensation Arrangements -- The 1998 Long-Term
Incentive Plan -- New Plan Benefits under the 1998 Plan." One-quarter of the
payout in respect of such performance units initially was required to be
made in shares of Alleghany Stock, valued at the date of the award. In
addition, participants were permitted to elect to have an additional portion
of the payment (up to one-third of the total amount of the payment) applied
to the purchase of Alleghany Stock at the same price. Pursuant to agreements
entered into in connection with the Spin-Off, the portion of the payout that
would have been made in Alleghany Stock instead will be made in cash, based
upon the market value of
50
<PAGE> 53
Alleghany Stock at the time of the Spin-Off. In respect of Mr. Rau only, the
performance units for the 1997-2000 award period will be canceled on the
Spin-Off Date and no payments made in respect thereof. The target value
shown is a representative amount, calculated using planned return on equity,
dividends and an expense ratio for 1998 and assuming that each of the named
executive officers has elected to have the value of his performance units
fixed at 1998 year-end. These performance units do not have threshold or
maximum payout amounts.
(2) These amounts represent the portion of the cash bonus earned by Messrs.
Sands and Halvorsen under the CT&T Annual Plan which was deferred and is
subject to reduction to reflect unfavorable title insurance claims
experience during 1997-2000 for policies written in 1997. If such experience
compares favorably with (i) a pre-established hypothetical claims experience
deemed acceptable by the Board of Directors of CT&T, and/or (ii) the
historical claims experience during 1994-1999 for policies written in 1994,
1995 and 1996, Messrs. Sands and Halvorsen will be entitled to receive such
deferred amount in full with interest. In addition, Messrs. Sands and
Halvorsen will be entitled to a related incentive payment, limited to two
times the amount of the deferral. The target value shown is a representative
amount assuming that title insurance policy claims experience in 1997-2000
for policies written in 1997 will be identical to such experience in
1994-1997 for policies written in 1994 and further assuming identical
interest rates in the two periods. This award does not have threshold payout
amounts.
In connection with the commencement of his employment, Mr. Rau was granted
an option to purchase for $3.5 million one percent of the outstanding common
stock of CT&T. On the Spin-Off Date, the option will be repurchased by Chicago
Title for a cash purchase price equal to the market value of one percent of the
outstanding shares of Chicago Title Common Stock measured as of the first
trading day after Spin-Off Date, less $3.5 million, subject to tax withholding.
In connection with the commencement of their employment, Messrs. Keller and
Hodges were granted an option, exercisable in the event of a sale or public
offering of CT&T, to acquire 0.285% of the outstanding common stock of CT&T for
$1.0 million. In lieu thereof, they will receive restricted shares of Chicago
Title Common Stock under the 1998 Long-Term Incentive Plan, and they also are
expected to receive options to purchase shares of Chicago Title Common Stock
under such Plan. See "Chicago Title Compensation Arrangements -- The 1998
Long-Term Incentive Plan."
CHICAGO TITLE COMPENSATION ARRANGEMENTS
THE 1998 LONG-TERM INCENTIVE PLAN
Chicago Title has adopted the 1998 Long-Term Incentive Plan (the "1998
Plan") to provide long-term incentives to officers and employees of Chicago
Title and its subsidiaries and to directors of Chicago Title. The 1998 Plan
permits Chicago Title to provide incentive compensation of the types commonly
known as restricted stock, stock options, stock appreciation rights, stock
awards and cash bonuses, as well as other types of incentive compensation. No
awards may be granted under the 1998 Plan after April 30, 2003.
The 1998 Plan will be administered by the Compensation Committee of the
Chicago Title Board (the "Committee"), which has the authority to select the
individuals to whom awards will be made and to interpret the 1998 Plan's
provisions. The Committee also will determine the type, size and terms of the
awards to be made, whether and to what extent to permit transferability of
awards, and whether to set objective performance goals that must be met in order
for the employee to receive the compensation payable under the awards. Except to
the extent prohibited by law or the rules of a stock exchange, the Committee may
delegate its responsibilities and powers to one or more persons selected by it.
All officers and employees of Chicago Title and its subsidiaries, including
executive officers named in the Summary Compensation Table, as well as certain
other persons who provide services to Chicago Title and its subsidiaries and
directors of Chicago Title, are eligible to participate in the 1998 Plan.
Chicago Title estimates that, at the Spin-Off Date, there will be approximately
285 persons eligible to receive awards under the 1998 Plan.
Subject to adjustment for corporate transactions involving Chicago Title,
such as stock splits, stock dividends, spin-offs, capital reorganizations and
similar types of events, a maximum of 2,230,000 shares of Chicago Title Common
Stock may be issued under the 1998 Plan, of which a maximum of 1,580,000 shares
51
<PAGE> 54
may be issued in connection with awards of stock options and stock appreciation
rights and a maximum of 650,000 shares may be issued as shares of restricted
stock and pursuant to other types of stock-based awards. No adjustment may be
made which would adversely affect the status of any outstanding Qualifying Award
(described below) as "performance-based compensation" under Section 162(m) of
the Code. Shares subject to awards which are forfeited or are not issued under
such award, because of settlement in cash or otherwise, will be available to be
awarded again under the 1998 Plan. The Chicago Title Board may amend or
terminate or suspend the 1998 Plan in any manner and at any time, except that no
such amendment or termination shall adversely affect outstanding awards without
the written consent of the holder of such award.
The 1998 Plan authorizes grants of options at exercise prices to be
determined by the Committee. The Committee will determine the persons to whom
options will be granted, the dates of grant, the number of shares to be subject
to each option, the duration, and the other terms and conditions of the options,
including any restrictions to be placed on transferability of shares upon
exercise of options. The Committee will determine whether to grant options
qualifying as "incentive stock options" under Section 422 of the Code ("ISOs"),
or options which do not so qualify ("non-qualified options"), or a combination
of both. Only employees of Chicago Title or its majority owned subsidiaries are
eligible to receive ISOs, and the exercise price of an ISO must be not less than
the fair market value of a share of Chicago Title Common Stock on the date of
grant. The Committee may establish conditions precedent to the vesting of the
right to exercise options, including continued employment with Chicago Title.
The Federal income tax consequences of the grant and exercise of options
under the 1998 Plan will depend upon the terms and conditions of particular
options as determined by the Committee, and upon the provisions of law as then
in effect. Under the Code as currently in effect, an optionee will not recognize
income upon the grant or, if he has been an employee of Chicago Title or its
majority owned subsidiaries throughout the period from the date of grant of the
ISO until three months prior to its exercise, upon the exercise of an ISO,
except that the excess of the fair market value of the shares at the time of
exercise over the option price is a tax preference item. As an item of tax
preference, such excess would be included in the alternative minimum tax
calculation for the year in which the ISO is exercised. If the optionee holds
the shares for at least two years after the date of grant of the ISO and one
year after the date the shares are transferred to the optionee, any difference
between the option price and amount received upon a sale or exchange is treated
as capital gain or loss. If the optionee does not comply with such holding
periods, ordinary income is recognized in the year of disposition of the shares
in an amount equal to the sale price (or, for other transfers, the fair market
value on the date of transfer) or the fair market value on the date of exercise
(whichever is less) less the option price. Chicago Title will not be allowed a
deduction for Federal income tax purposes in connection with the grant or
exercise of any ISO, if the requisite employment period is satisfied. If the
shares acquired are disposed of during the one-year or two-year holding periods
described above, Chicago Title generally will be entitled to a tax deduction
with respect to the ordinary income recognized by the optionee.
As to non-qualified options (or an ISO where the requisite employment
period is not satisfied), the optionee will recognize ordinary income upon the
exercise of the option to the extent that the fair market value of the shares at
the time of exercise exceeds the option price. Chicago Title is generally
entitled to a deduction for Federal income tax purposes equal to the amount of
income recognized by the optionee. The optionee's cost basis for the stock is
equal to the option price plus any amount recognized as ordinary income, and the
holding period for the stock commences with the exercise of the option.
With respect to other awards (including stock appreciation rights) granted
under the 1998 Plan that may be settled either in cash or in Chicago Title
Common Stock or other property that is either transferable or not subject to a
substantial risk of forfeiture under Section 83(c) of the Code, the participant
will realize compensation income (subject to withholding taxes) equal to the
amount of cash or the fair market value of the Chicago Title Common Stock or
other property received. Chicago Title will be entitled to a deduction in the
same amount and at the same time as the compensation income is realized by the
participant.
With respect to awards including Chicago Title Common Stock or other
property that is both nontransferable and subject to a substantial risk of
forfeiture under Section 83(c) of the Code, unless an election is made under
Section 83(b) of the Code, as described below, the participant will realize
52
<PAGE> 55
compensation income equal to the fair market value of the Chicago Title Common
Stock or other property received at the first time the Chicago Title Common
Stock or other property is either transferable or not subject to a substantial
risk of forfeiture. Chicago Title will be entitled to a deduction in the same
amount and at the same time as the compensation income is realized by the
participant.
Even though Chicago Title Common Stock or other property may be
nontransferable and subject to a substantial risk of forfeiture, a participant
may elect (within 30 days of receipt of the Chicago Title Common Stock or other
property) to include in gross income the fair market value (determined without
regard to such restrictions) of such Chicago Title Common Stock or other
property at the time received. In that event, the participant will not realize
any income at the time the Chicago Title Common Stock or other property either
becomes transferable or is not subject to a substantial risk of forfeiture, but
if the participant subsequently forfeits such Chicago Title Common Stock or
other property, the participant's loss would be limited to the amount actually
paid for the Chicago Title Common Stock or other property. While such Chicago
Title Common Stock or other property remains nontransferable and subject to a
substantial risk of forfeiture, any dividends or other income will be taxable as
additional compensation income. Finally, special rules may apply with respect to
participants subject to Section 16(b) of the Exchange Act.
The Committee may condition the payment, exercise or vesting of any award
on the payment of the withholding taxes and may provide that a portion of the
Common Stock or other property to be distributed will be withheld (or previously
acquired stock or other property surrendered by the participant) to satisfy such
withholding and other tax obligations.
Finally, amounts paid pursuant to an award which vests or becomes
exercisable, or with respect to which restrictions lapse, upon a change in
control may constitute "parachute payments" under Section 280G of the Code. To
the extent any such payment constitutes an "excess parachute payment," Chicago
Title would not be entitled to deduct such payment and the participant would be
subject to a 20 percent excise tax (in addition to regular income tax).
The Committee may grant an award which is intended to qualify as
"performance-based compensation" under Section 162(m) of the Code (a "Qualifying
Award"). If the Committee grants an award as a Qualifying Award, the right to
receive payment of such award will be conditional upon the achievement of
performance goals established by the Committee in writing at the time such
Qualifying Award is granted. Such performance goals, which may vary from
participant to participant and from award to award, shall be based upon the
attainment of specific amounts of, or increases or decreases in, one or more of
the following: revenues, market share, title losses, claims ratios, expense
ratios, paid losses, contribution margins, reserves, return on expenses,
operating income, cash flow, income before income taxes, net income, earnings or
earnings per share, net worth, stockholders' equity, market value, return on
equity or assets or total return to stockholders, whether applicable to Chicago
Title or any relevant subsidiary or business unit or entity in which Chicago
Title has a significant investment, or any other company or companies, or any
combination thereof as the Committee may deem appropriate. Before any Qualifying
Award is paid, the Committee will certify in writing that the performance goals
applicable to the Qualifying Award were satisfied. The maximum amount which may
be granted as Qualifying Awards to any participant in any calendar year shall
not exceed the aggregate of (i) for stock-based awards, 150,000 shares of
Chicago Title Common Stock (whether payable in cash or shares of Chicago Title
Common Stock), subject to adjustment for certain corporate transactions
involving Chicago Title, and (ii) for awards payable in cash, a tax bonus
payable with respect to such stock-based awards which are Qualifying Awards, and
cash payments (other than tax bonuses) of $1,000,000.
In the event of a "change of control" of Chicago Title, all awards granted
under the 1998 Plan (including Qualifying Awards) that are outstanding and not
yet vested or exercisable or which are subject to restrictions, immediately will
become 100% vested in each participant or will be free of any restrictions as of
the date the change of control is effective, and will be exercisable for the
remaining duration of the award. All awards that are exercisable as of the
effective date of the change of control will remain exercisable for the
remaining duration of the award.
Under the 1998 Plan, a "change of control" occurs upon: (i) acquisition by
any individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of beneficial ownership (within
53
<PAGE> 56
the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of either (x)
the then outstanding shares of capital stock of Chicago Title or (y) the
combined voting power of the then outstanding voting securities of Chicago Title
in a tender offer or exchange offer made to all of the stockholders of Chicago
Title, provided, however, that a change of control shall not include any of the
following transactions: (a) any acquisition by or from Chicago Title or any of
its subsidiaries; (b) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by Chicago Title or any of its subsidiaries; (c)
any acquisition by any corporation with respect to which, following such
acquisition, more than 50% of the then outstanding shares of capital stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the outstanding shares of capital stock
of Chicago Title and the outstanding voting securities of Chicago Title
immediately prior to such acquisition, in substantially the same proportion as
their ownership immediately prior to such acquisition of the outstanding shares
of capital stock of Chicago Title and outstanding voting securities of Chicago
Title, as the case may be; (ii) approval by the stockholders of Chicago Title of
a reorganization, merger or consolidation with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the outstanding shares of capital stock of Chicago Title
and the outstanding voting securities of Chicago Title immediately prior to such
reorganization, merger or consolidation do not, following such reorganization,
merger or consolidation, beneficially own, directly or indirectly, more than 50%
of, respectively, the then outstanding shares of capital stock and the combined
voting power of the then outstanding voting securities, as the case may be, of
the corporation resulting from such reorganization, merger or consolidation, in
substantially the same proportion as their ownership immediately prior to such
reorganization, merger or consolidation of the outstanding shares of capital
stock of Chicago Title and the outstanding voting securities of Chicago Title,
as the case may be; (iii) the approval by the stockholders of Chicago Title of a
sale or other disposition of all or substantially all of the assets of Chicago
Title, other than to a corporation with respect to which, following such sale or
disposition, more than 50% of, respectively, the then outstanding shares of
capital stock and the combined voting power of the then outstanding voting
securities is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the outstanding shares of capital stock of Chicago
Title and the outstanding voting securities of Chicago Title immediately prior
to such sale or disposition, in substantially the same proportion as their
ownership immediately prior to such sale or disposition of the outstanding
shares of capital stock of Chicago Title and the outstanding voting securities
of Chicago Title, as the case may be; or (iv) approval by the stockholders of
Chicago Title of a complete liquidation or dissolution of Chicago Title.
Prior to the Spin-Off Date, Chicago Title plans to grant up to an aggregate
of 364,746 restricted shares of Chicago Title Common Stock to 19 employees of
Chicago Title and its subsidiaries, including the executive officers named in
the Summary Compensation Table (assuming that all such eligible executive
officers and employees elect to receive such shares, as further described in
Note (1) to the table relating to long-term incentive awards in the last fiscal
year). Immediately after the Spin-Off, Chicago Title intends to issue an
additional 16,000 shares of restricted stock to 12 non-employee directors of
Chicago Title. Chicago Title also expects to grant non-qualified Options to
purchase up to an aggregate of about 860,000 shares of Chicago Title Common
Stock to approximately 285 employees, including the executive officers named in
the Summary Compensation Table and, under the Directors Stock Option Plan, to
the non-employee directors of Chicago Title. The exercise prices of these
non-qualified Options will be equal to the fair market value of the Chicago
Title Common Stock on the Spin-Off Date. In connection with the restricted stock
awards, each of the executive officers and employees are expected to make an
election under Section 83(b) of the Code, and, in return, Chicago Title will
reimburse such persons for income and employment taxes imposed on the value of
the restricted stock award and the amount of the payment.
The following table sets forth information regarding restricted stock
awards to be granted under the 1998 Plan by Chicago Title prior to the Spin-Off
Date and the stock options expected to be granted immediately after the Spin-Off
Date to (i) each of the executive officers named in the Summary Compensation
Table, (ii) each of the directors, (iii) all executive officers as a group, and
(iv) all employees who are not executive officers. The information set forth in
the table includes stock options to be awarded on the day after the Spin-
54
<PAGE> 57
Off Date to the non-employee Directors of Chicago Title under the Directors'
Stock Option Plan (see "Compensation of Directors" above).
NEW PLAN BENEFITS UNDER THE 1998 PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF NUMBER OF SHARES OF
UNDERLYING OPTIONS TOTAL OPTIONS RESTRICTED STOCK
NAME AND POSITION TO BE GRANTED TO BE GRANTED(2) TO BE GRANTED
----------------- ------------------ ---------------- -------------------
<S> <C> <C> <C>
John Rau.................................. 109,403(1) 12.7% 109,246(1)
Michael J. Keller......................... 30,000 3.5% 30,000
Paul T. Sands, Jr. ....................... 30,000 3.5% 30,000
Christopher Abbinante..................... 30,000 3.5% 30,000
William Halvorsen......................... 30,000 3.5% 30,000
Richard P. Toft........................... 1,000 0.1% 5,000
John J. Burns, Jr. ....................... 1,000 0.1% 1,000
Peter H. Dailey........................... 1,000 0.1% 1,000
Robert M. Hart............................ 1,000 0.1% 1,000
Allan P. Kirby, Jr. ...................... 1,000 0.1% 1,000
M. Leanne Lachman......................... 1,000 0.1% 1,000
William K. Lavin.......................... 1,000 0.1% 1,000
Lawrence F. Levy.......................... 1,000 0.1% 1,000
Margaret MacKimm.......................... 1,000 0.1% 1,000
Alan Prince............................... 15,000 1.7% 15,000
Philip G. Heasley......................... 1,000 0.1% 1,000
Norman R Bobins........................... 1,000 0.1% 1,000
Langdon Neal.............................. 1,000 0.1% 1,000
Non-Executive Officer Director Group...... 27,000 3.1% 31,000
Executive Officer Group................... 289,403 33.6% 289,246
Employee Group............................ 543,597(2) 63.2% 60,500
</TABLE>
- ---------------
(1) Estimated. The actual number of shares underlying options is expected to be
an amount equal to 0.5% of the number of outstanding shares of Chicago Title
Common Stock as of the close of business on the Spin-Off Date. The actual
number of restricted shares will be an amount equal to 0.5% of the number of
outstanding shares of Chicago Title Common Stock on the Spin-Off Date,
exclusive of the restricted shares granted to members of senior management
of Chicago Title on the Spin-Off Date, plus an additional number of shares
having a value of $50,000 based on the market price of Chicago Title Common
Stock on the Spin-Off Date.
(2) Estimated, based on options being granted to purchase 860,000 shares of
Chicago Title Common Stock.
ANNUAL BONUS PLAN
Chicago Title also has adopted the Chicago Title Corporation Annual
Incentive Plan (the "Annual Plan") to provide short-term incentives to officers
and employees of Chicago Title.
Plan participants are provided an incentive opportunity based on the higher
of a variable percentage of the participant's annual salary or salary range
mid-point, with the precise opportunity keyed to corporate financial
performance; certain participants may have their bonus opportunity modified
based on the attainment of special personal and/or operating unit objectives.
The incentive opportunity dependent on financial performance is determined by
multiplying (i) an incentive factor based on cyclical net revenue margin,
ranging from a threshold incentive factor of 0.5 to a maximum incentive factor
of 1.5, by (ii) a payout percentage based on cyclical earnings, ranging from a
threshold of 25 percent to a maximum of 100 percent. The result is then
multiplied by the incentive opportunity to determine the payout to the
participant.
55
<PAGE> 58
Cyclical earnings represent pre-tax earnings from Chicago Title's title and
real estate services operations, but exclude earnings, net of expenses,
associated with Chicago Title's investment portfolio. Cyclical net revenues
represent total revenues from Chicago Title's title and real estate services
operations, reduced by agents' commissions and excluding corporate investment
income.
Earned incentive payments will be made in a combination of cash and Chicago
Title common stock, in proportions determined by the Compensation Committee. No
incentive payments are made for financial results which fall below a
pre-established threshold.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Mr. Rau has an employment agreement with Chicago Title, with an initial
term from January 1, 1997 to December 31, 2001. Thereafter, the agreement will
be automatically extended from year to year unless either party gives notice to
the contrary at least nine months before the initial term or any subsequent
renewal date. The agreement may be terminated on or after January 1, 1999, by
Mr. Rau or by Chicago Title, without cause on sixty days written notice.
However, if Chicago Title terminates his employment without cause, Mr. Rau will
receive severance benefits based upon the remaining term of the agreement. Such
severance benefits will consist of continuation of Mr. Rau's base salary and
annual bonuses for that remaining term, at the rate of his then current annual
base salary and 60% of his maximum annual bonus, pro rata distribution of his
long-term incentive awards, and continuation of all employee benefits for that
remaining term. If Mr. Rau resigns due to a reduction in base salary or a
material reduction in his duties or authority, or if he resigns within ninety
days after Chicago Title gives notice that the agreement will not be renewed,
such resignation will be deemed a termination by Chicago Title without cause.
Mr. Rau's employment may also be terminated for cause (defined as willful
failure to perform his duties after written notice from the Chicago Title Board,
gross misconduct or conviction of a felony involving personal dishonesty), or
disability (inability to perform his duties for ninety or more days within any
twelve-month period). In the event of termination for cause or disability or
death or voluntary resignation, Mr. Rau is not entitled to further compensation
except as provided under the terms of the various incentive and benefit plans in
which he participates at the time of termination.
The agreement entitles Mr. Rau to be employed as President and Chief
Executive Officer of Chicago Title, to receive a salary at an annual rate of at
least $400,000 for 1998 (to be adjusted thereafter as periodically recommended
by the Compensation Committee), to participate in all Chicago Title incentive
and benefit plans for which he is eligible, to be credited under qualified and
non-qualified defined contribution plans with years of service credit beginning
in June 1972, and to receive vacation and all other benefits normally provided
to senior executives of Chicago Title. Mr. Rau will participate in Chicago
Title's Annual Incentive Plan with the opportunity to earn each year an annual
bonus at a maximum amount equal to not less than 150% of his base salary. For
calendar year 1998, his bonus opportunity will be equal to 150% of his base
salary, with two-thirds of such bonus opportunity dependent upon the
accomplishment of specified corporate financial goals, and one-third of such
bonus opportunity dependent upon the accomplishment of personal objectives, to
be agreed to by Mr. Rau and the Compensation Committee. Such annual bonuses will
be paid in a combination of cash and shares of Chicago Title Common Stock, as
determined by the Chicago Title Board or the Compensation Committee. In
addition, prior to the Spin-Off Date, Mr. Rau will enter into an agreement
modifying the terms of performance units awarded to him under CT&T's Executive
Performance Unit Plan of 1995, described as so amended in Note (1) to the table
relating to long-term incentive awards in the last fiscal year, which agreement
will provide that, on the Spin-Off Date, Chicago Title will grant to Mr. Rau an
award of shares of restricted stock in an amount equal to 0.5% of the
outstanding shares of Chicago Title Common Stock at the close of business on the
Spin-Off Date, exclusive of restricted shares granted to members of senior
management of Chicago Title, plus an additional number of shares of restricted
Stock having a value of $50,000 based on the market price of the Chicago Title
Common Stock on the Spin-Off Date. On the day after the Spin-Off Date, the
Compensation Committee will consider a recommendation to award non-qualified
stock options to purchase shares of Chicago Title Common Stock, in an amount
equal to 0.5% of the outstanding shares of Chicago Title Common Stock at the
close of business on the Spin-Off Date. Such awards will be governed by separate
agreements and by the provisions of the 1998 Plan. In connection with the
restricted stock award, Mr. Rau will make an election under Section 83(b) of the
Code,
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<PAGE> 59
and Chicago Title will make a payment to, Mr. Rau to reimburse him for income
and employment taxes imposed on the value of the restricted stock award and the
amount of the payment.
In connection with the commencement of Mr. Rau's employment as President
and Chief Executive Officer of CT&T in January 1997, he received a bonus of
$360,000 and a restricted stock award of 6,400 shares of Alleghany Stock (the
"Alleghany Restricted Stock"), which are described in Notes (2) and (3) to the
Summary Compensation Table. In the event of termination of his employment, any
unvested shares of Alleghany Restricted Stock, or Chicago Title Common Stock
distributed in respect thereof, will be subject to mandatory sale at $0.66 per
share of Alleghany Restricted Stock or $0.34 per share of Chicago Title Common
Stock, to Alleghany or Chicago Title, as the case may be. Vesting of all of his
shares of Alleghany Restricted Stock and shares of Chicago Title Common Stock
distributed in respect thereof will be accelerated if the Chicago Title Board
approves an acquisition of Chicago Title prior to January 1, 2001. Mr. Rau also
was granted an option in respect of the outstanding common stock of CT&T which,
as previously described, will be settled in cash on the Spin-Off Date.
Mr. Rau is prohibited, for a period of two years from any termination of
his employment, from soliciting the employment or engagement of any employees or
agents of Chicago Title and, at any time, from disclosing any confidential
information of Chicago Title. In addition, he is prohibited from competing with
the title insurance business, or title related businesses, of Chicago Title for
one year after any termination of his employment. However, at any time following
termination by Chicago Title without cause, Mr. Rau may elect to waive further
payment of all severance benefits described above and be released from his
covenant not to compete.
PENSION PLAN TABLE
CT&T maintains a pension plan for eligible employees hired before January
1, 1995. Messrs. Sands, Halvorsen and Abbinante participate in CT&T's Pension
Plan, which provides eligible employees with retirement income in the form of
monthly life annuity payments after their retirement. CT&T's Excess Benefits
Pension Plan restores benefits to certain employees whose benefits are limited
under the Pension Plan due to provisions in the Code regarding the maximum
amount of benefits payable under qualified plans. For employees hired after
January 1, 1995, including Messrs. Rau and Keller, CT&T maintains a defined
contribution plan, contributions to which are based upon salary and length of
service and are reflected, when paid, in the Summary Compensation Table.
The following table shows the estimated annual retirement benefit payable
under CT&T's Pension Plan (reflecting the Social Security offset described
below) to a participant who, upon retirement on January 1, 1997 at age 65, had
achieved the final average annual covered remuneration and years of service
indicated. The amounts shown include the additional sums payable under CT&T's
Excess Benefits Pension Plan. The amounts shown assume payment in the form of a
straight life annuity, with payment continuing for a period of ten years from
retirement if the participant dies during such period.
<TABLE>
<CAPTION>
FINAL AVERAGE YEARS OF SERVICE
ANNUAL COVERED --------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000.................... $ 28,666 $ 38,221 $ 47,776 $ 57,332 $ 66,887
150,000.................... 35,041 46,721 58,401 70,062 81,762
175,000.................... 41,416 55,221 69,026 82,832 96,637
200,000.................... 47,791 63,721 79,651 95,582 111,512
225,000.................... 54,196 72,221 90,276 108,332 126,387
250,000.................... 60,541 80,721 100,901 121,082 141,262
300,000.................... 73,291 97,721 122,151 146,582 171,012
400,000.................... 98,791 131,721 164,651 197,382 230,512
500,000.................... 124,291 165,721 207,151 248,582 290,012
</TABLE>
A participant's accrued benefit under CT&T's Pension Plan, expressed as a
monthly annuity starting at age 65, is calculated by multiplying his final
average annual covered remuneration by 1.7 percent, dividing by
57
<PAGE> 60
twelve and multiplying the result by his years of credited service not exceeding
thirty-five. Final average annual covered remuneration is defined as the highest
average monthly base salary (excluding bonuses and overtime pay and subject to
certain tax limitations, but including any amount by which an employee's
compensation is reduced to make before-tax contributions under CT&T's Savings
and Profit Sharing Plan or any similar plan) over a consecutive 60-month period
during the last 120 months of employment, multiplied by twelve. Pursuant to
CT&T's Pension Plan and Excess Benefits Pension Plan, such salary is determined
using amounts which would appear in the salary column in the Summary
Compensation Table for the relevant years. The benefit is reduced by a portion
of the participant's Social Security benefits. A participant may retire as early
as age 55, but the benefit payable to him at that time will be actuarially
reduced to reflect the commencement of benefit payments prior to age 65, unless
he has reached age 62 and has at least twenty years of service.
As of December 31, 1997, the credited years of service for Messrs. Sands,
Halvorsen and Abbinante were 28.8, 24.8 and 21.8. As of December 31, 1997, the
average annual covered remuneration for Messrs. Sands, Halvorsen and Abbinante
was $145,592, $150,550 and $115,483.
EXECUTIVE SALARY CONTINUATION PLAN
Messrs. Rau, Keller, Sands and Abbinante participate in Chicago Title's
Executive Salary Continuation Plan, which is a retirement plan designed to
encourage key employees to remain with Chicago Title until retirement. The plan
provides post-retirement monthly income of two percent of final monthly income
at retirement multiplied by the number of years of participation in the plan, up
to a maximum of 10 percent of final monthly salary. Benefits are actuarially
reduced for early retirement between the ages of 55 and 65. Payments under the
plan are payable for life or ten years, whichever is greater. If a participant
dies prior to retirement, annual payments of 25 percent of final salary are
payable until what would have been the employee's 65th birthday or for ten
years, whichever is greater. Based upon their current salaries, Messrs. Rau,
Keller, Sands and Abbinante would be entitled to an annual benefit at their
normal retirement age of $40,000, $22,500, $18,000 and $14,000, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of Directors
are Mr. Hart (Chairman), Mr. Heasley, Mr. Kirby and Ms. MacKimm.
In 1997, the committee of the CT&T Board of Directors which served as a
Compensation Committee, included Messrs. Rau and Toft. Mr. Rau has been
President and Chief Executive Officer of CT&T and CTI since January 1997. Since
October 1995, Mr. Toft has served as Chairman and Chief Executive Officer of
Alleghany Asset Management, currently a subsidiary of CT&T. Mr. Toft also served
as President and Chief Executive Officer of CT&T until July 1996 and as
President and Chief Executive Officer of CTI until January 1994.
SECURITIES OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the projected beneficial ownership of
Chicago Title Common Stock as of the Spin-Off Date of each of the persons who
will be a Chicago Title director as of the Spin-Off Date and each of the
executive officers named in the Summary Compensation Table below. The ownership
information presented below: (a) is based on Alleghany's knowledge of the
beneficial ownership of Alleghany Stock as of April 28, 1998, (b) reflects the
distribution ratio of three shares of Chicago Title Common Stock for each share
of Alleghany Stock, the shares of Chicago Title Common Stock to be issued as
restricted stock immediately prior to the Spin-Off to senior management of
Chicago Title and intended to be issued
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<PAGE> 61
immediately after the Spin-Off to non-employee directors of Chicago Title, and
(c) assumes no change in beneficial ownership of Alleghany Stock between March
20, 1998 and the Record Date.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------------------------
SOLE VOTING POWER SHARED VOTING POWER
AND SOLE AND/OR SHARED
NAME AND ADDRESS INVESTMENT INVESTMENT PERCENT
OF BENEFICIAL OWNER POWER POWER TOTAL OF CLASS
------------------- ----------------- ------------------- --------- --------
<S> <C> <C> <C> <C>
Richard P. Toft................... 25,578 -- 25,578 0.11
John J. Burns, Jr. ............... 86,682 -- 86,682(1) 0.39
Peter H. Dailey................... 1,000 -- 1,000 0.01
Robert M. Hart.................... 18,834 -- 18,834 0.08
Allan P. Kirby, Jr. .............. 1,661,179 -- 1,661,179(2) 7.59
M. Leanne Lachman................. 1,516 -- 1,516 0.01
William K. Lavin.................. 1,305 -- 1,305 0.01
Lawrence F. Levy.................. 1,000 -- 1,000 0.01
Margaret MacKimm.................. 1,000 -- 1,000 0.01
Alan Prince....................... 31,968 -- 31,968 0.14
Philip G. Heasley................. 1,000 -- 1,000 0.01
Norman R Bobins................... 1,000 -- 1,000 0.01
Langdon Neal...................... 1,000 -- 1,000 0.01
John Rau.......................... 128,446 -- 128,446(3) 0.59
Michael J. Keller................. 30,000 -- 30,000 0.13
Paul T. Sands, Jr. ............... 33,195 -- 33,195 0.15
Christopher Abbinante............. 30,237 -- 30,237 0.13
William Halvorsen................. 31,014 -- 31,014 0.14
</TABLE>
- ---------------
(1) Includes 3,063 shares projected to be owned by Mr. Burns' wife or daughter.
Mr. Burns will have no voting or investment power over these shares, and he
disclaims beneficial ownership of them.
(2) See Note (2) to the securities ownership table included in "Principal
Stockholders" below.
(3) See Note (1) to the table relating to new plan benefits under the 1998 Plan
included in "Chicago Title Compensation Arrangements" above.
On basis of the projected beneficial ownership of Chicago Title Common
Stock described above, on the Spin-Off Date, directors and executive officers of
Chicago Title as a group (20 persons) will beneficially own 2,145,954 shares, or
9.8 percent, of the outstanding Chicago Title Common Stock; such directors and
executive officers will have sole voting and investment power with respect to
2,142,891 shares, and no voting or investment power with respect to 3,063
shares.
PRINCIPAL STOCKHOLDERS
Prior to the Spin-Off, the only person who beneficially owned more than 5%
of any class of Chicago Title voting stock was Alleghany. Immediately prior to
the Spin-Off, Alleghany will own beneficially and of record approximately
21,515,871 shares of Chicago Title Common Stock, representing more than 98% of
the shares of capital stock of Chicago Title; expected to be issued and
outstanding immediately after the Spin-Off; the remaining shares will be issued
as shares of restricted stock to senior management of Chicago Title and its
subsidiaries. Alleghany has sole voting and sole investment power with respect
to the shares owned by it. After the completion of the Spin-Off, there will be
approximately 21,896,617 shares of Chicago Title Common Stock outstanding,
including 16,000 shares to be issued as restricted stock immediately after the
Spin-Off to the non-employee directors of Chicago Title, and none of the
outstanding shares of Chicago Title Common Stock will be owned by Alleghany.
59
<PAGE> 62
The following table sets forth the projected beneficial ownership of
Chicago Title Common Stock as of the Spin-Off Date of certain persons Chicago
Title believes will become the beneficial owners of more than five percent of
such class of securities. The ownership information presented below: (a) is
based on Alleghany's knowledge of the beneficial ownership of Alleghany Stock as
of April 28, 1998, (b) reflects the distribution ratio of three shares of
Chicago Title Common Stock for each share of Alleghany Stock, the shares of
Chicago Title Common Stock to be issued as restricted stock immediately prior to
the Spin-Off to senior management of Chicago Title and intended to be issued
immediately after the Spin-Off to the non-employee directors of Chicago Title,
and (c) assumes no change in beneficial ownership of Alleghany Stock between
April 28, 1998 and the Record Date.
As of April 28, 1998, approximately 35.2 percent of the outstanding
Alleghany Stock was believed to be beneficially owned, and the same percentage
of Chicago Title Common Stock is projected to be beneficially owned, by F. M.
Kirby, Allan P. Kirby, Jr., their sister, Grace Kirby Culbertson, and the
estate, or one or more beneficiaries, of Ann Kirby Kirby, primarily through a
number of family trusts. Mrs. Kirby, the sister of Messrs. Kirby and Mrs.
Culbertson, who was believed by Alleghany to be a principal stockholder of
Alleghany based on her Schedule 13D statement filed with the Commission in 1982,
died in 1996. Alleghany has not received any information from the
representatives of the estate of Mrs. Kirby, or any beneficiaries of her estate,
regarding its or their ownership of Alleghany Stock; therefore, it does not know
whether she, her estate, or any beneficiary of her estate beneficially owns more
than five percent of the outstanding Alleghany Stock.
<TABLE>
<CAPTION>
PROJECTED AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF CHICAGO TITLE COMMON STOCK
-----------------------------------------------------------------
SOLE VOTING POWER SHARED VOTING POWER
AND SOLE AND/OR SHARED
NAME AND ADDRESS INVESTMENT INVESTMENT PERCENT
OF BENEFICIAL OWNER POWER POWER TOTAL OF CLASS
------------------- ----------------- ------------------- --------- --------
<S> <C> <C> <C> <C>
F.M. Kirby........................ 877,287 1,856,901 2,734,188(1) 12.1
17 DeHart Street
P.O. Box 151
Morristown, NJ 07963
Allan P. Kirby, Jr. .............. 1,661,179 -- 1,661,179(2) 7.6
14 E. Main Street
P.O. Box 90
Mendham, NJ 07945
Grace Kirby Culbertson............ 423,291 756,318 1,179,609(3) 5.2
Blue Mill Road
Morristown, NJ 07960
Estate of Ann Kirby Kirby......... 953,643 1,178,358 2,132,001(4) 9.5
c/o Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005
Southeastern Asset Management,
Inc. ........................... (5) (5) 2,376,783(5) 10.6
6075 Poplar Avenue
Suite 900
Memphis, TN 38119
Sasco Capital, Incorporated....... (6) -- 1,492,242(6) 6.6
10 Sasco Hill Road
Fairfield, CT 06430
Franklin Mutual Advisers, Inc..... 1,220,085 -- 1,220,085(7) 5.4
51 John F. Kennedy Parkway
Short Hills, NJ 07078
</TABLE>
- ---------------
(1) Includes 331,032 shares projected to be held by F. M. Kirby as sole trustee
of trusts for the benefit of his children; 1,269,693 shares to be held by a
trust of which Mr. Kirby is co-trustee and primary beneficiary; and 587,208
shares to be held by trusts for the benefit of his children and his
children's descendants as to which Mr. Kirby was granted a proxy and,
therefore, would have shared voting power. Mr. Kirby has informed Chicago
Title that he intends to disclaim beneficial ownership of the shares of
Chicago Title
60
<PAGE> 63
Common Stock held for the benefit of his children and for the benefit of his
children and his children's descendants. Mr. Kirby will hold 546,255 shares
directly.
(2) Includes 104,919 shares projected to be held by a child of Allan P. Kirby,
Jr., as to which Mr. Kirby holds an irrevocable power of attorney; and
916,965 shares to be held by a trust of which of Mr. Kirby is co-trustee and
beneficiary. Mr. Kirby has informed Chicago Title that he intends to
disclaim beneficial ownership of the shares of Chicago Title Common Stock to
be held by his child. Mr. Kirby will hold 638,292 shares directly. Mr. Kirby
will also hold 1,000 shares of Chicago Title Common Stock to be granted to
him as a restricted stock award under the 1998 Long-Term Incentive Plan,
which shares of restricted stock will vest on the third anniversary of the
Spin-Off Date. See "Management -- Compensation of Directors" above.
(3) Includes 125,658 shares projected to be held by Grace Kirby Culbertson as
co-trustee of trusts for the benefit of her children; and 630,660 shares to
be held by trusts for the benefit of Mrs. Culbertson and her descendants, of
which Mrs. Culbertson is co-trustee. Mrs. Culbertson will hold 423,291
shares directly.
(4) Prior to her death in 1996, Ann Kirby Kirby had disclaimed being a
controlling person or member of a controlling group with respect to
Alleghany and had declined to supply information with respect to her
ownership of Alleghany Stock. However, Mrs. Kirby filed a statement on
Schedule 13D dated April 5, 1982 with the Commission reporting beneficial
ownership, both direct and indirect through various trusts, of 710,667
shares of the common stock of Alleghany Corporation, a Maryland corporation
and the predecessor of Alleghany ("Old Alleghany"). Upon the liquidation of
Old Alleghany in December 1986, stockholders received $43.05 in cash and one
share of Alleghany Stock for each share of Old Alleghany common stock. The
projected Chicago Title Common Stock ownership information provided herein
as to the estate of Mrs. Kirby is based solely on her statement on Schedule
13D in respect of Old Alleghany and does not reflect the two-percent stock
dividends paid in each of the years 1985 through 1997 by Old Alleghany or
Alleghany; if Mrs. Kirby, her estate and the beneficiaries of her estate had
continued to hold in the aggregate 710,667 shares of Alleghany Stock
together with all stock dividends received in consequence through the date
hereof, the beneficial ownership of Alleghany Stock would have increased by
208,649 shares and the beneficial ownership of Chicago Title Common Stock
projected herein would have increased by 625,947 shares.
(5) According to an amendment dated February 4, 1998 to a Schedule 13G statement
filed by Southeastern Asset Management, Inc. ("Southeastern"), an investment
advisor, Southeastern had sole voting power over 466,621 shares of Alleghany
Stock, shared voting power over 239,101 shares and no voting power over
86,539 shares, for a total of 792,261 shares. Its dispositive power with
respect to such shares of Alleghany Stock was reported as follows: sole
dispositive power over 553,160 shares and shared dispositive power over
239,101 shares. O. Mason Hawkins, Chairman of the Board and Chief Executive
Officer of Southeastern, joined in the filing of Southeastern's amendment to
its Schedule 13G statement in the event that he could be deemed to be a
controlling person of Southeastern as a result of his official positions
with, or ownership of, its voting securities. Mr. Hawkins expressly
disclaimed such control. Southeastern's amendment to its Schedule 13G
statement indicated that all shares of Alleghany Stock set forth therein
were owned legally by clients of Southeastern and no such shares were owned
directly or indirectly by Southeastern or Mr. Hawkins, both of whom
disclaimed beneficial ownership of such shares. The statement also indicated
that 112,128 shares of Alleghany Stock and 126,273 shares, respectively,
over which Southeastern had shared voting and dispositive power were owned
by two separate series of Longleaf Partners Funds Trust, an open-end
management investment company registered under the Investment Company Act of
1940, as amended.
(6) According to a Schedule 13G statement, which was amended January 30, 1998
filed by Sasco Capital, Incorporated ("Sasco"), Sasco had sole voting power
over 296,617 shares of Alleghany Stock and sole dispositive power over
497,414 shares.
(7) According to a Schedule 13G statement filed by Franklin Mutual Advisers,
Inc. ("Franklin"), Franklin Resources, Inc. ("FRI") and Charles B. Johnson
and Rupert H. Johnson, Jr., which was amended on January 26, 1998, Franklin
had sole voting power and sole dispositive power over 406,695 shares of
Alleghany Stock. The statement indicated that such shares were beneficially
owned by Franklin, an
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investment advisory subsidiary of FRI, and that, under Franklin's advisory
contracts, all voting and investment power over such shares was granted to
Franklin. The statement also indicated that Messrs. Johnson were the
principal shareholders of FRI and that Messrs. Johnson and FRI could be
deemed to be the beneficial owners of the shares of Alleghany Stock reported
therein. FRI, Franklin and Messrs. Johnson disclaimed any economic interest
or beneficial ownership of such shares.
DESCRIPTION OF CAPITAL STOCK
INTRODUCTION
We presently expect that we will have the following capital stock
authorization and terms and anti-takeover provisions in place on the Spin-Off
Date.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ALLEGHANY AND CHICAGO TITLE
Both Alleghany and Chicago Title are incorporated under the laws of the
state of Delaware. The Chicago Title Certificate and By-Laws are identical to
those of Alleghany in all material respects, except that, based upon the
distribution ratio of three shares of Chicago Title Common Stock for each share
of Alleghany Stock, the number of shares of authorized Chicago Title Common
Stock is three times the number of authorized shares of Alleghany Stock. As a
result, there are no significant differences between the rights of holders of
shares of Alleghany Stock and the rights of holders of Chicago Title Common
Stock.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of Chicago Title consists of 66,000,000 shares
of Chicago Title Common Stock, par value $1.00 per share, and 8,000,000 shares
of Preferred Stock, par value $1.00 per share (the "Preferred Stock"). The
authorized capital stock was determined based on the authorized capital stock of
Alleghany, with the authorized Chicago Title Common Stock increased
proportionately to reflect the distribution ratio of three shares of Chicago
Title Common Stock for each share of Alleghany Stock.
After the completion of the Spin-Off, there are expected to be
approximately 21,896,617 shares of Chicago Title Common Stock outstanding held
of record by approximately 2,000 persons, excluding shares of Chicago Title
Common Stock issuable upon the exercise of Chicago Title stock options granted
pursuant to the 1998 Plan in connection with the Spin-Off. See "The
Spin-Off -- Results of the Spin-Off" and "Chicago Title Compensation
Arrangements -- New Plan Benefits Under the 1998 Plan." In addition, up to
1,000,000 shares of Chicago Title Common Stock may be issued under the Chicago
Title Employee Stock Purchase Plan, pursuant to which eligible employees will be
offered Chicago Title Common Stock at a discount from prevailing market prices.
No shares of Preferred Stock have been issued by Chicago Title, and there is no
present intention to issue any shares of Preferred Stock.
CHICAGO TITLE COMMON STOCK; DELAWARE ANTI-TAKEOVER PROVISIONS
Holders of shares of Chicago Title Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders and are not
entitled to cumulate votes for the election of directors. Subject to preferences
that may be applicable to any outstanding Preferred Stock, holders of shares of
Chicago Title Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Chicago Title Board out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of Chicago Title, the holders of shares of Chicago Title Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. Holders of Chicago Title Common Stock have no preemptive,
conversion or other subscription rights and there are no redemption or sinking
fund provisions applicable to the Chicago Title Common Stock.
Chicago Title is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203 of
the DGCL prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
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years after the time of the transaction in which the person became an interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. A "business combination"
includes a merger, consolidation, sale or other disposition of assets having an
aggregate value in excess of 10% of either the aggregate market value of the
consolidated assets of the corporation or the aggregate market value of all the
outstanding stock of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation or which provide the interested stockholder with a financial
benefit. These restrictions do not apply where:
(i) the business combination or the transaction in which the
stockholder becomes interested is approved by the corporation's board of
directors prior to the time the interested stockholder acquired its shares;
(ii) the interested stockholder acquired at least 85% of the
outstanding voting stock of the corporation in the transaction in which the
stockholder became an interested stockholder excluding, for determining the
number of shares outstanding, shares owned by persons who are directors as
well as officers and by employee stock plans in which participants do not
have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
(iii) the business combination is approved by the board of directors
and the affirmative vote of two-thirds of the outstanding voting stock not
owned by the interested stockholder at an annual or special meeting.
The business combinations provisions of Section 203 of the DGCL may have
the effect of deterring merger proposals, tender offers or other attempts to
effect changes in control of Chicago Title that are not negotiated with and
approved by the Chicago Title Board.
PREFERRED STOCK
The Chicago Title Certificate provides that Chicago Title may issue up to
8,000,000 shares of Preferred Stock. The Chicago Title Board has the authority
to issue Preferred Stock in one or more series and to fix for each such series
the voting powers, full, limited or none, and the designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereon, and the number of shares constituting any
series and the designations of such series, without any further vote or action
by the stockholders of Chicago Title. Because the terms of the Preferred Stock
may be fixed by the Chicago Title Board without stockholder action, the
Preferred Stock could be issued quickly with terms calculated to defeat a
proposed takeover of Chicago Title or to make the removal of management of
Chicago Title more difficult. Under certain circumstances, this could have the
effect of decreasing the market price of the Chicago Title Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS -- CHICAGO TITLE CERTIFICATE AND BY-LAWS
Certain provisions of the Chicago Title Certificate and the By-Laws may
have the effect, either alone or in combination with each other, of making more
difficult or discouraging a tender offer, takeover attempt or change in control
that is opposed by Chicago Title's Board of Directors but that a stockholder
might consider to be in its best interest. Chicago Title believes that such
provisions are necessary to enable Chicago Title to develop its business in a
manner that will foster its long-term growth without disruption caused by the
threat of a takeover not deemed by the Chicago Title Board to be in the best
interests of Chicago Title and its stockholders. These provisions are summarized
in the following paragraphs.
Classified Board of Directors. The Chicago Title Certificate and By-Laws
provide that the Chicago Title Board will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible. The
Board consists of the persons referred to in "Management -- Directors." The
Certificate and By-Laws provide that of the initial directors of Chicago Title,
one-third will continue to serve until the 1999 Annual Meeting of Stockholders,
one-third will continue to serve until the 2000 Annual Meeting of Stockholders,
and one-third will continue to serve until the 2001 Annual Meeting of
Stockholders. Of the initial directors, Messrs. Bobins, Hart, Heasley and Prince
will serve until the 1999 Annual Meeting of
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Stockholders; Messrs. Lavin, Neal, Rau, and Ms. MacKimm will serve until the
2000 Annual Meeting of Stockholders; and Messrs. Burns, Dailey, Kirby and Levy
and Ms. Lachman will serve until the 2001 Annual Meeting of Stockholders.
Starting with the 1999 Annual Meeting of Stockholders, one class of directors
will be elected each year for a three-year term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Chicago Title Board.
At least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the Board of Directors. Such a
delay may help ensure that Chicago Title's directors, if confronted by a holder
attempting to force a proxy contest, a tender or exchange offer, or an
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board would be
beneficial to Chicago Title and its stockholders and whether or not a majority
of Chicago Title's stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Chicago Title, even through such an attempt
might be beneficial to Chicago Title and its stockholders. The classification of
the Board could thus increase the likelihood that incumbent directors will
retain their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of the Chicago Title Common Stock by
purchasers whose objective is to take control of Chicago Title and remove a
majority of the Board, the classification of the Board could tend to reduce the
likelihood of fluctuations in the market price of the Chicago Title Common Stock
that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain opportunities to sell
their shares of Chicago Title Common Stock at a higher market price than might
otherwise be the case.
Number of Directors; Removal of Directors; Vacancies. The By-Laws provide
that the number of directors of Chicago Title shall be fourteen which number (as
well as the number of each class of directors) may be increased or decreased by
a resolution adopted by the vote of in excess of 75% of the total number of
directors of Chicago Title then authorized under the By-Laws, whether or not
vacancies exist (the "Whole Board").
The Chicago Title Certificate also provides that, subject to the rights of
holders of any Preferred Stock then outstanding, directors may be removed only
for cause by the affirmative vote of the holders of at least 75% of the
outstanding shares of Chicago Title then entitled to vote generally in the
election of directors, voting as a single class (without a separate vote of the
holders of the Preferred Stock unless required pursuant to the terms of any
series of Preferred Stock). Subject to the rights of holders of any outstanding
Preferred Stock then outstanding, vacancies on the Board may be filled only by
the members of the Board then in office, whether or not they constitute of
quorum of directors.
Business Conducted at Meetings; Director Nominations. The By-Laws provide
that nominations of persons for election to the Chicago Title Board and the
proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to Chicago Title's notice with
respect to such meeting, (b) by or at the direction of the Chicago Title Board
or (c) by any stockholder of record of Chicago Title who was a stockholder of
record at the time of the giving of the notice required by the By-Laws,
described below, who is entitled to vote at the meeting and who has complied
with the notice procedures set forth in the By-Laws. For nominations or other
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
Chicago Title, such business must be a proper matter for stockholder action
under the Delaware General Corporation Law and, if the stockholder, or the
beneficial owner on whose behalf any such proposal or nomination is made,
solicits or participates in the solicitation of proxies in support of such
proposal or nomination, the stockholder must have timely indicated such
stockholder's, or such beneficial owner's, intention to do so. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of Chicago Title not less than 90 days prior to the first
anniversary of the preceding year's annual meeting of stockholders; provided,
however, that if the date of the annual meeting is advanced more
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than 30 days prior to or delayed more than 60 days after such anniversary date,
notice by the stockholder to be timely must be delivered not later than the
close of business on the later of the 90th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. The notice must include (a) certain information as to
each person whom the stockholder proposes to nominate for election or reelection
as a director and such person's written consent to serve as a director if
elected; (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of such business, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and (c) certain information as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, including whether either such stockholder or beneficial owner
intends to solicit or participate in the solicitation of proxies in favor of
such proposal or nominee or nominees.
In the event that the number of directors to be elected to the Chicago
Title Board is increased and there is not a public announcement naming all of
the nominees for director or specifying the size of the increased Board of
Directors made by Chicago Title at least 100 days prior to the first anniversary
of the preceding year's annual meeting, a stockholder's notice will be timely,
but only with respect to nominees for any new positions created by such
increase, if it is delivered to the Secretary at the principal executive offices
of Chicago Title not later than the close of business on the 10th day following
the day on which such public announcement is first made by Chicago Title.
Special Meeting of Stockholders. The DGCL provides that special meetings
of stockholders may be called by the Chicago Title Board or any person
authorized by the Chicago Title Certificate or By-Laws to call a special
meeting. The By-Laws provide that special meetings may be called by the Chairman
of the Board or by a majority of the Board. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to Chicago Title's notice of meeting. Nominations of
persons for election to the Chicago Title Board may be made at a special meeting
of stockholders at which directors are to be elected pursuant to Chicago Title's
notice of meeting (a) by or at the direction of the Chicago Title Board or (b)
by any stockholder of record of Chicago Title who is a stockholder of record at
the time of giving of notice required by the By-Laws, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in By-Laws.
Nominations by stockholders of persons for election to the Chicago Title Board
may be made at such a special meeting of stockholders if the stockholder's
notice required by this section is delivered to the Secretary at the principal
executive offices of Chicago Title not later than the close of business on the
later of the 90th day prior to such special meeting or the 10th day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Chicago Title Board to be elected at
such meeting.
No Stockholder Action by Written Consent; Stockholder Action at
Meetings. The By-Laws provide that stockholder action can be taken only at an
annual or special meeting of stockholders, and prohibit stockholder action by
written consent in lieu of a meeting.
Supermajority Voting. The Chicago Title Certificate requires the approval
of the holders of at least 75% of the voting power of all of the shares entitled
to vote (i) to authorize any merger, consolidation or dissolution of Chicago
Title or sale of substantially of the assets of Chicago Title, (ii) to authorize
any purchase, sale or other acquisition or disposition of assets of Chicago
Title having a value in excess of $12 million, to or from any 10% stockholder
or, subject to certain exceptions for pro rata offerings to all stockholders and
bona fide employee benefit plans, any issuance of voting stock to any 10%
stockholder which has not been approved by a majority of a quorum of the Whole
Board, such majority to consist of Continuing Directors (as defined below), or
(iii) to add, amend, alter, change or repeal any provision of the Chicago Title
Certificate and By-Laws, including the anti-takeover provisions listed above.
The Chicago Title Board may amend, supplement or repeal the By-Laws at any time,
except as limited by law. A "Continuing Director" means any member of the
Chicago Title Board who is not an affiliate of the 10% stockholder and who was a
member of the Chicago Title Board prior to, and served continuously since, the
time that the 10% stockholder first became a 10% stockholder.
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Stockholder Rights Plans and related matters. Although no stockholder
rights plan (or, as such plans are commonly called, "poison pill") has been
adopted, the Chicago Title Certificate affirms that the Chicago Title Board may
contest or oppose any unfair, abusive or otherwise undesirable transaction which
may result in a change in control of Chicago Title, including, without
limitation, by the adoption of such plans or the issuance of such rights,
options, stock, evidences of indebtedness or other securities of Chicago Title
which (i) may be exchangeable for or convertible into cash or other securities
and (ii) may provide for the treatment of any holder or class of holders thereof
designated by the Chicago Title Board which is different from, and unequal to,
the terms, conditions, provisions and rights applicable to all other holders
thereof.
Other Constituencies. In addition to any other considerations which the
Chicago Title Board may lawfully take into account, in determining whether to
take or to refrain from taking corporate action on any matter, including
proposing any matter to the stockholders of Chicago Title, the Board may take
into account the interests of creditors, customers, employees and other
constituencies of Chicago Title and its subsidiaries and the effect upon
communities in which Chicago Title and its subsidiaries do business.
LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
The Chicago Title Certificate eliminates to the fullest extent now or
hereafter permitted by Delaware law, liability of a director to Chicago Title or
its stockholders for monetary damages for any action taken, or failure to take
any action, as a director, except for liability:
(i) for any breach of the director's duty of loyalty to Chicago Title
or its stockholders;
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the DGCL, relating to prohibited dividends,
distributions and repurchases or redemptions of stock; or
(iv) for any transaction for which the director derives an improper
personal benefit (the "Exculpatory Provision").
The Exculpatory Provision is intended to afford directors additional
protection from, and limit their potential liability for, suits alleging a
breach of duty by a director. Chicago Title believes this provision will assist
it in maintaining and securing the services of directors who are not employees
of Chicago Title. As a result of the inclusion of the Exculpatory Provision,
stockholders may be unable to recover monetary damages from directors for
actions taken by them that constitute negligence or gross negligence or that are
in violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions, such as an
injunction or rescission based on a director's breach of the duty of care; as a
practical matter, equitable remedies may not be available (e.g., after a
transaction has already been effected). If equitable remedies are found not to
be available to stockholders for any particular case, stockholders may not have
any effective remedy against the challenged conduct.
Section 145 of the DGCL ("Section 145") permits indemnification of
directors, officers, agents and controlling persons of a corporation under
certain conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer or agent of the corporation or
another enterprise if serving at the request of the corporation. Depending on
the character of the proceeding, a corporation may indemnify against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner such
person reasonably believed to be in or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of
an action by or in the right of Chicago Title, no indemnification may be made
with respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the court
shall
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deem proper. Section 145 further provides that to the extent a director or
officer of Chicago Title has been successful in the defense of any action, suit
or proceeding referred to above or in the defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
The Chicago Title Certificate contains provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by
Section 145 and Delaware law which, in general, presently requires that the
individual act in good faith and in a manner he or she reasonably believed to be
in or not opposed to Chicago Title's best interests and, in the case of any
criminal proceedings, that the individual has no reason to believe his or her
conduct was unlawful. The Chicago Title Certificate also permits Chicago Title
to purchase insurance and Chicago Title has purchased and maintains insurance on
behalf of Chicago Title directors, officers, employees and agents against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not Chicago
Title would have the power to indemnify such person against such liability under
the foregoing provision of the By-Laws.
SHARES ELIGIBLE FOR FUTURE SALE
Shares of Chicago Title Common Stock distributed to Alleghany stockholders
will be freely transferable, except for shares received by persons who may be
deemed to be "affiliates" of Chicago Title under the Securities Act. Persons who
may be deemed to be affiliates of Chicago Title after the Spin-Off generally
include individuals or entities that control, are controlled by, or are under
common control with, Chicago Title. Persons who are affiliates of Chicago Title
will be permitted to sell their shares of Chicago Title Common Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, such as the
exemption afforded by Rule 144 under the Securities Act.
ADDITIONAL INFORMATION
Chicago Title has filed with the Commission the Form 10 Registration
Statement under the Exchange Act with respect to the shares of Chicago Title
Common Stock to be received by Alleghany stockholders in the Spin-Off. This
Information Statement does not contain all of the information set forth in the
Form 10 Registration Statement, and the exhibits and schedules relating thereto.
Statements made in this Information Statement as to the contents of any
contract, agreement, instrument or other document are not necessarily complete,
and in each instance reference is made to the copy of such contract, agreement,
instrument or document filed as an exhibit to the Form 10 Registration
Statement, each such statement being qualified in all respects by such reference
and the exhibits and schedules thereto.
For further information, reference is made to the Form 10 Registration
Statement and the exhibits and schedules filed as a part thereof, which are on
file at the offices of the Commission and may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission in New York (Seven World Trade Center, Suite 1300, New
York, New York 10048) and Chicago (500 West Madison Street, Suite 1400, Chicago,
Illinois 60661). Copies of such materials also may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be inspected at the offices
of the New York Stock Exchange, Inc. (20 Broad Street, New York, New York 10005)
or accessed electronically by means of the Commission's home page on the World
Wide Web (http://www.sec.gov).
Following the Spin-Off, Chicago Title will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Chicago Title also will be subject to the
proxy solicitation requirements of the Exchange Act and, accordingly, will
furnish audited financial statements to its stockholders in connection with its
annual meetings of stockholders.
No person is authorized by Alleghany or Chicago Title to give any
information or to make any representations other than those contained in this
document, and if given or made, such information or representations must not be
relied upon as having been authorized.
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CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996......................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes To Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets at March 31, 1998 (unaudited)
and December 31, 1997..................................... F-25
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 (unaudited)....................... F-26
Consolidated Statements of Changes in Shareholder's Equity
for the Three Months Ended March 31, 1998 (unaudited)..... F-27
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (unaudited)................. F-28
Notes to Consolidated Quarterly Financial Statements........ F-29
</TABLE>
Explanatory Note: The historical consolidated financial statements
presented herein are those of Chicago Title and Trust Company. Prior to the
Spin-Off Date, all of the issued and outstanding shares of stock of Chicago
Title and Trust Company will be contributed to Chicago Title Corporation, a
newly-formed Delaware holding company. On the Spin-Off Date, the shares of stock
of Chicago Title and Trust Company will constitute substantially all of the
assets of Chicago Title Corporation.
F-1
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When the transaction referred to in Note 17 of the Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report. The amounts presented related to earnings per share on the
statements of income and the number of shares disclosed in Note 17 are currently
based upon the Company's best estimate of the number of shares which will be
distributed to stockholders of Alleghany Corporation in such transaction.
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Chicago Title and Trust Company:
We have audited the accompanying consolidated balance sheets of Chicago
Title and Trust Company and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Chicago Title and Trust Company and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 6, 1998, except as to
Note 17, which is as of June , 1998
F-2
<PAGE> 72
CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(IN 000s, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Cash on hand and in banks................................... $ 21,219 23,072
Cash pledged to secure trust and escrow deposits............ 100,207 99,392
Marketable securities, available-for-sale:
Fixed maturities, at fair value (amortized cost of
$1,016,446 and $809,141 in 1997 and 1996,
respectively).......................................... 1,032,089 817,439
Equity securities, at fair value (cost of $33,232 and
$35,650 in 1997 and 1996, respectively)................ 34,489 33,349
---------- ---------
Total marketable securities............................ 1,066,578 850,788
Receivables, including accrued investment income, less
allowance for doubtful accounts of $7,574 and $6,456 in
1997 and 1996, respectively............................... 62,558 50,609
Deferred Federal income taxes............................... 75,997 70,275
Fixed assets, net........................................... 97,222 93,367
Title plants................................................ 150,546 152,291
Net assets of Alleghany Asset Management, Inc. to be
distributed to Alleghany Corporation...................... 18,097 15,775
Other assets................................................ 109,783 127,128
---------- ---------
Total assets...................................... $1,702,207 1,482,697
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable............................................ $ 105,692 76,922
Accrued expenses and other liabilities...................... 128,638 113,264
Notes payable and other obligations......................... 32,443 43,282
Reserve for title losses.................................... 564,334 532,923
Trust and escrow deposits secured by pledged assets......... 467,553 355,711
---------- ---------
Total liabilities...................................... 1,298,660 1,122,102
---------- ---------
Shareholder's equity (Note 17):
Common stock -- par value of $4,000 per share, authorized
3,722 shares; issued and outstanding 3,419 shares at
December 31, 1997 and December 31, 1996................ 13,676 13,676
Additional paid-in capital................................ 117,381 117,381
Retained earnings......................................... 261,425 225,659
Unrealized appreciation of marketable securities, net of
deferred taxes......................................... 11,065 3,879
---------- ---------
Total shareholder's equity............................. 403,547 360,595
---------- ---------
Total liabilities and shareholder's equity........ $1,702,207 1,482,697
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
(IN 000s)
<S> <C> <C> <C>
Revenues:
Title, escrow, trust and other revenue................. $1,411,496 1,278,590 1,082,008
Investment income...................................... 52,266 47,658 46,661
Net realized investment gain on sales to Alleghany
Corporation......................................... 2,214 -- --
Net realized investment gains -- other................. 1,470 1,436 3,697
---------- --------- ---------
Total revenues........................................... 1,467,446 1,327,684 1,132,366
---------- --------- ---------
Expenses:
Salaries and other employee benefits................... 454,648 411,815 344,767
Commissions paid to agents............................. 526,324 484,351 420,555
Provision for title losses............................. 102,324 83,023 81,385
Interest expense....................................... 4,644 5,566 6,456
Other operating and administrative expenses............ 295,903 273,236 242,380
---------- --------- ---------
Total expenses........................................... 1,383,843 1,257,991 1,095,543
---------- --------- ---------
Operating income from continuing operations before
income taxes........................................... 83,603 69,693 36,823
Income taxes............................................. 27,894 23,115 11,889
---------- --------- ---------
Net income from continuing operations.................... 55,709 46,578 24,934
Net income from discontinued operations.................. 12,162 5,462 5,478
---------- --------- ---------
Net income............................................... $ 67,871 52,040 30,412
========== ========= =========
Basic and diluted earnings per share (Note 17):
Continuing operations.................................. $ 2.54 2.13 1.14
Discontinued operations................................ .56 .25 .25
---------- --------- ---------
Net earnings per share................................. $ 3.10 2.38 1.39
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION OF
ADDITIONAL MARKETABLE TOTAL
COMMON PAID-IN RETAINED SECURITIES, NET OF SHAREHOLDER'S
STOCK CAPITAL EARNINGS DEFERRED TAXES EQUITY
------- ---------- -------- ------------------ -------------
(IN 000s)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... $14,876 121,620 191,450 (11,483) 316,463
Net income......................... -- -- 30,412 -- 30,412
Dividends paid to parent........... -- -- (29,515) -- (29,515)
Capital contributions from
parent.......................... -- 4,480 -- -- 4,480
Unrealized appreciation of
marketable securities net of
deferred tax effect............. -- -- -- 24,598 24,598
------- ------- ------- ------- -------
Balance at December 31, 1995......... 14,876 126,100 192,347 13,115 346,438
Net income......................... -- -- 52,040 -- 52,040
Purchase and retirement of common
stock........................... (1,200) (10,072) (18,728) -- (30,000)
Capital contributions from
parent.......................... -- 1,353 -- -- 1,353
Unrealized depreciation of
marketable securities net of
deferred tax effect............. -- -- -- (9,236) (9,236)
------- ------- ------- ------- -------
Balance at December 31, 1996......... 13,676 117,381 225,659 3,879 360,595
Net income......................... -- -- 67,871 -- 67,871
Dividends paid to parent........... -- -- (32,105) -- (32,105)
Unrealized appreciation of
marketable securities net of
deferred tax effect............. -- -- -- 7,186 7,186
------- ------- ------- ------- -------
Balance at December 31, 1997......... $13,676 117,381 261,425 11,065 403,547
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
(IN 000S)
<S> <C> <C> <C>
Cash flows from continuing operations activities:
Net income from continuing operations................... $ 55,709 46,578 24,934
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing
operations activities
Depreciation and amortization........................ 31,032 27,567 23,607
Changes in assets and liabilities:
Cash pledged to secure trust and escrow deposits... (815) 7,868 (46,815)
Receivables........................................ (10,979) (2,677) (6,236)
Current and deferred Federal income taxes.......... (4,792) 488 10,065
Other assets....................................... 12,058 (5,978) (12,986)
Accounts payable and accrued expenses and other
liabilities..................................... 39,091 25,940 (11,380)
Reserves for title losses.......................... 31,411 3,090 (6,080)
Trust and escrow deposits secured by pledged
assets.......................................... 111,842 (13,740) 49,619
Gain on sale of investments.......................... (3,684) (1,436) (3,697)
--------- -------- --------
Net adjustments................................. 205,164 41,122 (3,903)
--------- -------- --------
Net cash provided by continuing operations activities..... 260,873 87,700 21,031
Dividends received from Alleghany Asset Management,
Inc.................................................. 13,300 3,401 4,202
--------- -------- --------
Net cash provided by operations........................... 274,173 91,101 25,233
--------- -------- --------
Cash flows from investing activities:
Purchases of long-term marketable securities............ (384,693) (266,808) (352,064)
Sales of long-term marketable securities................ 148,968 119,799 200,481
Maturities and redemptions of long-term marketable
securities........................................... 132,664 131,505 163,082
Net sales (purchases) of short-term investments......... (99,509) (16,318) 56,886
Purchase of other invested assets....................... (4,955) (22,430) (12,809)
Sales of other invested assets.......................... 7,163 27,169 10,940
Purchase of fixed assets................................ (28,506) (33,048) (16,665)
Sales of fixed assets................................... 3,134 4,546 7,444
Purchase of title records and indexes................... (584) (118) (254)
Sales of title records and indexes...................... 1,385 -- 1,376
Purchases of subsidiaries............................... (4,106) (2,264) (15,108)
Cash received from sale of subsidiary................... -- 4,073 --
Cash of acquired subsidiaries........................... 33 1,700 503
--------- -------- --------
Net cash provided by (used in) investing
activities.................................... (229,006) (52,194) 43,812
--------- -------- --------
Cash flows from financing activities:
Dividends paid to parent................................ (32,105) -- (29,515)
Repurchase of common stock from parent.................. -- (30,000) --
Principal payments on notes payable and other
obligations.......................................... (11,554) (13,505) (17,450)
Proceeds of long-term debt.............................. -- 1,550 5,265
Cash remaining with discontinued operations............. (3,361) (512) 1,587
--------- -------- --------
Net cash used in financing activities..................... (47,020) (42,467) (40,113)
--------- -------- --------
Net increase (decrease) in cash........................... (1,853) (3,560) 28,932
Cash at beginning of year................................. 23,072 26,632 (2,300)
--------- -------- --------
Cash at end of year....................................... $ 21,219 23,072 26,632
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(IN 000S)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
The Company issues title insurance policies and manages escrow funds
principally through three subsidiaries: Chicago Title Insurance Company (CTI),
Ticor Title Insurance Company (Ticor) and Security Union Title Insurance Company
(Security Union). Title insurance provides protection against defects in title
to owners and lenders in real estate transactions, and the Company earns escrow
fees for its role in managing escrow funds related to real estate transactions.
Business is conducted on a nationwide basis, and insurance policies are
distributed through more than 300 full service offices and 3,800 policy-issuing
agents in 49 states, Puerto Rico, the Virgin Islands, Guam, and Canada.
Customers include attorneys, real estate professionals, banks, and other parties
to real estate transactions. Other real estate related services include the
production and delivery of flood certificates, consumer credit information and
real estate valuations. These services are offered through the following
subsidiaries: Chicago Title Flood Services, Inc., Chicago Title Credit Services,
Inc. and Chicago Title-Market Intelligence, Inc.
The Company reports its financial information as one segment.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Chicago
Title and Trust Company (a wholly-owned subsidiary of Alleghany Corporation) and
its subsidiaries (the Company). All significant intercompany transactions have
been eliminated in consolidation.
On December 17, 1997, Alleghany announced that it intends to establish the
title insurance and real estate related services businesses conducted by the
Company as an independent, publicly traded company through a spin-off to
Alleghany shareholders. The spin-off will be effected through a pro-rata
distribution to Alleghany's shareholders of shares of a newly formed holding
company, Chicago Title Corporation. The distribution is expected to be on a
tax-free basis and is expected to occur during the second quarter of 1998. The
asset management business conducted through Alleghany Asset Management Inc.
(AAM), a wholly-owned subsidiary of the Company, will not be part of the
distribution and will remain with Alleghany. Prior to the distribution to
Alleghany shareholders, the Company will dividend AAM to Alleghany. As such, in
this set of consolidated financial statements, AAM is classified as discontinued
operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Discontinued Operations
AAM participates in the financial services and investment management
business principally through two subsidiaries: The Chicago Trust Company and
Montag & Caldwell, Inc. These companies provide investment management,
counseling and administrative services to institutional clients, pension and
profit sharing plans and high net worth individuals. The Chicago Trust Company
acts as trustee and fiduciary under various types
F-7
<PAGE> 77
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
of trust agreements. Another subsidiary of AAM, Chicago Deferred Exchange
Corporation, acts as an intermediary to facilitate tax free exchanges of real
and personal property.
The net assets and results of operations of AAM are shown as discontinued
operations in the accompanying consolidated financial statements. All footnote
disclosures reflect continuing operations only, unless otherwise noted. See Note
14 for further discussion.
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash
For purposes of the consolidated statements of cash flows, cash includes
only funds on deposit which are available for immediate withdrawal.
Marketable Securities
Marketable securities consist of fixed maturities and equity securities.
Investments in fixed maturities consist of bonds, certificates of deposit,
commercial paper, and redeemable preferred stocks. The Company determines the
appropriate classification of marketable securities at the time of purchase. As
of December 31, 1997 and 1996, all marketable securities are classified as
available-for-sale and carried at fair value. Unrealized holding gains and
losses, net of deferred taxes, are excluded from net income and are reported as
a separate component of shareholder's equity until realized. A decline in the
market value of any marketable security below cost that is deemed other than
temporary is charged to net income, resulting in the establishment of a new cost
basis for the security. Realized gains and losses on marketable securities are
determined on the specific identification method.
Fixed Assets
Fixed assets, except land, are depreciated or amortized on a straight-line
basis using estimated lives ranging from 3 to 40 years. At December 31, 1997,
gross fixed assets consisted of land, buildings and improvements, and furniture
and equipment of $8,596, $57,553 and $89,001, respectively. At December 31,
1996, gross fixed assets consisted of land, buildings and improvements, and
furniture and equipment of $8,774, $56,435 and $77,509, respectively.
Accumulated depreciation and amortization was $57,928 and $49,351 at December
31, 1997 and 1996, respectively.
Title Plants
Title plants are carried at cost. The cost is not being amortized as
properly maintained title plants have indefinite lives. Title plants are
reviewed for impairment whenever events or circumstances provide evidence
suggesting the carrying amount of the asset may not be recoverable. Current
costs of maintaining title plants are expensed in the year incurred.
Goodwill
Goodwill is amortized over its estimated useful life on a straight-line
basis over periods ranging from 5 to 40 years. Goodwill is reviewed for
impairment whenever events or circumstances provide evidence suggesting the
carrying amount of the asset may not be recoverable. The carrying value of
goodwill included in other assets was $69,407 and $71,093 at December 31, 1997
and 1996, respectively.
F-8
<PAGE> 78
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
Federal Income Taxes
Revenues and expenses of the Company are included in a consolidated Federal
income tax return with its parent company and other affiliates. The tax
provisions and other tax-related balances are computed on a stand-alone basis as
if the Company filed a separate Federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Reserve for Title Losses
The reserve for title losses represents the estimated claim cost and loss
adjustment expense necessary to cover the ultimate net cost of settling all
losses incurred and unpaid. Such estimates are based on individual case
estimates for reported claims and estimates for incurred but not reported
losses. These estimates are adjusted in the aggregate for ultimate loss
expectations based on historical experience patterns, with any change in
probable ultimate liabilities being reflected in net income. In the opinion of
management, the reserve for title losses is adequate.
Fair Value Disclosures
The Company does not have a material amount of derivative financial
instruments. In addition, the carrying values and fair values of the Company's
financial instruments are disclosed in Note 13. Generally accepted accounting
principles exclude certain financial instruments and all nonfinancial
instruments from disclosure requirements.
Escrow Deposits
The title insurance subsidiaries administer escrow deposits generally
related to customers' real estate transactions. The funds are held in a
fiduciary capacity and, accordingly, amounts aggregating approximately
$1,626,000 and $1,331,000 are excluded from the accompanying consolidated
balance sheets at December 31, 1997 and 1996, respectively.
Regulatory Accounting Practices
The title insurance subsidiaries are required to file annual statements
with insurance regulatory authorities which are prepared on an accounting basis
prescribed or permitted by such authorities. Prescribed statutory accounting
principles include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, may differ from company to company within a state, and may change in
the future.
The title insurance subsidiaries have prepared their annual statements
using certain permitted statutory accounting practices, which differ from
prescribed statutory accounting practices, but which have been approved by their
respective insurance departments of the states of domicile. Such practices
include the recognition of a deferred tax asset attributable to net operating
loss carryforwards of a merged affiliated company, and different methodologies
in the calculation of the statutory premium reserve for three of the title
F-9
<PAGE> 79
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
insurers. The Company believes that such permitted practices do not have any
negative implication for the individual title insurers nor on the accompanying
consolidated financial statements.
Revenue Recognition
Title insurance premiums are recognized as revenues principally at the time
of the real estate closing and escrow fees principally when billed. Revenues
from title policies issued by independent agents are generally recorded when
notice of issuance is received from the agent.
Statements of Cash Flows
The Company has elected to use the indirect method in reporting net cash
flow from operating activities. Under this method, the following additional
disclosures are required for each of the years in the three-year period ended
December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Interest paid.................................. $ 5,077 5,602 6,417
Income taxes paid.............................. 41,331 28,216 4,752
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform with the 1997 presentation.
Accounting Changes
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 applies only to public companies. Under SFAS No. 128, the
dual presentation of basic and diluted earnings per share (EPS) is required on
the face of the income statement for all entities with complex capital
structures. In addition, SFAS No. 128 requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Since the Company was not a public company as of
December 31, 1997, the Company was not subject to SFAS No. 128 for 1997. The
Company will be subject to SFAS No. 128 for 1998.
Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure. The Company adopted SFAS No.
129 in 1997. The adoption of SFAS No. 129 did not have any effect on the
Company's financial reporting.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Under SFAS No. 130, for fiscal years beginning after December 15, 1997,
enterprises providing a full set of financial statements that report financial
position, results of operations and cash flows should also include a Statement
of Comprehensive Income. The Company intends to adopt SFAS No. 130 in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Under SFAS No. 131, for
fiscal years beginning after December 31, 1997, public business enterprises are
required to provide disclosures about operating segments using the "management
approach." Since the Company manages its business as one operating segment, SFAS
No. 131 results in no change in the Company's financial reporting.
F-10
<PAGE> 80
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes an
employer's disclosures about pension and other postretirement benefit plans,
requires additional information on the benefit obligations and fair values of
plan assets and eliminates certain disclosures. SFAS No. 132 is effective for
financial statements for periods beginning after December 15, 1997. The
provisions of SFAS No. 132 are of a reporting nature and are not expected to
have an impact on the financial position or results of operations of the
Company. The Company intends to adopt SFAS No. 132 in 1998.
(3) MARKETABLE SECURITIES
The amortized cost and fair value of those Company investments in
marketable securities included in the consolidated balance sheets which
represent fixed maturities and equity securities as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government
obligations............... $ 402,677 8,359 (492) 410,544
State and municipal bonds.... 267,914 4,350 (82) 272,182
Other bonds.................. 149,532 2,845 (337) 152,040
Certificates of deposit...... 30,710 -- -- 30,710
Commercial paper............. 150,000 -- -- 150,000
Redeemable preferred
stocks.................... 15,613 1,101 (101) 16,613
---------- ------ ------ ---------
Total fixed maturities.... 1,016,446 16,655 (1,012) 1,032,089
Equity securities......... 33,232 1,465 (208) 34,489
---------- ------ ------ ---------
$1,049,678 18,120 (1,220) 1,066,578
========== ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government
obligations............... $ 363,807 5,087 (1,868) 367,026
State and municipal bonds.... 229,076 3,034 (201) 231,909
Other bonds.................. 120,942 2,222 (421) 122,743
Certificates of deposit...... 9,400 -- -- 9,400
Commercial paper............. 71,800 -- -- 71,800
Redeemable preferred
stocks.................... 14,116 645 (200) 14,561
---------- ------ ------ ---------
Total fixed maturities.... 809,141 10,988 (2,690) 817,439
Equity securities......... 35,650 4,758 (7,059) 33,349
---------- ------ ------ ---------
$ 844,791 15,746 (9,749) 850,788
========== ====== ====== =========
</TABLE>
The fair value of certain bonds is less than amortized cost. No provision
has been made for possible losses on these bonds as such declines are considered
to be temporary. Amortized cost for certain investments represents original cost
adjusted for other than temporary declines in value.
F-11
<PAGE> 81
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
Marketable securities with restrictions at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Pledged to secure statutory premium reserves............ $400,164 386,349
On deposit with regulatory authorities.................. 17,701 17,393
Pledged to secure trust and escrow deposits............. 374,888 261,806
======== =======
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ---------
<S> <C> <C>
Due in one year or less.............................. $ 279,401 279,588
Due after one year through five years................ 393,652 399,362
Due after five years through ten years............... 56,077 57,022
Due after ten years.................................. 101,040 106,608
---------- ---------
830,170 842,580
Mortgage-backed securities........................... 186,276 189,509
---------- ---------
$1,016,446 1,032,089
========== =========
</TABLE>
The change in net unrealized appreciation on marketable securities included
in shareholder's equity for each of the years in the three-year period ended
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Change in unrealized appreciation on
marketable securities -- continuing
operations.................................. $10,903 (14,081) 37,624
Income tax benefit (expense) -- continuing
operations.................................. (3,816) 4,928 (13,168)
Change in unrealized appreciation on
marketable securities -- discontinued
operations, net of income tax benefit
(expense)................................... 99 (83) 142
------- ------- -------
Change in net unrealized appreciation on
marketable securities....................... $ 7,186 (9,236) 24,598
======= ======= =======
</TABLE>
Net investment income from marketable securities included in the results of
operations for each of the years in the three-year period ended December 31,
1997, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Interest on fixed maturities.................... $50,481 46,679 45,794
Dividends on equity securities.................. 1,785 979 867
------- ------ ------
Investment income............................... $52,266 47,658 46,661
======= ====== ======
</TABLE>
Investment expenses are included in other operating and administrative
expenses and are immaterial.
F-12
<PAGE> 82
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
Proceeds from sales of marketable securities were $148,968, $119,799, and
$200,481 during 1997, 1996, and 1995, respectively. The components of net gains
on sales of those marketable securities included in the results of operations
for each of the years in the three-year period ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Fixed maturities:
Gains........................................... $ 1,514 1,446 1,073
Losses.......................................... (45) (10) (102)
Equity securities:
Gains........................................... 8,097 -- 2,906
Losses.......................................... (5,882) -- (180)
------- ----- -----
Net gains on sales of marketable securities....... $ 3,684 1,436 3,697
======= ===== =====
</TABLE>
(4) NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations included in the consolidated balance
sheets at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Bank borrowing at 6.00% to 8.60% during 1997 and 6.00% to
8.73% during 1996....................................... $29,000 39,500
Unsecured promissory notes at 6.00% to 10.75% during 1997
and 6.00% to 9.25% during 1996.......................... 3,443 3,782
------- ------
Total notes payable and other obligations................. $32,443 43,282
======= ======
</TABLE>
The bank borrowing represents the outstanding balance borrowed in
connection with the acquisition of two of the Company's subsidiaries, Security
Union and Ticor. The credit agreement on the bank borrowing provides for
reductions of principal of $9,667 annually in 1998 through 2000 and bears
interest at floating rates payable quarterly. In prior years, interest on a
portion of the bank borrowing was effectively fixed at 8.73% by means of an
interest rate swap. The swap agreement terminated in 1997.
The credit agreement requires the Company to maintain certain financial
ratios and balances and places limitations on the amount of additional
indebtedness, dividends and future mergers and acquisitions. The agreement also
contains restrictions with respect to the mortgaging or pledging of assets. In
addition, the Company's consolidated shareholder's equity (excluding unrealized
appreciation of marketable securities, net of deferred taxes) can be no less
than $200,000. At December 31, 1997, the Company's consolidated shareholder's
equity as defined was $392,482.
The Company currently has two arrangements in place with banking
institutions for lines of credit for $15.0 million and $10.0 million expiring on
May 31, 1998 and June 10, 1998, respectively. The Company expects to negotiate
extensions of both of these lines of credit. Amounts may be drawn under these
lines of credit for general corporate purposes. No amounts were drawn under
these lines of credit during 1997 or 1996 and no amounts were outstanding under
such lines as of December 31, 1997.
Maturities of notes payable and other obligations are $10,927 in 1998,
$10,258 in 1999, $10,269 in 2000, $488 in 2001, $208 in 2002 and $293
thereafter.
F-13
<PAGE> 83
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
(5) STATUTORY SURPLUS AND NET INCOME
The Company's title insurance subsidiaries are restricted as to the amount
of dividends that may be paid without prior regulatory approval. The maximum
amount of dividends that these subsidiaries may pay to the Company in 1998
without prior regulatory approval is $65,432.
The statutory surplus of the direct insurance subsidiaries as reported to
regulatory authorities was $251,996, $243,093 and $230,834 as of December 31,
1997, 1996 and 1995, respectively. The statutory net income of the direct
insurance subsidiaries as reported to regulatory authorities was $72,683,
$56,038 and $49,716 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(6) SHAREHOLDER'S EQUITY
Dividends declared and paid to the Company by title insurance subsidiaries,
other continuing subsidiaries and Alleghany Asset Management, Inc. for each of
the years in the three-year period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Title insurance subsidiaries.................... $46,700 32,200 35,000
Other continuing subsidiaries................... 5,000 700 700
Alleghany Asset Management, Inc. ............... 13,300 3,401 4,202
------- ------ ------
Total dividends declared and paid to the Company
by subsidiaries............................... $65,000 36,301 39,902
======= ====== ======
</TABLE>
The Company paid $32,105, $0 and $29,515 in dividends to its parent in
1997, 1996 and 1995, respectively.
During 1996 the Company purchased 300 shares of its common stock from
Alleghany for $30,000, and retired the shares. Common stock was reduced by the
par value of the shares, and additional paid-in capital and retained earnings
have been reduced on a pro-rata basis for the cost of the repurchased shares.
Also in 1996, Alleghany transferred its ownership interest in Chicago
Title-Market Intelligence, Inc. and Chicago Title of Colorado to the Company in
the form of a capital contribution valued at $307 and $687, respectively.
In 1995, Alleghany transferred its ownership interest in Chicago Title
Credit Services, Inc. to the Company in the form of a capital contribution
valued at $4,480. This contribution was increased by $359 during 1996 upon
resolution of a related contingent liability.
(7) BENEFIT PLANS
Pension and Other Retirement Plans
The Company sponsors a contributory defined contribution savings and profit
sharing plan for eligible employees. Eligible employees may elect to
participate, contributing up to 13% of their base salaries. The Company will
match employee contributions from a minimum of $0.25 up to a maximum of $1.50
for each dollar of employee contribution up to 6% of the employee's base salary,
subject to the Company's return on equity for the year. The Company's cost for
this plan was $12,727, $10,421 and $2,327 in 1997, 1996 and 1995, respectively.
In addition to the defined contribution savings and profit sharing plan,
employees of the Company participate in one of two additional retirement plans.
Beginning in 1995, the Company implemented a
F-14
<PAGE> 84
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
noncontributory defined contribution plan. All new employees automatically
participate in this plan. Additionally, certain employees who were in the
defined benefit pension plan discussed below elected to participate in this
plan. Contributions to this plan are based upon salary and length of service.
Contributions are invested in a group of mutual funds or common stock of
Alleghany as directed by the employee. The Company's cost for this plan was
$2,151, $1,681 and $1,689 in 1997, 1996, and 1995, respectively.
The second additional retirement plan is a noncontributory defined benefit
pension plan (the Plan) covering certain of its employees. The benefits are
based on years of service and the employee's average monthly compensation in the
highest 60 consecutive calendar months during the 120 months ending at
retirement or termination. The Company's funding policy is to contribute
annually at least the minimum required contribution under the Employee
Retirement Income Security Act (ERISA). Contributions are intended to provide
not only for benefits attributed to date, but also for those expected to be
earned in the future. The Company made no contributions in 1997 and $9,411 in
1996.
The following table sets forth the funded status of the Plan and amounts
recognized in the Company's consolidated balance sheets at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $80,612 and $92,728 in 1997 and 1996,
respectively...................................... $ 88,515 99,413
-------- --------
Projected benefit obligation for service rendered to
date................................................. 101,924 111,595
Plan assets at fair value, consisting of approximately
45% debt securities and 55% equity and other
securities in 1997 and in 1996....................... 97,593 90,015
-------- --------
Projected benefit obligation in excess of plan
assets............................................... (4,331) (21,580)
Unrecognized net transition asset (amortization period
of 11 years)......................................... -- (718)
Unrecognized prior service cost........................ (446) (567)
Unrecognized net loss.................................. 19,499 37,467
Contribution........................................... -- 9,411
-------- --------
Prepaid pension cost included in other assets.......... $ 14,722 24,013
======== ========
</TABLE>
The principal assumptions used in the actuarial calculations of projected
benefit obligations at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted-average discount rate.............................. 7.50% 8.00%
Rate of increase in compensation levels..................... 4.50 4.50
Expected long-term rate of return on assets................. 9.00 9.00
==== ====
</TABLE>
The components of net periodic pension expense included in the results of
operations for each of the years in the three-year period ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period..................................... $ 5,046 4,765 4,388
Interest cost on projected benefit
obligation................................. 8,631 8,606 8,312
Actual return on Plan assets................. (13,816) (10,678) (12,830)
Net amortization and deferrals............... 9,464 3,514 3,426
-------- ------- -------
Net periodic pension expense................. $ 9,325 6,207 3,296
======== ======= =======
</TABLE>
F-15
<PAGE> 85
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
The Chicago Trust Company is a qualified trust company and, as such, serves
as trustee for the assets of the pension and other retirement plans.
Postretirement Plans
In addition to retirement benefits, the Company provides certain health
care and life insurance benefits for retired employees. The costs of these
benefit plans are accrued during the period the employees render service.
The Company is self-insured for its postretirement health care and life
insurance benefit plans and the plans are not funded. The health care plans
provide for insurance benefits after retirement and are generally contributory,
with contributions adjusted annually. Postretirement life insurance benefits are
noncontributory, with coverage amounts declining with increases in a retiree's
age.
The Company's postretirement health care and life insurance costs included
in the results of operations for each of the years in the three-year period
ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Interest cost on unfunded postretirement benefit
obligation....................................... $ 756 789 2,239
Service cost....................................... 531 419 323
------ ----- -----
Net periodic postretirement benefit expense........ $1,287 1,208 2,562
====== ===== =====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 7.50% in 1997 and 1996 declining to 5.00%
in the year 2002. The discount rate used was 7.25% in 1997 and 7.75% for 1996.
If the health care cost trend rate assumptions were increased 1%, the
accumulated postretirement benefit obligation as of December 31, 1997 would
increase by 4.40%. The effect of this change on the sum of the service and
interest cost would be an increase of 3.30%.
The accrued cost of the accumulated postretirement benefit obligation
included in the consolidated balance sheets at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Retirees.................................................. $17,920 15,342
Active plan participants.................................. 6,405 9,411
------- ------
24,325 24,753
Unrecognized prior service cost........................... 7,417 8,229
Unrecognized net gain..................................... (868) (1,515)
------- ------
Accrued postretirement benefit obligation included in
accrued expenses........................................ $30,874 31,467
======= ======
</TABLE>
F-16
<PAGE> 86
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
(8) INCOME TAXES
Income tax expense (benefit) included in the statements of income and
shareholder's equity for each of the years in the three-year period ended
December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
1997
----------------------------
FEDERAL STATE TOTAL
-------- ----- -------
<S> <C> <C> <C>
Continuing operations:
Current...................................... $ 38,290 840 39,130
Deferred..................................... (11,236) -- (11,236)
-------- ----- -------
Total from continuing operations............... 27,054 840 27,894
Total from discontinued operations............. 6,663 1,007 7,670
Shareholder's equity -- deferred............... 3,816 -- 3,816
-------- ----- -------
Total income tax expense............. $ 37,533 1,847 39,380
======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------
FEDERAL STATE TOTAL
-------- ----- -------
<S> <C> <C> <C>
Operations:
Current...................................... $ 19,568 281 19,849
Deferred..................................... 3,266 -- 3,266
-------- ----- -------
Total from continuing operations............... 22,834 281 23,115
Total from discontinued operations............. 3,681 586 4,267
Shareholder's equity -- deferred............... (4,928) -- (4,928)
-------- ----- -------
Total income tax expense............. $ 21,587 867 22,454
======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
FEDERAL STATE TOTAL
-------- ----- -------
<S> <C> <C> <C>
Operations:
Current...................................... $ 5,368 258 5,626
Deferred..................................... 6,263 -- 6,263
-------- ----- -------
Total from continuing operations............... 11,631 258 11,889
Total from discontinued operations............. 3,400 501 3,901
Shareholder's equity -- deferred............... 13,168 -- 13,168
-------- ----- -------
Total income tax expense............. $ 28,199 759 28,958
======== ===== =======
</TABLE>
During 1997 the Company utilized net operating loss carryforwards which
resulted in a $1,402 current tax benefit and a $1,402 deferred tax expense. In
addition, in 1996, the Company recorded an additional deferred tax asset of
$1,013 for acquired net operating loss and credit carryforwards with an
offsetting amount to goodwill.
F-17
<PAGE> 87
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
The difference between the Federal income tax rate and the effective
Federal income tax rate on income from continuing operations of the Company for
each of the years in the three-year period ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Expected expense........................... $29,261 35.0% $24,392 35.0% $12,888 35.0%
Nondeductible expenses..................... 1,467 1.8 1,215 1.7 1,302 3.5
Tax-exempt interest income................. (3,698) (4.4) (3,162) (4.5) (3,103) (8.4)
Dividends received deduction............... (489) (0.6) (324) (0.5) (286) (0.8)
State taxes, net of federal tax benefit.... (294) (0.4) (98) (0.1) (90) (0.2)
Other, net................................. 807 1.0 811 1.2 920 2.5
------- ----- ------- ----- ------- -----
Actual tax expense......................... $27,054 32.4% $22,834 32.8% $11,631 31.6%
======= ===== ======= ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities included in the consolidated
balance sheets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for title losses.................................. $ 89,737 82,457
Reserves for invested assets.............................. 2,102 2,149
Expenses deducted for tax purposes when paid.............. 18,435 19,412
Net operating loss and credit carryforwards............... 5,021 6,394
Other assets.............................................. 5,159 5,113
-------- -------
Total gross deferred tax assets........................ 120,454 115,524
Deferred tax liabilities:
Unrealized appreciation of marketable securities.......... 5,915 2,105
Book to tax basis differences of marketable securities.... 2,186 1,859
Receivable reserves and other liabilities................. 1,505 2,098
Tax over book depreciation................................ 1,813 1,810
Title plants.............................................. 29,085 29,085
Prepaid pension cost...................................... 3,953 8,292
-------- -------
Total gross deferred tax liabilities................... 44,457 45,249
-------- -------
Net deferred tax asset............................ $ 75,997 70,275
======== =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes the
deferred tax assets will be fully realized in the future based upon a review of
anticipated future earnings and all other available evidence.
The amount of operating loss carryforwards available to offset future
federal taxable income at December 31, 1997 is $14,260 expiring in 2001.
(9) LEASES
The Company leases certain facilities, furniture, and equipment under
long-term noncancelable operating lease agreements which expire at various dates
through 2012. Total lease expense for all operating leases amounted to $57,119,
$59,904 and $62,823 for the years ended December 31, 1997, 1996 and 1995,
F-18
<PAGE> 88
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
respectively. Of the total lease expense, contingent rental costs associated
with lease, tax and expense escalation clauses approximated $1.0 million, $0.9
million and $0.9 million for 1997, 1996 and 1995, respectively. Sublease rentals
are insignificant. The aggregate minimum payments under noncancelable operating
leases with initial terms of more than one year are $36,737 in 1998, $30,868 in
1999, $24,735 in 2000, $22,220 in 2001, $18,775 in 2002 and $96,097 thereafter.
These amounts are exclusive of any additional amounts which may become due under
certain leases containing terms that call for additional rental based on
increases in operating costs.
(10) LITIGATION AND CONTINGENT LIABILITIES
The Company and its title insurance subsidiaries are parties to pending
litigation involving losses under title insurance policies for which it has
established reserves. The title insurance subsidiaries are also involved in
various other types of litigation, including private antitrust litigation
relating to state rating bureau participation and actions by former employees
alleging violations of Federal or state employment laws. The Company has
established reserves for these items and is of the opinion that any losses
actually sustained in connection with the litigation described above will not
have a material effect on the Company's consolidated financial position or
results of operations.
(11) ACQUISITIONS
In February 1998, the Company announced the acquisition of Universal
Mortgage Services, Inc., which provides property inspection, preservation and
maintenance services nationwide. The company will operate as Chicago Title Field
Services, Inc. The acquisition was effected through the purchase of certain
assets and the assumption of certain liabilities in the amount of $5.25 million.
In February 1998, the Company announced the acquisition of California-based
Consolidated Reconveyance Co., which provides foreclosure and reconveyance
services for institutional lenders, title and escrow companies, governmental
agencies and individual investors. Together with the acquisition of Chicago
Title Field Services, Inc., these acquisitions represent the Company's first
major effort to enter the servicing sector of the residential mortgage business.
The acquisition was effected through the purchase of certain assets and the
assumption of certain liabilities in the amount of $6.30 million.
(12) RELATED PARTY TRANSACTIONS
In its capacity as a qualified trust company, The Chicago Trust Company, a
subsidiary of AAM, manages certain assets of affiliate companies and
correspondingly earns investment management fees, which are not material, from
such services.
In August 1997, Alleghany effected a transfer of equity security holdings
with the Company. The fair value of the shares sold by the Company and the
shares acquired from Alleghany was approximately equal. The transaction resulted
in a net gain in the results of operations for 1997 of $2.21 million. The
securities transferred were investments in marketable equity securities of
unrelated third parties.
Immediately prior to the Spin-Off, Alleghany and Chicago Title Corporation
will enter into certain agreements to define their ongoing relationship after
the Spin-Off. The following descriptions include a summary of all material terms
of these agreements.
Distribution Agreement
Chicago Title Corporation and Alleghany will enter the Distribution
Agreement which will generally provide for, among other things, cooperation
regarding past matters and the allocation of responsibility for past
F-19
<PAGE> 89
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
obligations and certain obligations that may arise in the future. The
Distribution Agreement will provide that each of Alleghany and Chicago Title
Corporation will indemnify the other party and its affiliates from and against
any and all damage, loss, liability and expense arising out of or due to the
failure of the indemnitor or any of its subsidiaries to pay, perform or
otherwise discharge any of the liabilities or obligations for which it is
responsible under the terms of the Distribution Agreement. The Distribution
Agreement also will provide that Chicago Title will bear the expenses incurred
in connection with the Spin-Off, except that Alleghany will bear certain
identified legal fees and expenses.
Tax Sharing Agreement
Chicago Title Corporation and Alleghany will enter into a Tax Sharing
Agreement (the "Tax Sharing Agreement") to allocate certain tax liabilities
between Chicago Title Corporation and Alleghany and their respective
subsidiaries and to allocate responsibilities with respect to tax returns. Under
the Tax Sharing Agreement, Chicago Title Corporation will bear (i) its
separately computed share of Alleghany's consolidated Federal income tax
liability for each taxable period for which Chicago Title Corporation or any of
its subsidiaries was a member of the Alleghany consolidated group for Federal
income tax purposes (except that Chicago Title is not liable for taxes in
respect of Alleghany Asset Management and its subsidiaries for any period) and
(ii) the appropriate part of any state or local tax imposed based on receipts,
income, capital or net worth and computed on a consolidated, unitary or combined
basis by reference to the assets and/or activities of Chicago Title Corporation.
Chicago Title Corporation will also be responsible for any tax liability
resulting from any action necessary to implement the Spin-Off and its associated
events, including the dividend of AAM to Alleghany (the "AAM Distribution") and
the transfer of a business previously conducted by a subsidiary of Alleghany
Asset Management to Chicago Title. All other taxes are allocated between Chicago
Title and Alleghany based on the legal entity on which the tax is imposed.
The Tax Sharing Agreement will provide that if Alleghany is subject to any
tax attributable to the Spin-Off, including by reason of the Spin-Off's failure
to qualify under Section 355 of the code as a tax-free distribution, then
Chicago Title will be obligated to indemnify and to hold Alleghany harmless from
any such tax unless such tax arises solely by reason of certain actions taken,
or certain misrepresentations made, by Alleghany. The Tax Sharing Agreement will
obligate Chicago Title to indemnify and hold Alleghany harmless from any tax
attributable to the AAM Distribution if the AAM Distribution does not qualify as
a tax-free distribution under Section 355 of the Code because of any
misrepresentations made by Chicago Title upon which the Tax Ruling will be based
or because of any actions taken by Chicago Title which are inconsistent with the
treatment of the AAM Distribution as a tax-free distribution. In the Tax Sharing
Agreement, Chicago Title also will agree not to take certain specified actions
which might adversely affect the tax-status of the Spin-Off or the AAM
Distribution.
Although Chicago Title Corporation and its subsidiaries will remain jointly
and severally liable with Alleghany and its subsidiaries for all unpaid tax
liabilities of the Alleghany consolidated group for any year for which Chicago
Title Corporation's subsidiaries were members of the Alleghany consolidated
group, the Tax Sharing Agreement provides that Alleghany shall indemnify Chicago
Title Corporation for all such liabilities (including interest and penalties),
provided that Chicago Title Corporation and its subsidiaries have performed all
of their obligations under the Tax Sharing Agreement. Moreover, although Chicago
Title Corporation and its subsidiaries will remain jointly and severally liable
with Alleghany and its subsidiaries for failures to fund current pension plan
obligations, as well as for the penalty taxes imposed to enforce such current
funding, Alleghany has agreed to indemnify Chicago Title Corporation for all
such liabilities.
F-20
<PAGE> 90
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
Agreements between Alleghany Asset Management and Chicago Title
Prior to the Spin-Off Date, certain agreements will be entered into between
Chicago Title (or Chicago Title's subsidiary CT&T) and Alleghany Asset
Management (or Alleghany Asset Management's subsidiary The Chicago Trust
Company) in connection with the AAM Distribution.
INVESTMENT MANAGEMENT AGREEMENT. Chicago Title and The Chicago Trust
Company will enter into an Investment Management Agreement providing for the
management by The Chicago Trust Company of substantially all of the long-term
investable assets and certain of the short-term investable assets of CT&T and
its subsidiaries. The term of the agreement will be five years, with automatic
one year renewals unless either party terminates within three months of the end
of any such term. The agreement also may be terminated by Chicago Title in the
event that investment performance is unsatisfactory. The investment management
fees to be charged under the Investment Management Agreement generally will be
based on market rates.
TRANSITIONAL SERVICES AGREEMENT. CT&T and Alleghany Asset Management will
enter into an agreement pursuant to which CT&T will continue to furnish various
administrative services to Alleghany Asset Management. The initial term of the
agreement will end on December 31, 1998, and is subject to renewal thereafter by
mutual agreement.
SUBLEASE. The Chicago Trust Company will sublease space at the principal
headquarters building of Chicago Title from CT&T at a rent and on such terms as
are currently applicable to CT&T for such space.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments included
in the consolidated balance sheets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- -------- -------
<S> <C> <C> <C> <C>
Assets:
Cash on hand and in banks.................... $ 21,219 21,219 23,072 23,072
Cash pledged to secure trust and escrow
deposits.................................. 100,207 100,207 99,392 99,392
Marketable securities, available-for-sale:
Fixed maturities.......................... 1,032,089 1,032,089 817,439 817,439
Equity securities......................... 34,489 34,489 33,349 33,349
========== ========= ======== =======
Liabilities:
Notes payable and other obligations.......... $ 32,443 32,443 43,282 43,528
Trust and escrow deposits secured by pledged
assets.................................... 467,553 467,553 355,711 355,711
========== ========= ======== =======
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practical to estimate fair
value:
Cash on hand and in banks, cash pledged to secure trust and escrow
deposits, and trust and escrow deposits secured by pledged assets: The
carrying amounts approximate fair value because of the short maturity of
the instruments.
F-21
<PAGE> 91
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
Marketable securities, available-for-sale: The fair values of the
Company's marketable securities are based on quoted market prices, where
available. For marketable securities not actively traded, fair values are
estimated using values obtained from independent pricing services.
Notes payable and other obligations: As of December 31, 1997, the fair
value of the Company's notes payable and other obligations is the same as
the carrying value as the interest rate is variable. As of December 31,
1996, the fair value is estimated based on the current market prices for
the same or similar issues of debt of the same remaining maturities. The
interest rate swap agreement (see Note 4) has not been separately valued
apart from the underlying indebtedness, as the agreement is an integral
part of the outstanding loan agreement and was entered into simultaneously
with the borrowing itself. Accordingly, the estimated fair value of notes
payable and other obligations includes any value associated with the
interest rate swap agreement.
In addition, the Company has not determined the fair value of various loan
guarantees made principally on behalf of policy issuing title insurance agents
for third-party financing. The total amount of loan guarantees at December 31,
1997 and 1996 was $9,479 and $3,386, respectively. This amount represents the
accounting loss the Company would incur if any party to the loan guarantees
failed to perform according to the terms of contract. Amounts that may become
payable, if any, under such loan guarantees are not reasonably estimable.
(14) DISTRIBUTION OF AAM TO ALLEGHANY CORPORATION
The net assets of AAM to be distributed to Alleghany Corporation included
in the consolidated balance sheets at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Assets:
Cash on hand and in banks................................. $ 7,667 5,532
Cash pledged to secure trust and escrow deposits.......... 1,336 18,674
Marketable securities..................................... 18,329 15,796
Receivables, net.......................................... 11,509 7,691
Deferred Federal income taxes............................. 2,915 1,467
Fixed assets, net......................................... 2,312 2,259
Other assets.............................................. 1,363 1,637
------- -------
Total assets...................................... 45,431 53,056
------- -------
Liabilities:
Accounts payable.......................................... 2,480 4,194
Accrued expenses and other liabilities.................... 20,625 11,259
Trust deposits secured by pledged assets.................. 4,229 21,828
------- -------
Total liabilities........................................... 27,334 37,281
------- -------
Net assets of AAM to be distributed to Alleghany
Corporation............................................... $18,097 15,775
======= =======
</TABLE>
(15) RESERVE FOR TITLE LOSSES AND REINSURANCE
The Company's reserve for title losses is based on long-range projections
subject to uncertainty. Uncertainty regarding reserves of a given policy year is
gradually reduced as new information emerges each succeeding year, allowing more
reliable revaluations of such reserves. While management believes that the
reserve as of December 31, 1997 is adequate, uncertainties in the reserving
process could cause such reserve to
F-22
<PAGE> 92
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
develop favorably or unfavorably as new or additional information emerges. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Movements in reserves which are small relative to the
amount of such reserves could significantly impact future reported earnings of
the Company.
Activity in the Company's reserve for title losses for each of the years in
the three-year period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Balance as of January 1...................... $532,923 529,915 536,068
Provision for title losses related to:
Current year............................... 102,324 91,023 81,385
Prior year................................. -- (8,000) --
-------- ------- -------
Total provision.................... 102,324 83,023 81,385
-------- ------- -------
Paid related to:
Current year............................... 3,509 3,071 2,829
Prior years................................ 67,404 76,944 84,709
-------- ------- -------
Total paid......................... 70,913 80,015 87,538
-------- ------- -------
Balance as of December 31.......... $564,334 532,923 529,915
======== ======= =======
</TABLE>
The Company had no reinsurance recoverable at December 31, 1997 or 1996.
The title insurance subsidiaries assume and cede title risks and the related
premiums with other title insurance companies. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. In addition, the
Company has purchased reinsurance coverage for losses in excess of $12,500. For
these losses, the reinsurers will pay 90% up to $50,000.
The following table presents the effects of reinsurance on earned premium
<TABLE>
<CAPTION>
EARNED PREMIUMS
----------------------------- PERCENTAGE OF
GROSS CEDED ASSUMED NET ASSUMED TO NET
----- ----- ------- --- --------------
<S> <C> <C> <C> <C> <C>
1997 1,204,968 5,115 1,959 1,201,812 0.16%
1996 1,098,875 4,579 2,160 1,096,456 0.20%
1995 953,364 5,872 2,012 949,504 0.21%
</TABLE>
F-23
<PAGE> 93
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN 000S)
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly revenues and net income included in the results of operations for
the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT 30 DEC 31 TOTAL
---- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Title, escrow, trust and other
revenue........................... $298,408 339,888 357,430 415,770 1,411,496
Investment income.................... 11,762 12,222 13,236 15,046 52,266
Net realized investment gains........ 155 141 2,509 879 3,684
-------- ------- ------- ------- ---------
Total revenues............... 310,325 352,251 373,175 431,695 1,467,446
-------- ------- ------- ------- ---------
Net income:
From continuing operations........... 5,827 16,746 15,851 14,889 53,313
From sales of marketable
securities........................ 101 92 1,632 571 2,396
From discontinued operations......... 2,196 3,123 3,752 3,091 12,162
-------- ------- ------- ------- ---------
Total net income............. $ 8,124 19,961 21,235 18,551 67,871
======== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPT 30 DEC 31 TOTAL
---- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Title, escrow, trust and other
revenue........................... $283,357 323,049 332,747 339,437 1,278,590
Investment income.................... 11,328 11,627 11,852 12,851 47,658
Net realized investment gains........ 369 851 1 215 1,436
-------- ------- ------- ------- ---------
Total revenues............... 295,054 335,527 344,600 352,503 1,327,684
-------- ------- ------- ------- ---------
Net income:
From continuing operations........... 8,138 13,697 10,048 13,762 45,645
From sales of marketable
securities........................ 240 553 1 139 933
From discontinued operations......... 1,263 1,803 1,679 717 5,462
-------- ------- ------- ------- ---------
Total net income............. $ 9,641 16,053 11,728 14,618 52,040
======== ======= ======= ======= =========
</TABLE>
(17) SUBSEQUENT EVENT
On June , 1998, Alleghany Corporation completed the Spin-Off of the
Company through the pro-rata distribution of shares of the newly
formed Delaware holding company, Chicago Title Corporation. Prior to the
Spin-Off Date, all of the issued and outstanding shares of stock of the Company
were contributed to Chicago Title Corporation. 66,000,000 shares of common stock
of Chicago Title Corporation are authorized with a $1.00 par value per share.
Immediately prior to the Spin-Off, shares were issued as restricted
stock to members of senior management of Chicago Title Corporation and an
additional 16,000 shares were issued to non-employee directors after the
Spin-Off. The restricted shares issued to management and non-employee directors
will be expensed over the respective vesting periods of such shares based upon
the value of such shares as of the first trading day after the Spin-Off Date.
Earnings per share information has been presented as if the above shares
had been outstanding for all periods presented.
F-24
<PAGE> 94
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(IN 000S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
1998 1997
----------- ----
<S> <C> <C>
ASSETS
Cash on hand and in banks................................... $ 35,887 21,219
Cash pledged to secure trust and escrow deposits............ 263,199 100,207
Marketable securities, available-for-sale:
Fixed maturities, at fair value (amortized cost of
$925,727 and $1,016,446 in 1998 and 1997,
respectively)......................................... 940,096 1,032,089
Equity securities, at fair value (cost of $33,203 and
$33,232 in 1998 and 1997, respectively)............... 35,803 34,489
---------- ---------
Total marketable securities................................. 975,899 1,066,578
Receivables, including accrued investment income, less
allowance for doubtful accounts of $8,918 and $7,574 in
1998 and 1997, respectively............................... 71,412 62,558
Deferred Federal income taxes............................... 81,204 75,997
Fixed assets, net........................................... 97,357 97,222
Title plants................................................ 150,771 150,546
Net assets of Alleghany Asset Management, Inc. to be
distributed to Alleghany Corporation...................... 19,825 18,097
Other assets................................................ 116,910 109,783
---------- ---------
Total assets................................................ $1,812,464 1,702,207
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable............................................ $ 120,366 105,692
Accrued expenses and other liabilities...................... 101,208 128,638
Notes payable and other obligations......................... 32,851 32,443
Reserve for title losses.................................... 569,829 564,334
Trust and escrow deposits secured by pledged assets......... 558,403 467,553
---------- ---------
Total liabilities........................................... 1,382,657 1,298,660
---------- ---------
Shareholder's Equity (Note 3):
Common stock-par value of $4,000 per share, authorized
3,722 shares; issued and outstanding 3,419 shares at
March 31, 1998 and December 31, 1997.................. 13,676 13,676
Additional paid-in capital............................. 117,381 117,381
Retained earnings...................................... 287,645 261,425
Accumulated other comprehensive income................. 11,105 11,065
---------- ---------
Total shareholder's equity.................................. 429,807 403,547
---------- ---------
Total liabilities and shareholder's equity.................. $1,812,464 1,702,207
========== =========
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-25
<PAGE> 95
CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHS ENDED, MARCH 31, 1998 AND 1997
(IN 000S)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Title, escrow, trust and other revenue.................... $385,804 298,408
Investment income......................................... 14,805 11,762
Net realized investment gains............................. 371 155
-------- -------
Total revenues......................................... 400,980 310,325
-------- -------
Expenses:
Salaries and other employee benefits...................... 127,603 100,477
Commissions paid to agents................................ 131,490 114,400
Provision for title losses................................ 26,279 21,772
Interest expense.......................................... 1,295 1,156
Other operating and administrative expenses............... 82,273 64,118
-------- -------
Total expenses......................................... 368,940 301,923
-------- -------
Operating income from continuing operations before income
taxes..................................................... 32,040 8,402
Income taxes................................................ 10,799 2,474
-------- -------
Net income from continuing operations....................... 21,241 5,928
Net income from discontinued operations..................... 4,979 2,196
-------- -------
Net income.................................................. $ 26,220 8,124
======== =======
Basic and diluted earnings per share (Note 3):
Continuing operations..................................... $ 0.97 0.27
Discontinued operations................................... 0.23 0.10
-------- -------
Net earnings per share.................................... $ 1.20 0.37
======== =======
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-26
<PAGE> 96
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE THREE-MONTHS ENDED, MARCH 31, 1998
(IN 000S)
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION OF
MARKETABLE
ADDITIONAL SECURITIES, TOTAL
COMMON PAID-IN RETAINED NET OF SHAREHOLDER'S
STOCK CAPITAL EARNINGS DEFERRED TAXES EQUITY
------ ---------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997........................ $ 13,676 $ 117,381 $ 261,425 $ 11,065 $ 403,547
Net income.................. -- -- 26,220 -- 26,220
Accumulated other
comprehensive income(1)..... -- -- -- 40 40
--------------- --------------- --------------- --------------- ---------------
Balance at March 31, 1998..... $ 13,676 $ 117,381 $ 287,645 $ 11,105 $ 429,807
=============== =============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-27
<PAGE> 97
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED, MARCH 31, 1998 AND 1997
(IN 000S)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from continuing operations activities:
Net income from continuing operations.................. $ 21,241 5,928
Adjustments to reconcile net income from continuing
operations to net cash used in continuing operations
activities:
Depreciation and amortization..................... 8,314 7,529
Changes in assets and liabilities:
Cash pledged to secure trust and escrow
deposits................................... (162,992) (20,400)
Receivables.................................. (4,172) 519
Current and deferred Federal income taxes.... 9,860 1,768
Other assets................................. 3,129 4,810
Accounts payable and accrued expenses and
other liabilities.......................... (32,391) (33,006)
Reserves for title losses.................... 5,495 433
Trust and escrow deposits secured by pledged
assets..................................... 90,850 (25,054)
Gain on sale of investments....................... (371) (155)
-------- -------
Net adjustments............................................. (82,278) (63,556)
-------- -------
Net cash used in continuing operations activities........... (61,037) (57,628)
Dividends received from Alleghany Asset Management, Inc. ... 5,300 --
-------- -------
Net cash used in operations................................. (55,737) (57,628)
-------- -------
Cash flows from investing activities:
Purchase of long-term marketable securities............ (103,577) (62,550)
Sales of long-term marketable securities............... 37,257 34,475
Maturities and redemptions of long-term marketable
securities........................................... 36,255 45,346
Net sales (purchases) of short-term investments........ 120,967 47,264
Purchase of other invested assets...................... (1,747) (1,381)
Sales of other invested assets......................... 558 1,651
Purchase of fixed assets............................... (7,485) (11,969)
Sales of fixed assets.................................. 2,522 2,725
Net purchases of title records and indexes............. (225) --
Purchases of subsidiaries.............................. (13,095) --
Cash of acquired subsidiaries.......................... 1,736 --
-------- -------
Net cash provided by investing activities................... 73,166 55,561
-------- -------
Cash flows from financing activities:
Principal payments on notes payable and other
obligations.......................................... (707) --
Cash remaining with discontinued operations............ (2,054) (2,363)
-------- -------
Net cash used in financing activities....................... (2,761) (2,363)
-------- -------
Net increase (decrease) in cash............................. 14,668 (4,430)
Cash at beginning of year................................... 21,219 23,072
-------- -------
Cash as of balance sheet date............................... $ 35,887 18,642
======== =======
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-28
<PAGE> 98
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
(IN 000S)
(1) BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1998 and the consolidated
statements of income, shareholder's equity and cash flows for the
three-months ended March 31, 1998 and March 31, 1997, have not been
audited, but have been prepared in accordance with generally accepted
accounting principles as applied in the Company's audited consolidated
financial statements as of and for the year ended December 31, 1997. In the
opinion of management, this information includes all material adjustments,
of a normal and recurring nature, for a fair presentation. The results for
the three-month periods are not necessarily indicative of the results
expected for the full year.
(2) NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. Interim financial statements are required to include only
disclosure of total comprehensive income for the current and prior
reporting periods.
The Company's total comprehensive income for the three-months ended March
31, 1998 and 1997 was $26,260 and $1,733, respectively. Other comprehensive
income relates to the Company's change in unrealized appreciation of
marketable securities, net of deferred taxes, and was $40 and $(6,391) for
the three-months ended March 31, 1998 and 1997, respectively.
(3) SUBSEQUENT EVENT
On June , 1998, Alleghany Corporation completed the Spin-Off of the
Company through the pro-rata distribution of shares of the newly
formed Delaware holding company, Chicago Title Corporation. Prior to the
Spin-Off Date, all of the issued and outstanding shares of stock of the
Company were contributed to Chicago Title Corporation. 66,000,000 shares of
common stock of Chicago Title Corporation are authorized with a $1.00 par
value per share. Immediately prior to the Spin-Off, shares were
issued as restricted stock to members of senior management of Chicago Title
Corporation and an additional 16,000 shares were issued to non-employee
directors after the Spin-Off. The restricted shares issued to management
and non-employee directors will be expensed over the respective vesting
periods of such shares based upon the value of such shares as of the first
trading day after the Spin-Off Date.
Earnings per share information has been presented as if the above shares
had been outstanding for all periods presented.
F-29
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Form of Distribution Agreement to be entered into by and
between Alleghany Corporation and Chicago Title
Corporation.+
3.1 Certificate of Incorporation of Chicago Title Corporation as
filed with the Delaware Secretary of State on March 26,
1998.+
3.2 Form of By-Laws of Chicago Title Corporation to be in effect
as of the Spin-Off Date.+
8.1 Internal Revenue Service Ruling Letter, dated March 19,
1998.+
10.1 Form of Tax Sharing Agreement to be entered into by and
between Alleghany Corporation and Chicago Title
Corporation.+
10.2 (a) Credit Agreement, dated as of March 29, 1996, among Chicago
Title and Trust Company, an Illinois corporation, the
various financial institutions as are or may become parties
thereto, and The Chase Manhattan Bank, N.A., as
administrative agent.+
10.2 (b) First Amendment to be effective as of the Spin-off Date
among Chicago Title and Trust Company, an Illinois
corporation, the lenders listed on the signature pages
thereto, and The Chase Manhattan Bank, as administrative
agent.+
10.3 Form of Chicago Title Corporation 1998 Long-Term Incentive
Plan to be in effect as of the Spin-Off Date.+
10.4 Form of Chicago Title Corporation Directors' Stock Option
Plan.+
10.5 Chicago Title Corporation Directors' Equity Compensation
Plan.+
10.6 CT&T Executive Performance Unit Incentive Plan of 1992,
adopted and effective as of January 1, 1989, as amended as
of January 1, 1992, filed as Exhibit 10.16 to Alleghany's
Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference (Securities and
Exchange Commission File No. 1-9371).
10.7 CT&T Executive Performance Unit Incentive Plan of 1995,
adopted and effective as of January 1, 1995.+
10.8 CT&T Quality Business Management Incentive Program for
Senior Corporate Officers.+
10.9 CT&T Excess Benefits Pension Plan, effective January 1,
1987, as amended by First Amendment to CT&T Excess Benefits
Pension Plan dated May 5, 1994, effective as of January 1,
1994, filed as Exhibit 10.19 to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1994, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.10 CT&T Executive Salary Continuation Plan effective as of
January 1, 1979, as adopted on August 23, 1978, filed as
Exhibit 10.15 to Alleghany Corporation's Annual Report on
Form 10-K for the year ended December 31, 1990, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.11 CT&T Excess Benefits Savings Plan.+
10.12 CT&T Annual Incentive Plan.+
10.13 Agreement between Chicago Title and Trust Company and Alan
N. Prince, dated as of July 29, 1996, as amended on
September 23, 1997.+
10.14 Form of amended and restated employment agreement among
Chicago Title Corporation, Chicago Title and Trust Company
and John Rau.+
10.15 Form of agreement with John Rau in respect of Awards
pursuant to Chicago Title and Trust Company's 1995
Performance Unit Plan (the "1995 Plan").+
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 Form of agreement to be entered into with participants in
the Executive Section of the 1995 Plan in respect of Awards
made to such participants under the 1995 Plan.+
10.17(a) Stock Purchase Agreement dated as of June 18, 1985 by and
among Alleghany Corporation, a Maryland corporation ("Old
Alleghany"), Alleghany Corporation, a Delaware corporation,
Alleghany Capital Corporation and Lincoln National
Corporation (the "CT&T Stock Purchase Agreement"), filed as
Exhibit (2)(i) to Old Alleghany's Current Report on Form 8-K
dated July 11, 1985, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.17(b) List of Contents of Schedules to the CT&T Stock Purchase
Agreement, filed as Exhibit (2)(ii) to Old Alleghany's
Current Report on Form 8-K dated July 11, 1985, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.17(c) Amendment No. 1 dated December 20, 1985 to the CT&T Stock
Purchase Agreement, filed as Exhibit 10.12(c) to Old
Alleghany's Annual Report on Form 10-K for the year ended
December 31, 1985, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.18 Letter Agreement dated May 2, 1991, between CT&T and
Continental Bank, N.A. relating to an interest rate swap
effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's
quarterly report on Form 10-Q for the quarter ended March
31, 1991, is incorporated herein by reference (Securities
and Exchange Commission File No. 1-9371).
10.19 Letter Agreement dated December 13, 1994 between CT&T and
Bank of America Illinois (previously known as Continental
Bank) relating to the transfer of Continental Bank's risk
management business to Bank of America National Trust and
Savings Association, filed as Exhibit 10.31(f) to
Alleghany's Annual Report on Form 10-K for the year ended
December 31, 1994, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.20 Lease dated July 24, 1989 (commencing October 1, 1992,
between Linpro Chicago Land Limited Partnership ("Linpro")
and Chicago Title and Trust Company, pursuant to which
Linpro leased to CT&T certain premises designated therein
and located in the building known as 171 North Clark Street,
Chicago, Illinois, as amended by a First Amendment to lease
dated November 17, 1989, by letter agreements dated October
31, 1989; November 17, 1989; November 30, 1989; December 1,
1989; December 6, 1989 and December 8, 1989 and by a Second
Amendment to Lease dated December 23, 1992; a supplement to
Lease dated July 13, 1993; and letter regarding Lobby
termination Notice dated September 24, 1996.+
10.21 Chicago Title Corporation Employee Stock Purchase Plan.+
21.1 Subsidiaries of Chicago Title Corporation as of the Spin-Off
Date.+
27 Financial Data Schedule.+
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 101
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHICAGO TITLE CORPORATION
By: /s/ PETER R. SISMONDO
------------------------------------
Peter R. Sismondo
Date: May 19, 1998
<PAGE> 102
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Form of Distribution Agreement to be entered into by and
between Alleghany Corporation and Chicago Title
Corporation.+
3.1 Certificate of Incorporation of Chicago Title Corporation as
filed with the Delaware Secretary of State on March 26,
1998.+
3.2 Form of By-Laws of Chicago Title Corporation to be in effect
as of the Spin-Off Date.+
8.1 Internal Revenue Service Ruling Letter, dated March 19,
1998.+
10.1 Form of Tax Sharing Agreement to be entered into by and
between Alleghany Corporation and Chicago Title
Corporation.+
10.2 (a) Credit Agreement, dated as of March 29, 1996, among Chicago
Title and Trust Company, an Illinois corporation, the
various financial institutions as are or may become parties
thereto, and The Chase Manhattan Bank, N.A., as
administrative agent.+
10.2 (b) First Amendment to be effective as of the Spin-Off Date
among Chicago Title and Trust Company, an Illinois
corporation, the lenders listed on the signature pages
thereto, and The Chase Manhattan Bank, as administrative
agent.+
10.3 Form of Chicago Title Corporation 1998 Long-Term Incentive
Plan to be in effect as of the Spin-Off Date.+
10.4 Form of Chicago Title Corporation Directors' Stock Option
Plan.+
10.5 Chicago Title Corporation Directors' Equity Compensation
Plan.+
10.6 CT&T Executive Performance Unit Incentive Plan of 1992,
adopted and effective as of January 1, 1989, as amended as
of January 1, 1992, filed as Exhibit 10.16 to Alleghany's
Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference (Securities and
Exchange Commission File No. 1-9371).
10.7 CT&T Executive Performance Unit Incentive Plan of 1995,
adopted and effective as of January 1, 1995.+
10.8 CT&T Quality Business Management Incentive Program for
Senior Corporate Officers.+
10.9 CT&T Excess Benefits Pension Plan, effective January 1,
1987, as amended by First Amendment to CT&T Excess Benefits
Pension Plan dated May 5, 1994, effective as of January 1,
1994, filed as Exhibit 10.19 to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1994, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.10 CT&T Executive Salary Continuation Plan effective as of
January 1, 1979, as adopted on August 23, 1978, filed as
Exhibit 10.15 to Alleghany Corporation's Annual Report on
Form 10-K for the year ended December 31, 1990, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.11 CT&T Excess Benefits Savings Plan.+
10.12 CT&T Annual Incentive Plan.+
10.13 Agreement between Chicago Title and Trust Company and Alan
N. Prince, dated as of July 29, 1996, as amended on
September 23, 1997.+
10.14 Form of amended and restated employment agreement among
Chicago Title Corporation, Chicago Title and Trust Company
and John Rau.+
10.15 Form of agreement with John Rau in respect of Awards
pursuant to Chicago Title and Trust Company's 1995
Performance Unit Plan (the "1995 Plan").+
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.16 Form of agreement to be entered into with Participants in
the Executive Section of the 1995 Plan in respect of Awards
made to such Participants under the 1995 Plan.+
10.17 (a) Stock Purchase Agreement dated as of June 18, 1985 by and
among Alleghany Corporation, a Maryland corporation ("Old
Alleghany"), Alleghany Corporation, a Delaware corporation,
Alleghany Capital Corporation and Lincoln National
Corporation (the "CT&T Stock Purchase Agreement"), filed as
Exhibit (2)(i) to Old Alleghany's Current Report on Form 8-K
dated July 11, 1985, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.17 (b) List of Contents of Schedules to the CT&T Stock Purchase
Agreement, filed as Exhibit (2)(ii) to Old Alleghany's
Current Report on Form 8-K dated July 11, 1985, is
incorporated herein by reference (Securities and Exchange
Commission File No. 1-9371).
10.17 (c) Amendment No. 1 dated December 20, 1985 to the CT&T Stock
Purchase Agreement, filed as Exhibit 10.12(c) to Old
Alleghany's Annual Report on Form 10-K for the year ended
December 31, 1985, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.18 Letter Agreement dated May 2, 1991, between CT&T and
Continental Bank, N.A relating to an interest rate swap
effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's
quarterly report on Form 10-Q for the quarter ended March
31, 1991, is incorporated herein by reference (Securities
and Exchange Commission File No. 1-9371).
10.19 Letter Agreement dated December 13, 1994 between CT&T and
Bank of America Illinois (previously known as Continental
Bank) relating to the transfer of Continental Bank's risk
management business to Bank of America National Trust and
Savings Association, filed as Exhibit 10.31(f) to
Alleghany's Annual Report on form 10-K for the year ended
December 31, 1994, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.20 Lease dated July 24, 1989 (commencing October 1, 1992,
between Linpro Chicago Land Limited Partnership ("Linpro")
and Chicago Title and Trust Company, pursuant to which
Linpro leased to CT&T certain premises designated therein
and located in the building known as 171 North Clark Street,
Chicago, Illinois, as amended by a First Amendment to lease
dated November 17, 1989, by letter agreements dated October
31, 1989; November 17, 1989; November 30, 1989; December 1,
1989; December 6, 1989 and December 8, 1989 and by a Second
Amendment to Lease dated December 23, 1992; a supplement to
Lease dated July 13, 1993; and letter regarding Lobby
termination Notice dated September 24, 1996.+
10.21 Chicago Title Corporation Employee Stock Purchase Plan.+
21.1 Subsidiaries of Chicago Title Corporation as of the Spin-Off
Date.+
27 Financial Data Schedule.+
</TABLE>
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+ Previously filed.
