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As filed with the Securities and Exchange Commission on March 27, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
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)
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)
Registrant's telephone number, including area code (888) 431-4288
Securities to be registered pursuant to Section 12(b) of the Act:
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
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:
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
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ALLEGHANY CORPORATION
Information Included in Information Statement
and Incorporated in Form 10 By Reference
Cross-Reference Sheet Between Information Statement
and Items of Form 10
Item Item Caption Location in Information Statement
- ---- ------------ ---------------------------------
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 Securities Ownership of Directors and
Certain Beneficial Executive Officers; Principal Stockholders.
Owners and Management.
5 Directors and Management; Description of Capital
Executive Officers. Stock--Limited Liability And Indemnification
Provisions.
6 Executive Compensation. Management.
7 Certain Relationships Summary; The Spin-Off; Arrangements Between
and Related Alleghany And Chicago Title Relating To The
Transactions. Spin-Off.
8 Legal Proceedings. Business--Legal Proceedings.
9 Market Price of and Summary; Market Uncertainties With Respect to
Dividends on the Chicago Title Common Stock; Market for Chicago
Registrant's Common Title Common Stock; Dividend Policy.
Equity and Related
Stockholder Matters.
10 Recent Sales of Not Applicable.
Unregistered
Securities.
11 Description of Description of Capital Stock; Market for
Registrant's Chicago Title Common Stock.
Securities to be
Registered.
12 Indemnification of Description of Capital Stock--Limited
Directors and Officers. Liability And Indemnification Provisions.
13 Financial Statements Summary; Pro Forma Consolidated Financial
and Supplementary Data. 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.
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14 Changes in and Not Applicable.
Disagreements with
Accountants on
Accounting and
Financial Disclosure.
15 Financial Statements Chicago Title Corporation And Subsidiaries
and Exhibits. Index To Financial Statements; Index to
Exhibits.
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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 April __, 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 April
__, 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 on or about April __, 1998. The Spin-Off is conditioned upon
receiving a ruling from the Internal Revenue Service 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. We are seeking to list the Chicago
Title common stock on the New York Stock Exchange, and expect that it will trade
under the symbol "___."
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
April __, 1998
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TABLE OF CONTENTS
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? ................... 6
Please explain the Distribution Ratio. ................................. 6
Will my Alleghany 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? ......... 7
Is the Spin-Off Taxable for United States Federal tax purposes? ........ 8
Will Alleghany and Chicago Title be related in any way
after the Spin-Off? .................................................. 8
What We Have Already Accomplished to Prepare for the Spin-Off ............. 9
Board Appointments ..................................................... 9
Senior Management Appointments ......................................... 9
United States Federal tax ruling ....................................... 9
New York Stock Exchange Listing ........................................ 9
Regulatory Approvals ................................................... 10
Key Terms of the Spin-Off Transaction ..................................... 10
No Stockholder Action Required ......................................... 10
Record Date ............................................................ 10
Distribution Ratio ..................................................... 10
Shares to be Distributed ............................................... 10
Mailing Date ........................................................... 10
Information Regarding the Spin-Off and Chicago Title ...................... 11
Chicago Title Corporation ................................................. 11
Business ............................................................... 11
Financial Highlights ................................................... 12
Alleghany Corporation ..................................................... 12
Selected Financial Data ................................................... 13
Risk Factors .............................................................. 14
Competition ............................................................ 14
Interest rate levels; Seasonality ...................................... 14
Reserve for Title Losses ............................................... 14
Regulation ............................................................. 15
Holding Company Structure .............................................. 15
Tax Treatment of the Spin-Off .......................................... 15
Market Uncertainties With Respect to Chicago Title Common Stock ........ 16
Anti-Takeover Provisions ............................................... 17
Forward-Looking Information ............................................... 17
The Spin-Off .............................................................. 18
Background and Purposes of the Spin-Off ................................ 18
Manner of Effecting the Spin-Off ....................................... 18
Results of the Spin-Off ................................................ 19
Certain Federal Income Tax Consequences ................................ 19
Regulatory Approvals ................................................... 20
Market for Chicago Title Common Stock .................................. 20
Conditions Precedent to the Spin-Off ................................... 21
Arrangements Between Alleghany And Chicago Title Relating To The Spin-Off . 22
Distribution Agreement ................................................. 22
Tax Sharing Agreement .................................................. 23
Agreements Between Alleghany Asset Management and Chicago Title ........ 24
Investment Management Agreement ..................................... 24
Transitional Services Agreement ..................................... 24
Sublease ............................................................ 24
Reasons for Furnishing this Information Statement ......................... 24
Selected Financial Data ................................................... 25
Pro Forma Consolidated Financial Data ..................................... 26
Pro Forma Results of Operations ........................................... 26
Pro Forma Consolidated Balance Sheet and Capitalization ................... 26
Dividend Policy ........................................................... 29
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Management's Discussion And Analysis Of Financial Condition And
Results Of Operations ................................................... 30
General ................................................................ 30
Forward Looking Statements .......................................... 30
Overview ............................................................ 30
Operating Revenues .................................................. 31
Investment Income ................................................... 31
Operating Expenses .................................................. 32
Provision for Title Losses .......................................... 32
Income Taxes ........................................................ 33
Seasonality ......................................................... 33
Contingencies ....................................................... 34
New Accounting Standards ............................................ 34
Year 2000 Issues .................................................... 34
Results Of Operations .................................................. 35
Net Income .......................................................... 35
Operating Revenues .................................................. 36
Investment Income ................................................... 36
Expenses ............................................................ 36
Liquidity and Capital Resources ........................................ 38
Quarterly Financial Information (Unaudited) ............................ 40
Business .................................................................. 41
Chicago Title .......................................................... 41
The Title Insurance Industry ........................................... 42
Strategy ............................................................... 43
Financial Ratings ...................................................... 44
Investment Operations .................................................. 44
Reserve for Title Losses ............................................... 47
Business Conditions; Seasonality ....................................... 48
Competition ............................................................ 49
Regulation ............................................................. 50
Employees .............................................................. 51
Properties ............................................................. 51
Legal Proceedings ...................................................... 51
Management ................................................................ 52
Directors .............................................................. 52
Compensation of Directors .............................................. 55
Executive Officers ..................................................... 57
Executive Compensation ................................................. 59
Summary Compensation Table .......................................... 59
Long-Term Incentive Plan--Awards In Last Fiscal Year ................ 61
Chicago Title Compensation Arrangements ................................ 63
The 1998 Long-Term Incentive Plan ................................... 63
New Plan Benefits under the 1998 Plan ............................... 68
Annual Bonus Plan ................................................... 69
Employment Contracts, Termination of Employment and
Change-in-Control Agreements ...................................... 69
Pension Plan Table .................................................. 71
Compensation Committee Interlocks and Insider Participation ......... 73
Securities Ownership of Directors and Executive Officers .................. 73
Principal Stockholders .................................................... 74
Description of Capital Stock .............................................. 78
Introduction ........................................................... 78
Comparison Of Rights Of Stockholders Of Alleghany And Chicago Title .... 78
Authorized And Outstanding Capital Stock ............................... 78
Chicago Title Common Stock; Delaware Anti-takeover Provisions .......... 79
Preferred Stock ........................................................ 80
Certain Anti-takeover Provisions--Chicago Title Certificate
And By-Laws .......................................................... 80
Classified Board of Directors ....................................... 80
Number of Directors; Removal of Directors; Vacancies ................ 81
Business Conducted at Meetings; Director Nominations ................ 82
Special Meeting of Stockholders ..................................... 83
No Stockholder Action by Written Consent; Stockholder
Action at Meetings ................................................ 83
Supermajority Voting ................................................ 83
Stockholder Rights Plans and related matters ........................ 83
Other Constituencies ................................................ 84
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Limited Liability And Indemnification Provisions ....................... 84
Shares Eligible For Future Sale ........................................... 85
Additional Information .................................................... 86
Chicago Title Corporation and Subsidiaries Index to
Financial Statements .................................................... F-1
4
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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 is one of the nation's
Chicago Title? 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
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5
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real estate-related services industry.
What do I have to do to Nothing. No proxy or vote is
participate in the Spin-Off? necessary for the Spin-Off. If you own
Alleghany Stock as of the close of
business on April __, 1998 (the "Record
Date"), Chicago Title Common Stock will be
mailed to you or credited to your
brokerage account on or about April __,
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 Three shares of Chicago Title Common
Distribution Ratio. 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 April __, 1998,
you will receive 300 shares of Chicago
Title Common Stock through the Spin-Off.
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 $0.33 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 of
Directors (the "Chicago Title Board").
What are the risks involved The Chicago Title business is
in owning Chicago Title subject to risks related to competition in
Common Stock? 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 Chicago Title
Common Stock is expected to be listed 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
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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 Yes, during part of April 1998. We
differently as a result of expect that a temporary form of interim
the Spin-Off? 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 April __, 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-distributed
basis, reflecting an assumed post-Spin-Off
value for Alleghany Stock. Alleghany Stock
when-distributed trading, if available,
could last from April __, 1998 through the
Spin-Off Date. If this occurs, an
additional listing for Alleghany Stock,
followed by the "wi" letters, will appear
on the NYSE. When-issued (and
when-distributed) trading occurs in order
to develop an orderly market and trading
price for 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-distributed 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-distributed
trading is not available, the NYSE will
require that shares of Alleghany Stock
that are sold or purchased from the period
beginning on April __, 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
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that during such period neither the
Alleghany Stock nor the due bills may be
purchased or sold separately.
Is the Spin-Off taxable The Spin-Off is conditioned upon
for United States receiving a ruling from the Internal
Federal income tax Revenue Service (the "IRS") that the
purposes? Spin-Off will be tax-free to Alleghany
stockholders and to Alleghany. The IRS
ruling will be based upon the accuracy of
numerous representations made by
Alleghany and Chicago Title. In ________
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 "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 After the Spin-Off, Alleghany will
Title be related in any no longer own any Chicago Title Common
way after the Spin-Off? 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.
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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 Alleghany filed for, and the
Income Tax Ruling Spin-Off is conditioned on receipt of, a
tax ruling (the "Tax Ruling") from the IRS
concerning the United States Federal
income tax consequences of the Spin-Off.
The Tax Ruling is expected to state 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 will be 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 is expected to
provide 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 __________ 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 We are seeking to list the Chicago
Stock Exchange Listing Title Common Stock on the NYSE and expect
that the Chicago Title Common Stock will
begin trading on the NYSE in April 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 April __,
1998. We plan to list the Chicago Title
Common Stock on the NYSE under the symbol
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"___," and regular-way trading of Chicago
Title Common Stock is expected to begin on
April __, 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 No action is required by Alleghany
Required stockholders to receive Chicago Title
Common Stock in the Spin-Off.
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 (April __,
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 April __, 1998.
Shares to be Distributed All Chicago Title Common Stock owned
by Alleghany will be distributed in the
Spin-Off. Based on 7,373,739 shares of
Alleghany Stock outstanding as of March 2,
1998, 22,121,217 shares of Chicago Title
Common Stock will be distributed in the
Spin-Off. Immediately prior to the
Spin-Off, an additional 367,773 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 on or about April
__, 1998.
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INFORMATION REGARDING THE SPIN-OFF AND CHICAGO TITLE
Before the Spin-Off, inquiries relating to the Spin-Off should be directed to:
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
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
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:
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(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 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
$83.6 million on revenues of $1.47 billion
for 1997, compared with pre-tax earnings
of $69.7 million on revenues of $1.33
billion for 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. Prior to the Spin-Off Date, the
Chicago Title Board will declare and pay
to Alleghany as a dividend a non-interest
bearing promissory note in the principal
amount of $7.5 million and due 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 2, 1998, Alleghany beneficially owned approximately 7.43
million shares, or 4.8 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.
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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>
(In 000s) As of and for the years ended December 31,
---------------------------------------------------------------
Operating results data: 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Title, escrow, trust and other revenue $1,411,496 1,278,590 1,082,008 1,283,970 1,359,955
Investment income 52,266 47,658 46,661 44,913 49,290
Net realized investment gains (losses) 3,684 1,436 3,697 (5,447) 7,058
---------- ---------- ---------- ---------- ----------
Total revenues 1,467,446 1,327,684 1,132,366 1,323,436 1,416,303
Expenses:
Salaries and other employee benefits 454,648 411,815 344,767 368,097 393,418
Commissions paid to agents 526,324 484,351 420,555 549,990 545,552
Provision for title losses 102,324 83,023 81,385 94,845 121,865
Interest expense 4,644 5,566 6,456 6,859 9,572
Other operating and administrative expenses 295,903 273,236 242,380 244,655 263,057
---------- ---------- ---------- ---------- ----------
Total expenses 1,383,843 1,257,991 1,095,543 1,264,446 1,333,464
---------- ---------- ---------- ---------- ----------
Operating income from continuing operations
before income taxes 83,603 69,693 36,823 58,990 82,839
Income taxes 27,894 23,115 11,889 18,854 26,329
---------- ---------- ---------- ---------- ----------
Net income from continuing operations $ 55,709 46,578 24,934 40,136 56,510
========== ========== ========== ========== ==========
Balance sheet data:
Total assets $1,702,207 1,482,697 1,447,351 1,389,700 1,500,390
Notes payable and other obligations 32,443 43,282 55,043 64,441 74,966
</TABLE>
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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
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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."
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
The Spin-Off is conditioned on Alleghany receiving the Tax Ruling from
the IRS concerning the United States Federal income tax consequences of the
Spin-Off. The Tax Ruling is expected to state 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 is expected to state that the AAM Distribution is
tax-free to Alleghany. Nevertheless, the Tax Ruling will be 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
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<PAGE> 19
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
Chicago Title Common Stock is expected to be listed 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 (the "Securities Act"), and the
sale of a substantial number of shares of Chicago Title Common Stock after the
Spin-Off could
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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
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<PAGE> 21
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.
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
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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 367,773 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 on or about April
__, 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 22,504,990 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 March 2, 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Spin-Off is conditioned upon Alleghany receiving 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.
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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 Chicago Title 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 will be 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
Chicago Title will seek to list Chicago Title Common Stock on the NYSE, we
cannot predict, estimate or
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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
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 "___."
Alleghany Stock will continue to trade on a regular-way basis and may also
trade on a when-distributed basis, reflecting an assumed post-Spin-Off value for
Alleghany Stock. Alleghany Stock when-distributed trading, if available, could
last from April __, 1998 through the Spin-Off Date. Chicago Title and Alleghany
understand that if Alleghany Stock when-distributed trading is not available,
the NYSE will require that shares of Alleghany Stock that are sold or purchased
from the period beginning on April __, 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:
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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 have been received and 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.
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
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<PAGE> 26
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 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 conduct of, certain businesses of CT&T.
See
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"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.
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 other
terms as are currently applicable to CT&T for such space.
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.
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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>
(In 000s) As of and for the years ended December 31,
---------------------------------------------------------------
Operating results data: 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Title, escrow, trust and other revenue $1,411,496 1,278,590 1,082,008 1,283,970 1,359,955
Investment income 52,266 47,658 46,661 44,913 49,290
Net realized investment gains (losses) 3,684 1,436 3,697 (5,447) 7,058
---------- ---------- ---------- ---------- ----------
Total revenues 1,467,446 1,327,684 1,132,366 1,323,436 1,416,303
Expenses:
Salaries and other employee benefits 454,648 411,815 344,767 368,097 393,418
Commissions paid to agents 526,324 484,351 420,555 549,990 545,552
Provision for title losses 102,324 83,023 81,385 94,845 121,865
Interest expense 4,644 5,566 6,456 6,859 9,572
Other operating and administrative expenses 295,903 273,236 242,380 244,655 263,057
---------- ---------- ---------- ---------- ----------
Total expenses 1,383,843 1,257,991 1,095,543 1,264,446 1,333,464
---------- ---------- ---------- ---------- ----------
Operating income from continuing operations
before income taxes 83,603 69,693 36,823 58,990 82,839
Income taxes 27,894 23,115 11,889 18,854 26,329
---------- ---------- ---------- ---------- ----------
Net income from continuing operations $ 55,709 46,578 24,934 40,136 56,510
========== ========== ========== ========== ==========
Balance sheet data:
Total assets $1,702,207 1,482,697 1,447,351 1,389,700 1,500,390
Notes payable and other obligations 32,443 43,282 55,043 64,441 74,966
</TABLE>
25
<PAGE> 29
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.
PRO FORMA RESULTS OF OPERATIONS
During 1997, 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 pro forma consolidated
results of operations would be reflective of the historical based results.
For purposes of presenting pro forma earnings per share, it is assumed
that the Spin-Off had taken place on January 1, 1997. The number of shares used
to compute earnings per share is based upon the assumed distribution of
22,121,217 shares using the ratio of three shares of Chicago Title Common Stock
for every share of Alleghany Stock and taking into account an estimated 367,773
shares of restricted Chicago Title Common Stock to be issued to employees
immediately prior to the Spin-Off and an additional 16,000 shares which will be
issued to the non-employee directors of Chicago Title immediately after the
Spin-Off.
Pro forma earnings per share for the year ended December 31, 1997 were
$2.48 per share based upon 22,504,990 shares outstanding for the period as
described above.
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 December 31, 1997. 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 December 31, 1997. 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 December 31, 1997.
26
<PAGE> 30
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
December 31, 1997
(In 000s)
<TABLE>
<CAPTION>
===================================================================================================
Assets Historical Adjustments Pro Forma
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash on hand and in banks $ 21,219 -- 21,219
Cash pledged to secure trust and escrow deposits 100,207 -- 100,207
Total marketable securities 1,066,578 -- 1,066,578
Receivables 62,558 -- 62,558
Deferred Federal income taxes 75,997 -- 75,997
Fixed assets, net 97,222 -- 97,222
Title plants 150,546 -- 150,546
Net assets from discontinued operations 18,097 (18,097) (1) --
Other assets 109,783 -- 109,783
- ---------------------------------------------------------------------------------------------------
Total assets $1,702,207 (18,097) 1,684,110
===================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------
Accounts payable $ 105,692 -- 105,692
Accrued expenses and other liabilities 128,638 15,000 (2) 143,638
Notes payable and other obligations 32,443 -- 32,443
Reserve for title losses 564,334 -- 564,334
Trust and escrow deposits secured by pledged assets 467,553 -- 467,553
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,298,660 15,000 1,313,660
- ---------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock -- -- --
Common stock 13,676 8,829 (3) 22,505
Additional paid-in capital 117,381 (8,829) (3) 108,552
Retained earnings 261,425 (33,097)(1)(2) 228,328
Unrealized appreciation of marketable
securities, net of deferred taxes 11,065 -- 11,065
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 403,547 (33,097) 370,450
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,702,207 (18,097) 1,684,110
===================================================================================================
</TABLE>
1 Net assets of Alleghany Asset Management to be distributed to Alleghany.
2 To record direct costs associated with the Spin-Off, including
professional fees, printing costs, listing fees and executive compensation
(tax effected).
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 December 31, 1997. The number of shares used to compute
stockholders' equity-common stock is based upon the assumed distribution
of 22,121,217 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 383,773 shares of Chicago Title Common Stock to senior
management of Chicago Title and its subsidiaries and to the non-employee
directors of Chicago Title.
27
<PAGE> 31
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
Pro Forma Consolidated Capitalization
December 31, 1997
(In 000s, except share data)
<TABLE>
<CAPTION>
=====================================================================================================
Historical Adjustments Pro Forma
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable and other obligations $ 32,443 - 32,443
Stockholders' equity
Preferred stock, no par value, authorized
8,000,000 shares, none issued and outstanding - - -
Common stock, par value $1.00, authorized
66,000,000 shares, 22,504,990 issued and
outstanding shares 13,676 8,829 (1) 22,505
Additional paid in capital 117,381 (8,829)(1) 108,552
Retained earnings 261,425 (33,097)(2)(3) 228,328
Unrealized appreciation of marketable securities,
net of deferred taxes 11,065 - 11,065
- ------------------------------------------------------------------------------------------------------
Total pro forma consolidated capitalization $ 435,990 (33,097) 402,893
=====================================================================================================
</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 December 31, 1997. The number of shares used to compute
stockholders' equity-common stock is based upon the assumed distribution
of 22,121,217 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 383,773 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 direct costs associated with the spin-off, including
professional fees, printing costs, listing fees and executive compensation
(tax effected).
3 Net assets of Alleghany Asset Management to be dividended to Alleghany.
28
<PAGE> 32
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. Prior to the Spin-Off Date, the Chicago Title Board
will declare and pay to Alleghany as a dividend, a non-interest bearing
promissory note in the principal amount of $7.5 million and due on December 31,
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 $0.33 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 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."
29
<PAGE> 33
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
30
<PAGE> 34
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.
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
the Company 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.
31
<PAGE> 35
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 the Company'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, the Company 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, 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.
32
<PAGE> 36
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 the Company's financial
condition and results of operations. Based on current information, Chicago Title
management believes the reserve for losses at December 31, 1997 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
33
<PAGE> 37
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.
The Spin-Off is conditioned on Alleghany receiving the Tax Ruling from
the IRS concerning the United States Federal income tax consequences of the
Spin-Off. The Tax Ruling is expected to state 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 is expected to
state that the AAM Distribution is tax-free to Alleghany. Nevertheless, the Tax
Ruling will be 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 the Company's financial reporting.
Year 2000 Issues
Many computer programs utilized by the Company 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
34
<PAGE> 38
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 the Company's business units on a local basis. Regional managers
report on the status of Year 2000 compliance activities within their area of
responsibility to the Company'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 the
Company'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, the Company's management believes that such costs will not exceed
$5.0 million in total over the years 1998 and 1999.
In addition to the review of internal systems, the Company 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
the Company has important business relationships to resolve their Year 2000
issues could have a significant adverse effect on the Company's operations.
RESULTS OF OPERATIONS
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 the Company'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 favorably impacted by an increase in pre-
35
<PAGE> 39
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.
In 1997, approximately 62% of Chicago Title's direct title revenues were
generated by residential real estate activity, with C&I accounting for the
remainder. Direct title premiums on C&I transactions rose significantly compared
to the prior year in both 1997 and 1996. Premiums on direct residential
refinance transactions grew modestly in 1997 following a substantial rise in
1996. Growth in direct title premiums related to residential purchase
transactions was relatively modest in both 1997 and 1996. Paralleling the rise
in title premium revenue, property information sales and escrow fees increased,
reflecting a higher level of real estate activity. Gross title premiums received
by agents were also positively impacted by healthy economic conditions during
the three-year period.
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 77.8% in 1997, 77.3% in 1996 and 77.0% in 1995. The Company 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:
36
<PAGE> 40
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
---- ---- ----
<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 the
Company's net income performance. In 1997, the level of total salaries and other
employee benefits 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 the Company, 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>
(dollars in thousands) 1997 1996 1995
---- ---- ----
<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 8.0 x 6.7 x 6.1 x
</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 the Company's
long-term debt.
Other Operating and Administrative Expenses. Other operating and
administrative expenses amounted to $295.9 million in 1997, $273.2 million in
1996 and $242.4 million in 1995. These amounts represented increases of 8.3% in
1997 and 12.7% in 1996, while total revenue increased by 10.5% and 17.2% in the
same respective periods. Growth in these expenses was primarily attributable to
increased contract labor and property information costs incurred related to
higher levels of business volume.
37
<PAGE> 41
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations amounted to $255.6 million, $84.1
million and $21.0 million for the fiscal years ended December 31, 1997, 1996 and
1995, respectively. 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 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. In 1998, parent company cash will also be required
to pay non-recurring expenses associated with the Spin-Off, which are estimated
to be approximately $15 million (on an after-tax basis).
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. Prior to the Spin-Off Date, the Chicago Title
Board will declare and pay to Alleghany as a dividend a non-interest bearing
promissory note in the principal amount of $7.5 million and due on December 31,
1998. See "Dividend Policy."
At December 31, 1997, CT&T had outstanding long-term debt of $32.4
million. Of this 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 December 31, 1997, CT&T satisfied all applicable financial
tests imposed by the credit agreement.
38
<PAGE> 42
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 1997 or 1996 and no amounts were
outstanding under such lines as of December 31, 1997.
CT&T is 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.
The Company spent $25.8 million, $28.5 million and $9.2 million for
capital expenditures in the years 1997, 1996 and 1995, respectively. As of
December 31, 1997, there were no existing material commitments for capital
expenditures. Management believes that there are adequate sources of liquidity
for Chicago Title.
39
<PAGE> 43
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:
(In 000s)
<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
====================================================================================================
Three months ended
---------------------------------------------------------
1996 March 31 June 30 Sept 30 Dec 31 Total
- ----------------------------------------------------------------------------------------------------
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>
40
<PAGE> 44
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.
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<PAGE> 45
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 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
42
<PAGE> 46
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.
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
43
<PAGE> 47
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.
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.
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.
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 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.
44
<PAGE> 48
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>
45
<PAGE> 49
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.
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.
46
<PAGE> 50
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 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 December 31, 1997 are
adequate.
47
<PAGE> 51
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 growth in the commercial and industrial
segment and a resurgence in the second half of 1997 in residential resale and
refinancing transactions.
48
<PAGE> 52
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
49
<PAGE> 53
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
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
50
<PAGE> 54
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.
51
<PAGE> 55
MANAGEMENT
DIRECTORS
On the Spin-Off Date, the directors of Chicago Title will consist of the
persons named below.
<TABLE>
<CAPTION>
Principal Occupation or Employment
Name for Past Five Years Age
- ------------------------ --------------------------------------------- -----
<S> <C> <C>
Richard P. Toft......... Chairman of the Board of Directors, Chicago 61
Title, as of 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, 55
LaSalle National 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 66
operating officer, Alleghany. Mr. Burns is a
director of Alleghany and Burlington Northern
Santa Fe Corporation.
Peter H. Dailey......... Chairman, Enniskerry Financial (investments). 67
Robert M. Hart.......... Senior Vice President and General Counsel 53
since 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. 48
Heasley is a director of SunAmerica Inc.
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
Principal Occupation or Employment
Name for Past Five Years Age
- ------------------------ --------------------------------------------- -----
<S> <C> <C>
Allan P. Kirby, Jr...... President, Liberty Square, Inc. 66
(investments); management of family and
personal affairs. Mr. Kirby is a director of
Alleghany.
M. Leanne Lachman....... Managing Director, Schroder Real Estate 55
Associates (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 53
Board and 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 54
Officer, The Levy Organization (real estate,
restaurants, and food service).
Margaret MacKimm........ Former Senior Vice President-Communications 64
of Kraft 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 59
Operations, CTI, from January 1995 until
December 1997; Executive Vice President, CTI,
prior thereto.
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
Principal Occupation or Employment
Name for Past Five Years Age
- ------------------------ --------------------------------------------- -----
<S> <C> <C>
John Rau................ President and Chief Executive Officer, 49
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. 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
54
<PAGE> 58
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 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.
55
<PAGE> 59
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 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.
56
<PAGE> 60
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 October 1997; 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 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; 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.
</TABLE>
57
<PAGE> 61
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
- ------------------- ----- -----------------------------------------
<S> <C> <C>
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.
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>
58
<PAGE> 62
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>
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term 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 1997 $ 140,000 $ 318,941 -- -- $ 117,006 $ 27,722
Abbinante,
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
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<PAGE> 63
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.
(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
60
<PAGE> 64
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.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Performance
Shares, or Estimated Future Payouts
Units Other Period Under Non-Stock
or Until Price-based Plans
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>
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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 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,
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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
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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
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.
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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
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.
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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 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, 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, and (ii) for awards payable in cash, a tax bonus payable with
respect to such stock-based
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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 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.
Notwithstanding the foregoing, with regard to an award made to any participant
under the 1988 Plan, no "change of control" shall be deemed to occur in the
event of occurrence of any transaction described in clause (i), (ii) or (iii)
above where, in connection with such transaction, such participant or any party
acting in concert with such participant substantially increases his or its, as
the case may be, ownership interest in Chicago Title or a successor to Chicago
Title.
Prior to the Spin-Off Date, Chicago Title plans to grant up to an
aggregate of 367,773 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
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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-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 Number of Shares of
Underlying Options to Percent of Total Options Restricted Stock to be
Name and Position be Granted to be Granted(2) Granted
- ------------------------------ --------------------- ------------------------ ----------------------
<S> <C> <C> <C>
John Rau ...................... 112,445(1) 13.0% 112,273(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 ....... 292,445 34.0% 292,273
Employee Group ................ 540,555(2) 62.9% 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.
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(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.
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
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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, 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
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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.
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<PAGE> 75
<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 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
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<PAGE> 76
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 March 20, 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
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. ....... 1,658,230 -- 1,658,230 (2) 7.37
M. Leanne Lachman.......... 1,516 -- 1,516 0.01
</TABLE>
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<PAGE> 77
<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>
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...................... 131,473 -- 131,473 (3) 0.58
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 2,086,032
shares, or 9.3 percent, of the outstanding Chicago Title Common Stock; such
directors and executive officers will have sole voting and investment power
with respect to 2,082,969 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
22,121,217 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
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<PAGE> 78
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 22,504,990 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.
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 March 2, 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
March 2, 1998 and the Record Date.
As of March 2, 1998, approximately 35.1 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
</TABLE>
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<PAGE> 79
<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>
Allan P. Kirby, Jr. ............ 1,657,230 -- 1,657,230(2) 7.4
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 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 635,346 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.
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<PAGE> 80
(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.
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<PAGE> 81
(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 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, no par value (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 22,504,990 shares of Chicago Title Common Stock outstanding held
of record by
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<PAGE> 82
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." 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
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
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<PAGE> 83
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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<PAGE> 84
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
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<PAGE> 85
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 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.
82
<PAGE> 86
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.
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,
83
<PAGE> 87
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
84
<PAGE> 88
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 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.
85
<PAGE> 89
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.
86
<PAGE> 90
CHICAGO TITLE AND TRUST COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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
Shareholders' 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
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.
<PAGE> 91
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
F-2
<PAGE> 92
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In 000s, except share data)
================================================================================
<TABLE>
<CAPTION>
Assets 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==================================================================================================
<CAPTION>
Liabilities and Shareholder's Equity
<S> <C> <C>
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:
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> 93
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
(In 000s)
================================================================================
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------
<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 gains 3,684 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
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 94
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholder's Equity
Years ended December 31, 1997, 1996 and 1995
(In 000s)
================================================================================
<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, 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> 95
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In 000s)
================================================================================
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<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 (11,949) (2,677) (6,236)
Current and deferred Federal income taxes (4,792) 488 10,065
Other assets 6,990 (9,598) (12,986)
Accounts payable and accrued expenses and other liabilities 39,858 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 199,893 37,502 (3,903)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations activities 255,602 84,080 21,031
- ---------------------------------------------------------------------------------------------------------
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
Net sales of other invested assets 2,208 4,739 (1,869)
Net purchases of fixed assets (25,833) (28,502) (9,221)
Net sales of title records and indexes 1,745 3,502 1,122
Purchases of subsidiaries -- (2,264) (15,108)
Cash received from sale of subsidiary -- 4,073 --
Cash of acquired subsidiaries -- 1,700 503
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (224,450) (48,574) 43,812
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to parent (32,105) -- (29,515)
Dividends received from Alleghany Asset Management, Inc. 13,300 3,401 4,202
Repurchase of common stock from parent -- (30,000) --
Principal payments on notes payable and other obligations (10,839) (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 (33,005) (39,066) (35,911)
- ---------------------------------------------------------------------------------------------------------
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> 96
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.
(Continued)
F-7
<PAGE> 97
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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 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.
(Continued)
F-8
<PAGE> 98
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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.
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.
Calculations of Federal income taxes are based on the Company's
consolidated net income.
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.
(Continued)
F-9
<PAGE> 99
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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 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.
(Continued)
F-10
<PAGE> 100
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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.
(Continued)
F-11
<PAGE> 101
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
(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.
(Continued)
F-12
<PAGE> 102
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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>
(Continued)
F-13
<PAGE> 103
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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.
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>
(Continued)
F-14
<PAGE> 104
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
(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.
(Continued)
F-15
<PAGE> 105
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(Continued)
F-16
<PAGE> 106
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
(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 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.
(Continued)
F-17
<PAGE> 107
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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>
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.
(Continued)
F-18
<PAGE> 108
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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>
(Continued)
F-19
<PAGE> 109
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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
===============================================================================
<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
===============================================================================
<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.
(Continued)
F-20
<PAGE> 110
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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>
(Continued)
F-21
<PAGE> 111
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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, respectively. 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.
(Continued)
F-22
<PAGE> 112
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
(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.
Immediately prior to the spin-off (see Note 1), Alleghany and Chicago
Title Corporation will enter into certain agreements to define their
ongoing relationship after the spin-off. The Distribution Agreement 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. In addition, the Distribution
Agreement also provides guidance on liability indemnification and sharing
of spin-off expenses. The Tax Sharing Agreement will allocate certain tax
liabilities between Chicago Title Corporation and Alleghany and allocate
responsibilities with respect to tax returns.
Also immediately prior to the spin-off, certain agreements will be entered
into between Chicago Title Corporation (or the Company) and AAM (or The
Chicago Trust Company) in connection with the transfer of AAM by the
Company to Alleghany. Chicago Title Corporation 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 the Company and its subsidiaries. In addition, the Company and
AAM will enter into an agreement pursuant to which the Company will
continue to furnish various administrative services to AAM.
(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>
(Continued)
F-23
<PAGE> 113
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
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.
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 which total $9,479 and $3,386 at December
31, 1997 and 1996, respectively. 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>
(Continued)
F-24
<PAGE> 114
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In 000s)
================================================================================
(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 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 total amounts of assumed and ceded premiums were
$1,959 and $5,115, $2,160 and $4,579, and $2,012 and $5,872 in 1997, 1996
and 1995, respectively.
(Continued)
F-25
<PAGE> 115
CHICAGO TITLE AND TRUST COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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>
F-26
<PAGE> 116
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
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.
4.1 Specimen Common Stock Certificate, $1.00 par value
per share, of Chicago Title Corporation.+
8.1 Internal Revenue Service Ruling Letter, dated
________ __, 1998.+
10.1 Form of Tax Sharing Agreement to be entered into by
and between Alleghany Corporation and Chicago Title
Corporation.
10.2 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. +
10.3 Form of Chicago Title Corporation 1998 Long-Term
Incentive Plan to be in effect as of the Spin-Off
Date.
10.4 Form of 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 Description of 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 Agreement between Chicago Title Corporation, Chicago
Title and Trust Company and John Rau, dated October 22,
1996, as amended on December 9, 1996 and ________ __,
1998. +
10.15 1995 Plan Award Agreement dated ______ __, 1998
between Chicago Title Corporation and CT&T and John
Rau. +
10.16 1995 Plan Award Agreement dated ________ __, 1998
between Chicago Title Corporation and CT&T and
__________. Agreements between Chicago Title
Corporation and CT&T and each of Thomas H. Hodges,
Michael J. Keller, Peter G. Leemputte, Paul T.
Sands, Jr., Christopher Abbinante and William
Halverson are omitted pursuant to Instruction 2 of
Item 601 of Regulation S-K. +
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.+
21.1 Subsidiaries of Chicago Title Corporation as of the
Spin-Off Date.
- ------------------------------------
+ To be filed by amendment.
<PAGE> 117
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHICAGO TITLE CORPORATION
Date: March 27, 1998 By: /s/ Peter R. Sismondo
---------------------------
Peter R. Sismondo
<PAGE> 118
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
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.
4.1 Specimen Common Stock Certificate, $1.00 par value
per share, of Chicago Title Corporation.+
8.1 Internal Revenue Service Ruling Letter, dated
________ __, 1998.+
10.1 Form of Tax Sharing Agreement to be entered into by
and between Alleghany Corporation and Chicago Title
Corporation.
10.2 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. +
10.3 Form of Chicago Title Corporation 1998 Long-Term
Incentive Plan to be in effect as of the Spin-Off
Date.
10.4 Form of 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 Description of 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 Agreement between Chicago Title Corporation, Chicago
Title and Trust Company and John Rau, dated October 22,
1996, as amended on December 9, 1996 and ________ __,
1998. +
10.15 1995 Plan Award Agreement dated ______ __, 1998
between Chicago Title Corporation and CT&T and John
Rau. +
10.16 1995 Plan Award Agreement dated ________ __, 1998
between Chicago Title Corporation and CT&T and
__________. Agreements between Chicago Title
Corporation and CT&T and each of Thomas H. Hodges,
Michael J. Keller, Peter G. Leemputte, Paul T.
Sands, Jr., Christopher Abbinante and William
Halverson are omitted pursuant to Instruction 2 of
Item 601 of Regulation S-K. +
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.+
21.1 Subsidiaries of Chicago Title Corporation as of the
Spin-Off Date.
- ------------------------------------
+ To be filed by amendment.
<PAGE> 1
Exhibit 2.1
DISTRIBUTION AGREEMENT
DATED AS OF APRIL __, 1998
BY AND BETWEEN
ALLEGHANY CORPORATION
AND
CHICAGO TITLE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.................................................. 2
Section 1.1. Definitions......................................... 2
ARTICLE II THE DISTRIBUTION............................................ 5
Section 2.1. Conditions Precedent to the Distribution............ 5
Section 2.2. The Distribution.................................... 6
ARTICLE III AGREEMENT AS TO LIABILITIES; INSURANCE..................... 6
Section 3.1. Discharge of Liabilities............................ 6
Section 3.2. Insurance........................................... 7
ARTICLE IV INDEMNIFICATION............................................. 7
Section 4.1. Chicago Title Indemnification of the Alleghany Group 7
Section 4.2. Alleghany Indemnification of Chicago Title Group.... 7
Section 4.3. Procedures Regarding Indemnification................ 8
ARTICLE V TAX MATTERS.................................................. 9
Section 5.1. Tax Agreement....................................... 9
ARTICLE VI ACCOUNTING MATTERS.......................................... 9
Section 6.1. Allocation of Prepaid Items and Reserves............ 9
Section 6.2. Accounting Treatment of Assets Transferred and
Liabilities Assumed................................... 9
Section 6.3. Specified Items..................................... 9
ARTICLE VII INFORMATION................................................ 10
Section 7.1. Access to Information............................... 10
Section 7.2. Litigation Cooperation.............................. 10
ARTICLE VIII INTEREST ON PAYMENTS...................................... 10
Section 8.1. Interest on Payments................................ 10
ARTICLE IX MISCELLANEOUS............................................... 10
Section 9.1. Allocation of Costs and Expenses.................... 10
Section 9.2. Disputes............................................ 11
Section 9.3. Notices............................................. 12
Section 9.4. Limitation.......................................... 12
Section 9.5. Entire Agreement; Amendment......................... 12
Section 9.6. Assignment.......................................... 13
Section 9.7. Survival of Agreements and Covenants................ 13
i
<PAGE> 3
Section 9.8. Parties in Interest................................. 13
Section 9.9. Further Assurances and Consents..................... 13
Section 9.10. Severability........................................ 13
Section 9.11. Governing Law....................................... 14
Section 9.12. Counterparts........................................ 14
Section 9.13. Headings............................................ 14
ii
<PAGE> 4
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT (this "Agreement") dated as of April __, 1998
by and between Alleghany Corporation, a Delaware corporation (together with its
successors and permitted assigns, "Alleghany"), and Chicago Title Corporation, a
Delaware corporation (together with its successors and permitted assigns,
"Chicago Title").
WITNESSETH:
WHEREAS, Chicago Title and Trust Company, an Illinois corporation
("CT&T"), is a wholly owned subsidiary of Alleghany; and
WHEREAS, the Board of Directors of Alleghany has determined that it
is in the best interests of Alleghany and the stockholders of Alleghany (i) to
contribute all of the outstanding shares of CT&T Common Stock (as defined
herein) to Chicago Title, (ii) to effect the other transactions referred to in
this Agreement, and (iii) to distribute to the holders of Alleghany Common Stock
(as defined herein) all of the outstanding shares of Chicago Title Common Stock
(as defined herein) owned by Alleghany (which, as of the Distribution Date (as
defined herein) will constitute approximately 98% of the shares of Chicago Title
Common Stock, with the remaining shares of Chicago Title Common Stock to be
awarded, on or about the Distribution Date, as shares of restricted stock to
members of senior management of the Chicago Title Group (as defined herein) and
to non-employee directors of Chicago Title) at the rate of three shares of
Chicago Title Common Stock for each share of Alleghany Common Stock outstanding
as of the Record Date (as defined herein); and
WHEREAS, prior to the date hereof, (i) The Chicago Trust Company, an
Illinois trust company ("TCTC"), has transferred its land trust and release
business to Chicago Title Land Trust Company, an Illinois trust company
("CTLTC") which was formed as a wholly-owned subsidiary of TCTC, and (ii)
subsequent thereto, TCTC has distributed (the "CTLTC Distribution") all of the
outstanding common stock, par value $_____ per share, of CTLTC to Alleghany
Asset Management, Inc., a Delaware corporation ("AAM"), and (iii) subsequent
thereto, CT&T has distributed (the "AAM Distribution") all of the outstanding
common stock, par value $1.00 per share, of AAM to Alleghany, and (iv)
subsequent thereto, CT&T has distributed all of the outstanding Non-Voting
Preferred Stock, par value $12.50 per share, of TCTC to Alleghany, so that as of
the date hereof CTLTC is a member of the Chicago Title Group (as defined herein)
and AAM and its subsidiaries TCTC, Chicago Deferred Exchange Corporation, Montag
& Caldwell, Inc. and Security Trust Company are members of the Alleghany Group
(as defined herein); and
WHEREAS, the parties have determined that it is necessary and
desirable to set forth in this Agreement the principal corporate transactions
required to effect the
<PAGE> 5
Distribution and to set forth other agreements that will govern certain other
matters following such Distribution; and
WHEREAS, in connection with the Distribution, Alleghany and Chicago
Title intend to enter into the Tax Agreement (as such term is defined herein).
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, the parties hereto hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. As used herein, the following terms have
the following meaning:
"AAM Agreements" means the agreements entered into between AAM
and/or subsidiaries of AAM, on the one hand, and Chicago Title and/or
subsidiaries of Chicago Title, on the other hand, in connection with the AAM
Distribution and related transactions including, without limitation, the
Investment Management Agreements, the Transitional Services Agreement and the
Sublease.
"Affiliate" has the meaning set forth in Rule 12b-2 promulgated
under the Exchange Act.
"Alleghany Business" means the business now or formerly conducted by
Alleghany and its present and former subsidiaries, but excluding (i) the Chicago
Title Business and (ii) the land trust and release business conducted by TCTC
prior to the date of the CTLTC Distribution and currently conducted by CTLTC.
"Alleghany Common Stock" means the outstanding shares of common
stock, par value $1.00 per share, of Alleghany.
"Alleghany Group" means (i) Alleghany and its subsidiaries,
excluding any member of the Chicago Title Group, and (ii) AAM and its
subsidiaries.
"Alleghany Indemnitees" is defined in Section 4.1.
"Alleghany Liabilities" means (i) Liabilities of Alleghany under
this Agreement and (ii) Liabilities, other than Chicago Title Liabilities,
incurred in connection with the operation of the Alleghany Business, whether
arising before, on or after the Distribution Date.
"Assets" means all properties, rights, contracts, leases and claims,
of every kind and description, wherever located, whether tangible or intangible,
and whether real, personal or mixed.
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<PAGE> 6
"Chicago Title Business" means the business now or formerly
conducted by Chicago Title and its present or former subsidiaries or any other
member of the Chicago Title Group, but excluding the business now or formerly
conducted by AAM and its present and former subsidiaries, except that the
Chicago Title Business shall include the land trust and release business
conducted by TCTC prior to the date of the CTLTC Distribution and presently
conducted by CTLTC.
"Chicago Title By-laws" means the By-laws of Chicago Title in the
form filed as an exhibit to the Form 10 at the time it becomes effective.
"Chicago Title Certificate" means the certificate of incorporation
of Chicago Title in the form filed as an exhibit to the Form 10 at the time it
becomes effective.
"Chicago Title Common Stock" means the outstanding shares of common
stock, par value $1.00 per share, of Chicago Title.
"Chicago Title Group" means Chicago Title, CT&T, and the
subsidiaries of CT&T, but excluding AAM and its subsidiaries.
"Chicago Title Indemnitees" is defined in Section 4.2.
"Chicago Title Liabilities" means (i) Liabilities of Chicago Title
under this Agreement or any of the AAM Agreements, (ii) Liabilities of any
member of the Chicago Title Group, including all Liabilities incurred in
connection with the conduct or operation of any Chicago Title Business or the
ownership or use of any of the Assets related to any Chicago Title Business,
whether arising before, on or after the Distribution Date, (iii) Liabilities
arising under or in connection with the Form 10, and (iv) Liabilities relating
to a Sold Business or arising out of the sale thereof.
"Claim" is defined in Section 4.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"CT&T Common Stock" means the outstanding shares of common stock,
par value $6-2/3 per share, of CT&T.
"Distribution" means the distribution on the Distribution Date of
all outstanding shares of Chicago Title Common Stock owned by Alleghany to the
holders of Alleghany Common Stock on the Record Date.
"Distribution Agent" means Harris Trust and Savings Bank in its
capacity as distribution agent.
"Distribution Date" means the date on which the Distribution shall
be effective, as determined by the Board of Directors of Alleghany.
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"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Form 10" means the registration statement on Form 10 filed by
Chicago Title with the Commission to effect the registration of the Chicago
Title Common Stock pursuant to the Exchange Act, as such registration statement
may be amended from time to time.
"Governmental Authority" means any government or agency, bureau,
board, commission, court, department, official, or other instrumentality of the
United States or any state or political subdivision of the United States.
"Group" means either the Alleghany Group or the Chicago Title Group,
as the context requires.
"Indemnitor" is defined in Section 4.3.
"Information Statement" means the information statement to be sent
to each holder of Alleghany Common Stock in connection with the Distribution.
"Law" means all laws, statutes and ordinances and all regulations,
rules and other pronouncements of Governmental Authorities having the effect of
law of the United States or any state or political subdivision of the United
States.
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under this
Agreement, under any law, rule, regulation, action, order or consent decree of
any governmental entity or under any award of any arbitrator of any kind, and
those arising under any contract, commitment or undertaking.
"Lincoln National Indemnity" means all rights of Alleghany and CT&T
and Chicago Title Insurance Company, and all of the corporations, associations
or other business organizations which either of them controls, by ownership, a
management contract or otherwise, to be indemnified by Lincoln National
Corporation, pursuant to the Stock Purchase Agreement by and among Alleghany,
Alleghany Financial Corporation, Alleghany Capital Corporation and Lincoln
National Corporation, dated as of June 18, 1985.
"Record Date" means such date as is designated by Alleghany's Board
of Directors as the record date for determining the stockholders of Alleghany
entitled to receive the Distribution.
"Securities Act" means the Securities Act of 1933, as amended.
"Sold Business" means any Chicago Title Business which has been
sold, terminated or disposed of, whether or not for consideration, on or prior
to the date hereof.
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"Tax" has the meaning set forth in the Tax Agreement.
"Tax Agreement" means the Tax Sharing Agreement entered into on or
before the Distribution Date by and among Alleghany and Chicago Title, as
amended from time to time.
ARTICLE II
THE DISTRIBUTION
Section 2.1. Conditions Precedent to the Distribution. The
Distribution shall be subject to, in the sole discretion of Alleghany, the
fulfillment or waiver of each of the following conditions:
(a) Alleghany's Board of Directors, in its discretion, shall have
declared the Distribution, established the Record Date and the
Distribution Date and any appropriate procedures in connection with the
Distribution to the extent not provided for herein;
(b) any necessary regulatory approvals shall have been received;
(c) the Form 10 shall have become effective under the Exchange Act
and no stop order shall have been entered, and no proceeding for that
purpose shall have been initiated or threatened by the Commission with
respect thereto;
(d) 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 transactions
contemplated by this Agreement shall have been received or become
effective;
(e) Chicago Title's Board of Directors, as named in the Form 10,
shall have been elected by Alleghany, as sole stockholder of Chicago
Title, and the Chicago Title Certificate and Chicago Title By-laws shall
be in effect;
(f) the Chicago Title Common Stock shall have been approved for
listing on the New York Stock Exchange, subject to official notice of
issuance;
(g) the Tax Agreement shall have been executed and delivered by the
parties thereto and shall be in full force and effect;
(h) Alleghany shall have received a ruling from the Internal Revenue
Service (in form and substance satisfactory to Alleghany) to the effect
that, by reason of the applicability of Section 355 of the Code, the AAM
Distribution will not be taxable to Alleghany and the Distribution will
not be taxable to the stockholders of Alleghany;
(i) the CTLTC Distribution shall have been effected and, subsequent
thereto, the AAM Distribution shall have been effected and, subsequent
thereto,
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the distribution by CT&T of all of the Non-Voting Preferred Stock, par
value $12.50 per share, of TCTC to Alleghany shall have been effected;
(j) consummation of the Distribution and the other transactions
contemplated hereby shall not be prohibited by Law and no Governmental
Authority of competent jurisdiction shall have enacted, issued,
promulgated or entered, or shall have threatened to enact, issue,
promulgate or enter, any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or
permanent) which materially restricts, prevents or prohibits consummation
of the Distribution or any transaction contemplated by this Agreement, it
being understood and agreed that the parties hereto shall use all
reasonable efforts to cause any such decree, judgment, injunction or other
order to be vacated or lifted as promptly as possible; and
(k) Alleghany and Chicago Title and the members of their respective
Groups shall have obtained all third-party consents and approvals, the
failure of which to obtain would, in the sole determination of Alleghany's
Board of Directors, have a material adverse effect on the Alleghany Group
or the Chicago Title Group, each taken as a whole, and such consents and
approvals shall be in full force and effect.
Section 2.2. The Distribution. On or before the Distribution Date,
subject to satisfaction or waiver of the conditions set forth in this Agreement,
Alleghany shall deliver to the Distribution Agent a certificate or certificates
representing all of the then outstanding shares of Chicago Title Common Stock
owned by Alleghany (which, as of the Distribution Date, will constitute
approximately 98% of the shares of Chicago Title Common Stock, with the
remaining shares of Chicago Title Common Stock to be awarded, on or about the
Distribution Date, to members of senior management of the Chicago Title Group
and to non-employee directors of Chicago Title), endorsed in blank, and shall
instruct the Distribution Agent to distribute to each holder of record of
Alleghany Common Stock on the Record Date a certificate or certificates
representing three shares of Chicago Title Common Stock for each share of
Alleghany Common Stock so held. Chicago Title agrees to provide all certificates
for shares of Chicago Title Common Stock that the Distribution Agent shall
require in order to effect the Distribution.
ARTICLE III
AGREEMENT AS TO LIABILITIES; INSURANCE
Section 3.1. Discharge of Liabilities.
(a) Alleghany and Chicago Title agree that on and after the
Distribution Date each will, and will cause each member of its respective
Group to, use its best efforts to cause any such member who, if the
Distribution had not occurred, would have been entitled to payment
pursuant to the Lincoln National Indemnity in respect of any Liabilities,
whether arising before, on or after the Distribution
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Date, to receive payment in respect of any such Liabilities pursuant to
the Lincoln National Indemnity directly from Lincoln National Corporation
(or, if necessary, indirectly from any member of either Group which is
directly entitled to the benefit of the Lincoln National Indemnity).
Alleghany and Chicago Title each further agree that after the Distribution
Date, in the event any payment pursuant to the Lincoln National Indemnity
is received by any member of its respective Group in respect of a
Liability of the other Group, it will, and will cause any involved member
of its respective Group to, pay such amount promptly to such member of the
other Group as may be designated by Alleghany or Chicago Title, as the
case may be. It is the intention of the parties that payments pursuant to
the Lincoln National Indemnity in respect of matters for which
reimbursement was sought prior to the Distribution Date shall be for the
benefit of Alleghany, and that payments pursuant to the Lincoln National
Indemnity in respect of matters for which reimbursement is sought from and
after the Distribution Date shall be for the benefit of Chicago Title.
(b) From and after the Distribution Date, each party shall promptly
transfer or cause the members of its Group promptly to transfer to the
other party or the appropriate member of the other party's Group, from
time to time, any property received that is an Asset of the other party or
a member of its Group.
Section 3.2. Insurance. Prior to the Distribution Date, Alleghany
and Chicago Title will cooperate in obtaining insurance (or binders therefor)
providing coverage to the Chicago Title Group similar to the insurance coverage
in place prior to the Distribution Date; provided, however that all expense
involved in procuring such insurance coverage shall constitute Chicago Title
Liabilities.
ARTICLE IV
INDEMNIFICATION
Section 4.1. Chicago Title Indemnification of the Alleghany Group.
On and after the Distribution Date, Chicago Title shall indemnify Alleghany and
its Affiliates (collectively, the "Alleghany Indemnitees") from and against any
and all demands, claims, actions, assessments, losses, damages, liabilities,
reasonable costs and expenses, including, without limitation, interest,
penalties and attorneys' fees and expenses, judgments and, subject to Section
4.3, amounts paid in settlement of or in connection with any threatened, pending
or contemplated claim, action, suit or proceeding, whether criminal, civil,
administrative or investigative, or investigation (the "Claims"), asserted
against, resulting to, imposed upon or incurred by Alleghany Indemnitees,
directly or indirectly, arising out of or due to the failure of Chicago Title,
or any member of the Chicago Title Group, to pay, perform or otherwise discharge
any of the Chicago Title Liabilities.
Section 4.2. Alleghany Indemnification of Chicago Title Group. On
and after the Distribution Date, Alleghany shall indemnify Chicago Title and its
Affiliates (collectively, the "Chicago Title Indemnitees") from and against any
and all Claims
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asserted against, resulting to, imposed upon or incurred by Chicago Title
Indemnitees, directly or indirectly, arising out of or due to the failure of
Alleghany, or any member of the Alleghany Group, to pay, perform or otherwise
discharge any of the Alleghany Liabilities.
Section 4.3. Procedures Regarding Indemnification.
(a) If Alleghany or Chicago Title has actual knowledge that any
Indemnitee has suffered or incurred any Claim, Alleghany or Chicago Title
shall so notify the other promptly in writing describing such Claim, the
basis for its belief that it is entitled to indemnification and the amount
for which the Indemnitee reasonably believes it is entitled to be
indemnified. If any action at law or suit in equity is instituted by or
against a third party with respect to which any Indemnitee intends to
claim any liability or expense as a Claim hereunder, any such Indemnitee
shall promptly notify the indemnifying party of such action or suit. An
Indemnitee providing such notice of the commencement of any action or
proceeding will permit the party responsible for indemnification thereof
(the "Indemnitor") to assume the defense of such action. Failure by
Indemnitor to notify Indemnitee of its election to defend any such action
within a reasonable time, but in no event more than 30 days after written
notice thereof shall have been given to Indemnitor, shall be deemed a
waiver by Indemnitor of its right to defend such action.
(b) If Indemnitor assumes the defense of any such Claim or
litigation resulting therefrom, the obligations of Indemnitor as to such
Claim shall be limited to taking all steps necessary in the defense or
settlement of such Claim or litigation resulting therefrom and to holding
Indemnitee harmless from and against any and all losses, damages and
liabilities caused by or arising out of any settlement approved by
Indemnitor or any judgment in connection with such Claim or litigation
resulting therefrom. Indemnitee may participate, at its expense, in the
defense of such Claim or litigation provided that Indemnitor shall direct
and control the defense of such Claim or litigation. Indemnitor shall not,
in the defense of such Claim or any litigation resulting therefrom,
consent to entry of any judgment or enter into any settlement other than a
judgment or settlement involving only the payment of money, except with
the written consent of Indemnitee, which consent shall not be unreasonably
withheld.
(c) If Indemnitor shall not assume the defense of any such Claim or
litigation resulting therefrom, Indemnitee may defend against such Claim
or litigation in such manner as it may deem appropriate, provided that
Indemnitee shall not settle such Claim or litigation without providing
notice and a description of the proposed settlement to Indemnitor. If
Indemnitee shall not receive from Indemnitor within ten days of the date
of notice of such proposed settlement a notice that Indemnitor reasonably
objects to such proposed settlement accompanied by an acknowledgment by
Indemnitor that the Claim or litigation which is subject of the proposed
settlement is subject to Indemnification pursuant to the provisions of
this Article IV, Indemnitee shall be free to settle such Claim
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or litigation. In the case of any such settlement, Indemnitor shall
promptly reimburse Indemnitee for the amount of all reasonable expenses,
legal or otherwise, incurred by Indemnitee in connection with the defense
against or settlement of such Claim or litigation. If no settlement of
such Claim or litigation is made, Indemnitor shall promptly reimburse
Indemnitee for the amount of any final judgment rendered with respect to
such Claim or in such litigation and for the amount of all expenses, legal
or otherwise, incurred by Indemnitee in the defense against such Claim or
litigation, provided that Indemnitee has contested any such Claim or
litigation in good faith.
(d) For purposes hereof, a judgment or decree of a court shall be
deemed final when such judgment or decree may be enforced against the
party bound thereby.
ARTICLE V
TAX MATTERS
Section 5.1. Tax Agreement. All matters relating to Taxes shall be
governed exclusively by the Tax Agreement. In the event of any inconsistency
between the Tax Agreement and this Agreement, the Tax Agreement shall govern.
ARTICLE VI
ACCOUNTING MATTERS
Section 6.1. Allocation of Prepaid Items and Reserves. All prepaid
items and reserves that have been maintained by Alleghany on a consolidated
basis but that relate in part to Assets or Liabilities of the Chicago Title
Group shall be allocated between Alleghany and Chicago Title in such reasonable
manner as they shall mutually agree.
Section 6.2. Accounting Treatment of Assets Transferred and
Liabilities Assumed. Any transfers of Assets of the Alleghany Group to the
Chicago Title Group pursuant to this Agreement shall constitute contributions by
Alleghany to the capital of Chicago Title. Any transfers of Assets of the
Chicago Title Group to the Alleghany Group, and any assumption by the Chicago
Title Group of Liabilities of the Alleghany Group pursuant to this Agreement,
net of Assets received, shall be treated as a distribution by Chicago Title to
Alleghany.
Section 6.3. Specified Items. The Assets, Liabilities and reserves
identified on Exhibit A hereto shall be allocated between Alleghany and Chicago
Title in the manner described in Exhibit A.
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ARTICLE VII
INFORMATION
Section 7.1. Access to Information. From and after the Distribution
Date, Alleghany and Chicago Title each shall afford the other (including each
party's accountants, counsel and other designated representatives) reasonable
access (including using reasonable efforts to give access to persons or firms
possessing information) and duplicating rights during normal business hours to
all records, books, contracts, instruments, computer data and other data and
information in its possession relating to its business and affairs, insofar as
such access is reasonably required including, without limitation, for audit,
accounting and litigation purposes.
Section 7.2. Litigation Cooperation. Alleghany and Chicago Title
shall each use reasonable efforts to make available to the other, upon written
request, its officers, directors, employees and agents as witnesses to the
extent that such persons may reasonably be required in connection with any
legal, administrative or other proceedings arising out of the business of the
other prior to the Distribution Date in which the requesting party may from time
to time be involved. In the event that either Alleghany or Chicago Title
provides witnesses to the other under this Article VII, the party providing such
witnesses shall be entitled to reimbursement from the recipient for all
reasonably incurred out-of-pocket costs and expenses, but not including internal
time charges.
ARTICLE VIII
INTEREST ON PAYMENTS
Section 8.1. Interest on Payments. Except as otherwise expressly
provided in this Agreement, all payments by one party to the other under this
Agreement shall be paid, by wire transfer of immediately available funds to an
account in the United States designated by the recipient, within 30 days after
receipt of an invoice or other written request for payment setting forth the
specific amount due and a description of the basis therefor in reasonable
detail. Any amount remaining unpaid beyond its due date, including disputed
amounts that are ultimately determined to be payable, shall bear interest at a
floating rate of interest equal to the prime commercial lending rate publicly
announced by The Chase Manhattan Bank or any successor thereto at its principal
office (or any alternative rate substituted therefor by such Bank).
ARTICLE IX
MISCELLANEOUS
Section 9.1. Allocation of Costs and Expenses. Except as otherwise
set forth in this Agreement or the Tax Agreement, Chicago Title shall pay for
all fees, costs and expenses incurred in connection with the Distribution and
the consummation of the transactions contemplated by this Agreement, including,
but not limited to, any and all
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fees, costs and expenses related to (i) the preparation, printing and filing of
the Form 10, including all fees and expenses of complying with applicable
federal and state securities laws and insurance laws, (ii) the listing of the
Chicago Title Common Stock on the New York Stock Exchange, (iii) the preparation
and negotiation of all of the documentation related to all of the transactions
contemplated by this Agreement, (iv) the preparation, printing and mailing of
the Information Statement, and (v) the fees, costs and expenses of counsel
associated with the foregoing; provided, however, that Alleghany shall pay for
(i) all of the fees, costs and expenses incurred in connection with the
preparation and filing of the Ruling Request (as defined in the Tax Agreement),
including all fees, costs and expenses of counsel associated with the Ruling
Request, (ii) the fees, costs and expenses of counsel for matters related to the
Distribution which were invoiced to Alleghany on or prior to January 31, 1998
for time charges incurred prior to January 1, 1998, and (iii) the fees, costs
and expenses payable to Merrill Lynch & Co. pursuant to its engagement as
financial advisor to Alleghany in connection with the Distribution.
Section 9.2. Disputes.
(a) Resolution of any and all disputes arising from or in connection
with this Agreement, whether based on contract, tort, statute or
otherwise, including, but not limited to, disputes in connection with
claims by third parties (collectively, "Disputes"), shall be subject to
the provisions of this Section 9.2; provided, however, that a party may,
without prejudice to the provisions of this Section 9.2, file a complaint
for statute of limitations reasons, or to seek a preliminary injunction or
other provisional relief, if in its sole judgment such action is necessary
to avoid irreparable damage or to preserve the status quo. Despite such
action the parties shall continue to participate in good faith in the
procedures specified in this Section 9.2. All applicable statutes of
limitation and defenses based upon the passage of time shall be tolled
while the procedures set forth in this Section 9.2 are pending. The
parties will take such action, if any, as is required to effectuate such
tolling.
(b) Any party may give another party written notice of any Dispute
not resolved in the normal course of business. Such notice shall include a
statement of the position of the party giving such notice and a summary of
arguments supporting that position. The parties shall thereupon attempt in
good faith to resolve any Dispute promptly by negotiation between the
Chief Executive Officers of Alleghany and Chicago Title, who shall meet at
a mutually acceptable time and place, within 60 days after the date of
delivery of the written notice, and thereafter as often as they reasonably
deem necessary, to attempt to resolve the Dispute. All reasonable requests
for information made by one party to the other will be honored.
(c) If the Dispute has not been resolved by negotiation within 90
days of delivery of the first notice, or if the Chief Executive Officers
of Alleghany and Chicago Title have failed to meet within 60 days after
the date of delivery of the written notice, the dispute shall be settled
by arbitration in accordance with the then current Center for Public
Resources/Legal Project Non-Administered
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Arbitration Rules by a sole arbitrator. The arbitration shall be governed
by the United States Arbitration Act, 9 U.S.C.Sections 1-16, and
judgment upon the award rendered by the arbitrator may be entered any
court having jurisdiction thereof. The arbitrator is not empowered to
award damages in excess of compensatory damages and each party hereby
irrevocably waives any right to recover such damages with respect to any
Dispute resolved by arbitration.
Section 9.3. Notices. All notices or other communications required
or permitted under this Agreement shall be in writing and sufficient if sent by
registered or certified mail, postage prepaid, addressed as provided below; or
delivered personally, by private courier or fax, and followed by such mailing:
If to Alleghany, to
Alleghany Corporation
375 Park Avenue
New York, New York 10152
Telecopy: (212) 759-3295
Attention: Robert M. Hart, Esq.
Senior Vice President, General Counsel and Secretary
If to Chicago Title, to
Chicago Title Corporation
171 North Clark Street
Chicago, Illinois 60601
Telecopy: (312) 223-5912
Attention: Paul T. Sands, Jr., Esq.
Executive Vice President, General Counsel and
Secretary
(a) Either party may change the person and address to which notices
or other communications are to be sent to it by giving written notice of
any such change in the manner provided herein.
Section 9.4. Limitation. From and after the Distribution Date,
Alleghany shall be under no obligation, for any purpose whatsoever, to deliver
shares of Alleghany Common Stock to any member of the Chicago Title Group or in
connection with any employee plan or executive compensation plan maintained by
any member of the Chicago Title Group, whether before or after the Distribution
Date.
Section 9.5. Entire Agreement; Amendment. This Agreement, together
with the other agreements set forth on Exhibit B hereto and the exhibits and
other documents delivered pursuant hereto, sets forth the entire agreement and
understanding of the parties hereto in respect of the transactions contemplated
hereby, and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof. No party hereto has relied upon any
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oral or written statement, representation, warranty, covenant, condition,
understanding or agreement made by any other party or any representative, agent
or employee thereof, except for those expressly set forth in this Agreement or
in the exhibits or other documents delivered pursuant hereto. This Agreement may
be amended, modified, superseded or supplemented only by an instrument in
writing executed and delivered by Alleghany and Chicago Title. Nothing herein is
intended to diminish any of the rights or obligations of any of the parties to
the Tax Agreement or to any of the AAM Agreements.
Section 9.6. Assignment. This Agreement shall inure to the benefit
of, and be binding upon, the respective successors, heirs, executors,
administrators, legal representatives and permitted assigns of the parties
hereto; provided, however, that no assignment of any rights or delegation of any
obligations provided for herein shall be made by any party hereto without the
express prior written consent of the other party, which consent shall not be
unreasonably withheld.
Section 9.7. Survival of Agreements and Covenants. Except as
otherwise expressly provided herein, all agreements and covenants of the parties
hereto which are contained in this Agreement, together with the exhibits and
other documents delivered pursuant hereto, shall survive the Distribution and
remain operative and in full force and effect, regardless of any investigation
heretofore or hereafter made by or on behalf of any of the parties hereto.
Section 9.8. Parties in Interest. Neither of the parties hereto may
assign its rights or delegate any of its duties under this Agreement without the
prior written consent of each other party. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
Section 9.9. Further Assurances and Consents. In addition to the
actions specifically provided for elsewhere in this Agreement, each of the
parties hereto will use its reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as any other party
may reasonably request in order to effectuate the purposes of this Agreement and
to carry out the terms hereof and (ii) take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third party from whom such consents, approvals and amendments are requested or
to take any action or omit to take any action if the taking of or the omission
to take such action would be unreasonably burdensome to the party or its Group
or the business thereof.
Section 9.10. Severability. In the event that any provision hereof
is prohibited or unenforceable in any jurisdiction, such provision shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without
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invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 9.11. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
Section 9.12. Counterparts. This Agreement may be executed in any
number of separate counterparts, each of which shall be deemed to be an
original, but which together shall constitute one and the same instrument.
Section 9.13. Headings. The section headings contained in this
Agreement are inserted for convenience of reference only and shall not affect
the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, each party hereto has duly executed this
Agreement, or has caused this Agreement to be duly executed, as of the date
first above written.
ALLEGHANY CORPORATION
By _________________________________
Name:
Title:
CHICAGO TITLE CORPORATION
By _________________________________
Name:
Title:
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<PAGE> 1
Exhibit 3.1
================================================================================
CERTIFICATE OF
INCORPORATION
OF
CHICAGO TITLE CORPORATION
--------------
DELAWARE
================================================================================
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
CHICAGO TITLE CORPORATION
FIRST: The name of the Corporation is Chicago Title Corporation.
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation shall be to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 74,000,000 of which 8,000,000
shares shall be Preferred Stock of the par value of $1.00 per share and
66,000,000 shares shall be Common Stock of the par value of $1.00 per share.
A. Preferred Stock. The Board of Directors is expressly authorized
to provide for the issue of all or any shares of the Preferred Stock, in
one or more series, and to fix for each such series such voting powers,
full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereon, as shall be stated
and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issue of such series (a "Preferred Stock
Designation") and as may be permitted by the General Corporation Law of
the State of Delaware. The number of authorized shares of Preferred Stock
may be increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of the holders of at least 75
percent of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock"), voting together as a single
class, without a separate vote of the holders of the Preferred Stock, or
any series thereof, unless a vote of any such holders is required pursuant
to any Preferred Stock Designation.
B. Common Stock. Except as otherwise required by law or as otherwise
provided in any Preferred Stock Designation, the holders of the Common
Stock shall exclusively possess all voting power, and each share of Common
Stock shall have one vote.
FIFTH: A. Number, election and terms of directors. Subject to the rights
of the holders of any series of Preferred Stock to elect additional directors
under specified circumstances, the number of directors shall be fixed from time
to time exclusively by the Board of Directors pursuant to a resolution adopted
by the vote
<PAGE> 3
of in excess of three-quarters (75%) of the Whole Board (as defined in
Article EIGHTH). The directors, other than those who may be elected by the
holders of any series of Preferred Stock under specified circumstances,
shall be divided, with respect to the time for which they severally hold
office, into three classes which shall be as nearly equal as practicable,
with the term of office of the first class to expire at the 1999 annual
meeting of stockholders, the term of office of the second class to expire
at the 2000 annual meeting of stockholders and the term of office of the
third class to expire at the 2001 annual meeting of stockholders, with
each director to hold office until his or her successor shall have been
duly elected and qualified. At each annual meeting of stockholders,
commencing with the 1999 annual meeting, (i) directors elected to succeed
those directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified, and (ii) if
authorized by a resolution of the Board of Directors, directors may be
elected to fill any vacancy on the Board of Directors, regardless of how
such vacancy was created.
B. Stockholder nomination of director candidates and introduction of
business. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting
of the stockholders of the Corporation shall be given in the manner
provided in the By-Laws of the Corporation.
C. Newly created directorships and vacancies. Subject to the rights
of the holders of any series of Preferred Stock, and unless the Board of
Directors otherwise determines, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only by
a majority vote of the directors then in office, though less than a
quorum, and any director so chosen shall hold office for a term expiring
at the annual meeting of stockholders at which the term of office of the
class to which such director has been elected expires and until such
director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the entire
Board of Directors shall shorten the term of any incumbent director.
D. Removal. Subject to the rights of the holders of any series of
Preferred Stock, any director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least 75 percent of the voting power
of all of the then outstanding shares of the Voting Stock, voting together
as a single class.
SIXTH: In furtherance and not in limitation of the powers conferred by
law, the Board of Directors is expressly authorized to make, alter, amend and
repeal the By-Laws of the Corporation, except for Article II, Section 8 of the
By-Laws of the Corporation, pursuant to a resolution adopted by the vote of a
majority of the Whole Board.
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SEVENTH: Subject to the rights of the holders of any series of Preferred
Stock, (A) any action required or permitted to be taken by the stockholders of
the Corporation must be effected at an annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in writing by such
stockholders and (B) special meetings of stockholders of the Corporation may be
called only in the manner provided in the By-Laws of the Corporation.
EIGHTH: A. Anything in this Certificate of Incorporation to the contrary
notwithstanding, in addition to any vote that may be required by statute
or otherwise, the affirmative vote of the holders of at least 75 percent
of the voting power of the outstanding shares of Voting Stock, voting as a
single class, shall be required in order to authorize:
(1) the merger or consolidation of the Corporation with or into any
other corporation; provided, however, that this subsection (A)(1) shall
not apply to any merger in which the Corporation is the survivor or
successor if the merger does not reclassify or change the nature or
ownership, including number of such shares, of the Voting Stock of the
Corporation outstanding immediately prior to such merger or effect any one
or more of the actions otherwise provided for in this Section (A);
(2) the dissolution of the Corporation;
(3) any sale, lease, exchange or other disposition of all or
substantially all of the assets of the Corporation;
(4) the addition, amendment, alteration, change or repeal of any
provision of this Certificate of Incorporation;
(5) the addition, amendment, alteration, change or repeal of any
provision of the By-Laws of the Corporation by the stockholders of the
Corporation;
(6) any purchase, sale, lease, exchange or other acquisition or
disposition (other than by way of dividends or other pro rata
distributions to stockholders or pursuant to a tender offer or exchange
offer made to all stockholders on the same terms) of assets having a
"value" (as hereinafter defined) of $12 million or more by (i) the
Corporation or any Subsidiary (as hereinafter defined) of, or other entity
controlled by, the Corporation, to or from (ii) any "10% Stockholder" (as
hereinafter defined) or any "Affiliate" (as hereinafter defined) of a 10%
Stockholder, whether in one transaction or a series of related
transactions with such 10% Stockholder or one or more of such 10%
Stockholder's Affiliates; or
(7) any issuance of Voting Stock of the Corporation (whether
authorized but unissued or Treasury stock), or any security convertible
into such Voting Stock, to any 10% Stockholder or Affiliate of a 10%
Stockholder; provided, however, that this subsection (A)(7) shall not
apply to any issuance of Voting Stock of the Corporation pursuant to (i)
an offering to common stockholders of
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<PAGE> 5
the Corporation pro rata according to their respective holdings of Voting
Stock, or (ii) shares issued pursuant to the Corporation's 1998 Long-Term
Incentive Plan, or any bona fide employee compensation or benefit plan
which is adopted by the Corporation in the ordinary course and is approved
by the vote of holders of a majority of the outstanding shares of Voting
Stock of the Corporation, or (iii) shares issued pursuant to the
Corporation's Directors' Stock Option Plan, the Corporation's Directors'
Equity Compensation Plan, or any other bona fide director compensation or
benefit plan which is adopted by the Corporation in the ordinary course
and is approved by the vote of the holders of a majority of the
outstanding shares of Voting Stock of the Corporation;
provided, however, that subsections (A)(6) and (A)(7) shall not apply to any
transaction with a 10% Stockholder or its Affiliates which is approved by a
majority of a quorum of the Whole Board of Directors, such majority consisting
of Continuing Directors (as hereinafter defined).
B. For the purposes of Section (A) of this Article Eighth, the
following terms shall have the following meanings:
(1) A "person" means any individual, limited partnership, general
partnership, corporation or other firm or entity.
(2) "10% Stockholder" shall mean any person who or which is the
beneficial owner (as hereinafter defined), directly or indirectly, of more
than 10 percent of the outstanding Voting Stock of the Corporation;
provided, however, that the term "10% Stockholder" shall not include the
Corporation, or any subsidiary of, or other entity controlled by, the
Corporation. For the purpose hereof, any corporation, person or other
entity shall be deemed to own or control any shares of capital stock of
the Corporation which are owned or controlled by its "Affiliates."
(3) An "Affiliate" of another person shall mean any person (i) which
would be an "affiliate" as that term is defined in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934,
as in effect on March 25, 1998 or (ii) with which such other person has
any agreement, arrangement or understanding with respect to the
acquisition or disposition of stock or assets of the Corporation or the
holding or voting of stock of the Corporation; provided, however, that the
term "Affiliate" shall not include the Corporation or any subsidiary of,
or other entity controlled by, the Corporation.
(4) A person shall be a "beneficial owner" of, and shall
"Beneficially Own," any Voting Stock:
(i) which such person or any of its Affiliates beneficially
owns, directly or indirectly, within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as in effect on March 25, 1998;
or
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(ii) which such person or any of its Affiliates has (a) the
right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (b)
the right to vote pursuant to any agreement, arrangement or
understanding (but neither such person nor any such Affiliate shall
be deemed to be the beneficial owner of any shares of Voting Stock
solely by reason of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public solicitation of
proxies for such meeting, and with respect to which shares neither
such person nor any such Affiliate is otherwise deemed the
beneficial owner); or
(iii) which are beneficially owned, directly or indirectly,
within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934, as in effect on March 25, 1998, by any other person with
which such person or any of its Affiliates has any agreement,
arrangement or understanding for the purpose of acquiring, holding,
voting (other than solely by reason of a revocable proxy as
described in subsection (ii) of this subsection (4)) or disposing of
any shares of Voting Stock;
provided, however, that in the case of any employee stock ownership or
similar plan of the Corporation or of any Subsidiary in which the
beneficiaries thereof possess the right to vote any shares of Voting Stock
held by such plan, no such plan nor any trustee with respect thereto (nor
any Affiliate of such trustee), solely by reason of such capacity of such
trustee, shall be deemed, for any purposes hereof, to beneficially own any
shares of Voting Stock held under any such plan.
(5) "Value" shall mean the aggregate cash and non-cash consideration
given or to be given by the Corporation and/or any Subsidiary or other
entity controlled by the Corporation, in connection with the transaction,
determining the value of non-cash consideration as follows: (i) readily
marketable securities at their average daily closing market price during
the six months prior to the date the determination is to be made, (ii)
non-marketable equity securities, and marketable equity securities for
which there is not an established market, at the higher of their book
value, redemption price, or liquidation preference, (iii) bonds or other
evidences of indebtedness at the full principal amount thereof plus an
amount equal to the aggregate of all interest payments to be made
thereunder in excess of the prime rate of Citibank, N.A. as then in
effect, (iv) guarantees or assumptions of the obligations or liabilities
of any person at the aggregate amount of all payments that may be made
pursuant thereto, (v) lease or rental obligations at the aggregate amount
of all payments to be made thereunder, and (vi) all other non-cash assets
at the higher of (x) their carrying value on the balance sheet of the
Corporation or (y) if appraised by the Corporation within one (1) year
prior to the date the determination is to be made, their appraised fair
market value.
(6) For the purposes of determining whether a person is a 10%
Stockholder pursuant to subsection (2) of this Section (B), the number of
shares of
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Voting Stock deemed to be outstanding shall include shares deemed owned
through application of subsection (4)(ii) of this Section (B) but shall
not include any other unissued shares of Voting Stock which may be
issuable pursuant to any agreement, arrangement or understanding or upon
exercise of conversion rights, warrants or options, or otherwise.
(7) "Subsidiary" means any corporation which is controlled, directly
or indirectly, through one or more intermediaries, by the Corporation.
(8) "Continuing Director" means any member of the Board of Directors
of the Corporation who is not an Affiliate of the 10% Stockholder and who
was a member of the Board of Directors prior to, and has served
continuously since, the time that the 10% Stockholder first became a 10%
Stockholder.
(9) "Whole Board" means the total number of directors which this
Corporation would have if there were no vacancies.
C. The Board of Directors shall have the power and duty to
determine, on the basis of information known to them after reasonable
inquiry, all facts necessary to determine compliance with this Article
EIGHTH.
NINTH: A. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation 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
General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted
by the General Corporation Law of the State of Delaware as so amended. Any
repeal or modification of this Section (A) of this Article Ninth by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
B. (1) Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she or a person of whom he
or she is the legal representative is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be
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<PAGE> 8
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that except
as provided in subsection (2) of this Section (B) with respect to
proceedings seeking to enforce rights to indemnification, the Corporation
shall indemnify any such person seeking indemnification in connection with
a proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Section
(B) shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the General
Corporation Law of the State of Delaware requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or
is rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking by or on behalf of such director or officer
to repay all amounts so advanced if it shall ultimately be determined that
such director or officer is not entitled to be indemnified under this
Section (B) or otherwise.
(2) If a claim under subsection (1) of this Section (B) is not paid
in full by the Corporation within thirty days after a written claim has
been received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall
be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its
final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the Corporation to indemnify
the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel
or stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an
actual determination by the Corporation (including its Board of Directors,
independent
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<PAGE> 9
legal counsel or stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of
conduct.
(3) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition
conferred in this Section (B) shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Law, agreement, vote of
stockholders or disinterested directors or otherwise.
(4) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State
of Delaware.
(5) The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to
be paid by the Corporation the expenses incurred in defending any
proceeding in advance of its final disposition, to any employee or agent
of the Corporation to the fullest extent of the provisions of this Section
(B) with respect to the indemnification and advancement of expenses of
directors and officers of the Corporation.
TENTH: In addition to any other considerations which the Board of
Directors 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 the Corporation, the Board of Directors may take
into account the interests of creditors, customers, employees and other
constituencies of the Corporation and its subsidiaries and the effect upon
communities in which the Corporation and its subsidiaries do business.
ELEVENTH: In furtherance and not in limitation of the powers conferred by
law or in this Certificate of Incorporation, the Board of Directors (and any
committee of the Board of Directors) is expressly authorized, to the extent
permitted by law, to take such action or actions as the Board or such committee
may determine to be reasonably necessary or desirable to (A) encourage any
person (as defined in Article EIGHTH of this Certificate of Incorporation) to
enter into negotiations with the Board of Directors and management of the
Corporation with respect to any transaction which may result in a change of
control of the Corporation which is proposed or initiated by such person or (B)
contest or oppose any such transaction which the Board of Directors or such
committee determines to be unfair, abusive or otherwise undesirable with respect
to the Corporation and its business, assets or properties or the stockholders of
the Corporation, including, without limitation, the adoption of such plans or
the issuance of such rights, options, capital stock, notes, debentures or other
evidences of indebtedness or other securities of the Corporation, which rights,
options, capital stock, notes, evidences of indebtedness and other securities
(i) may be exchangeable for or convertible into cash or other securities on
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<PAGE> 10
such terms and conditions as may be determined by the Board or such committee
and (ii) may provide for the treatment of any holder or class of holders thereof
designated by the Board of Directors or any such committee in respect of the
terms, conditions, provisions and rights of such securities which is different
from, and unequal to, the terms, conditions, provisions and rights applicable to
all other holders thereof.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, and any
other provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted, in the manner now or hereafter provided herein
or by statute, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as amended
are granted subject to the rights reserved in this Article TWELFTH.
THIRTEENTH: The name and mailing address of the incorporator is Frank R.
Adams, Esq., Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New
York 10019.
IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges
that the foregoing certificate of incorporation is his act and deed and that the
facts stated therein are true on this 26th day of March, 1998.
By: /s/ Frank R. Adams
------------------------------
Frank R. Adams
Incorporator
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<PAGE> 1
Exhibit 3.2
BY-LAWS
OF
CHICAGO TITLE CORPORATION
DELAWARE
<PAGE> 2
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING
The annual meeting of stockholders for the election of directors and
for the transaction of any other business that may properly come before the
meeting shall be held at such hour and at such place or places within or without
the State of Delaware as may from time to time be determined by the Board of
Directors, on the first Tuesday of May in each year or such other date as may be
set by the Board of Directors not more than fifteen days before, nor fifteen
days after, the first Tuesday of May.
SECTION 2. SPECIAL MEETINGS
At any time in the interval between regular meetings, special
meetings of stockholders may be called by the Chairman, or by a majority of the
Board of Directors, to be held at such times and at such places within or
without the State of Delaware as may be specified in the notices of such
meetings. The notice of any special meeting shall state the purpose of the
meeting and specify the action to be taken at said meeting and no business shall
be transacted thereat except that specifically named in the notice.
SECTION 3. NOTICE OF MEETING
Notice of the time and place of every meeting of stockholders shall
be delivered personally or mailed at least ten days and not more than sixty days
prior thereto to each stockholder of record entitled to vote at his address as
it appears on the records of the Corporation. Such further notice shall be given
as may be required by law. Business transacted at any special meeting shall be
confined to the purpose or purposes stated in the notice of such special
meeting. Meetings may be held without notice if all stockholders entitled to
vote are present or if notice is waived by those not present.
SECTION 4. VOTING
At all meetings of stockholders any stockholder entitled to vote may
vote in person or by proxy in writing or by a transmission permitted by law
filed in accordance with the procedure established for the meeting. Any copy,
facsimile telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this paragraph may be substituted or used in
lieu of the original writing or transmission for any and all purposes for which
the original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
SECTION 5. QUORUM
Unless otherwise required by statute or the Certificate of
Incorporation of the Corporation (the "Certificate of Incorporation"), at any
annual or special meeting of
<PAGE> 3
stockholders the presence in person or by proxy of stockholders entitled to cast
a majority of all the votes entitled to be cast at the meeting shall constitute
a quorum, but if at any meeting of the stockholders there be less than a quorum
present, the stockholders present at such meeting may, without further notice,
adjourn, the same from time to time until a quorum shall attend, but no business
shall be transacted at any such adjournment except such as might have been
lawfully transacted had the meeting not been adjourned.
SECTION 6. ACTION AT MEETINGS
Except as otherwise required by law, the Certificate of
Incorporation or these By-Laws, a majority of the votes cast at a meeting at
which a quorum is present shall be sufficient to take or authorize action upon
any matter which may properly come before the meeting, and the stockholders
shall not be entitled to cumulate their votes upon the election of directors or
any other matter. Any action required or permitted to be taken by the
stockholders must be effected at an annual or special meeting of stockholders
and may not be effected by any consent in writing by such stockholders.
SECTION 7. PROCEDURE AT MEETINGS
The Board of Directors may appoint two or more persons to serve as
inspectors of election at any meeting of stockholders. In the absence of such
appointment, the Chairman of the Meeting may make such appointment. The
inspectors of election shall receive, examine and tabulate all ballots and
proxies, including proxies filed with the Secretary, shall determine the
presence or absence of a quorum and shall report to the officer of the
Corporation or other person presiding over the meeting the result of all voting
taken at the meeting by ballot.
The order of business and all other matters of procedure at every
meeting of the stockholders may be determined by the officer of the Corporation
or other person presiding over the meeting.
SECTION 8. NOMINATIONS AND STOCKHOLDER BUSINESS
Nominations of persons for election to the Board of Directors and
the proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice with
respect to such meeting, (b) by or at the direction of the Board of Directors or
(c) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in this Section 8,
who is entitled to vote at the meeting and who has complied with the notice
procedures set forth in this Section 8.
For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to this Section 8, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation,
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
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stockholder's, or such beneficial owner's, intention to do so as hereinafter
provided. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation 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 than 30 days prior to or delayed more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so 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. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person as
would be required to be disclosed in solicitations of proxies for the election
of such nominees as directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such person's written
consent to serve as a director is 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; (c) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they appear on
the Corporation's books, and of such beneficial owner, (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner, and (iii) 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.
Notwithstanding anything in this Section 8 to the contrary, in the
event that the number of directors to be elected to the Board of Directors is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 100 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this section shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) by any stockholder of
record of the Corporation who is a stockholder of record at the time of giving
of notice provided for in this Section 8, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section 8.
Nominations by stockholders of persons for election to the Board of Directors
may be made at such a special meeting of stockholders if the stockholder's
notice required by this Section 8 shall be delivered to the Secretary at the
principal executive offices of the
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Corporation 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 Board of Directors to be elected at such meeting.
Only persons nominated in accordance with the procedures set forth
in this section shall be eligible to serve as directors and only such business
shall be conducted at a meeting of stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in this Section
8. The officer of the Corporation or other person presiding over the meeting
shall have the power and the duty to determine whether a nomination or any
business proposed to be brought before the meeting has been made in compliance
with the procedures set forth in this Section 8 and, if any proposed nomination
or business is not in compliance with this Section 8, to declare that such
defective proposed business or nomination shall not be presented for stockholder
action at the meeting and shall be disregarded.
For purposes of this section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this section, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 8. Nothing in this Section 8 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 9. ADJOURNMENTS
Any meeting of stockholders may be adjourned from time to time,
whether or not a quorum is present, by the affirmative vote of a majority of the
votes present and entitled to be cast at the meeting, or by the officer of the
Corporation presiding over the meeting, or by the Board of Directors.
ARTICLE II
DIRECTORS
SECTION 1. NUMBER AND ELECTION
Directors (other than such directors, if any, as are elected by
holders of preferred stock of the Corporation voting as a separate class) shall
be divided into three classes, which shall be as nearly equal in number as
practicable. Unless changed by the Board of Directors pursuant hereto the number
of directors shall be fourteen. The number of directors and the number of which
each class is to consist may be increased or
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decreased from time to time by a resolution adopted by the vote of in excess of
75 percent of the Whole Board (as defined in the Certificate of Incorporation);
and provided that no decrease in the number of directors shall affect the tenure
of office of any existing director. The term of office of the first class shall
expire at the 1999 annual meeting of stockholders, the term of office of the
second class shall expire at the 2000 annual meeting of stockholders and the
term of office of the third class shall expire at the 2001 annual meeting of
stockholders, with each director to hold office until his or her successor shall
have been duly elected and qualified. At each annual meeting of stockholders,
commencing with the 1999 annual meeting, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her successor shall
have been duly elected and qualified.
SECTION 2. VACANCIES
Subject to the rights of the holders of any series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the directors then in office, though less than a
quorum, and any director so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
such director has been elected expires and until such director's successor shall
have been duly elected and qualified.
SECTION 3. REGULAR MEETINGS
Regular meetings of the Board of Directors shall be held at such
times and places as the Board of Directors may from time to time determine.
SECTION 4. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called at any
time, at any place and for any purpose by the Chairman of the Board or by any
three directors.
SECTION 5. NOTICE OF MEETING
Notice of regular meetings of the Board of Directors need not be
given.
Notice of every special meeting of the Board of Directors shall be
given to each director, by (a) deposit in the mail at least seventy-two hours
before the meeting, or (b) telephonic or telefacsimile communication directly
with such person, the dispatch of a telegraphic communication to his address, or
actual delivery to his address, at least forty-eight hours before the meeting.
If given to a director by mail, telegraph or actual delivery to his address,
such notice shall be sent or delivered to his business or residential address as
shown on the records of the Secretary or an Assistant Secretary of the
Corporation, or to such other address as shall have been furnished to the
Secretary or an
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<PAGE> 7
Assistant Secretary of the Corporation by him for the purpose. Such notice need
not include a statement of the business to be transacted at, or the purpose of,
any such meeting.
SECTION 6. QUORUM; ACTION AT MEETINGS
A majority of the Board of Directors shall constitute a quorum for
the transaction of business, but if, at any meeting of the Board, there be less
than a quorum present, the members at the meeting may, without further notice,
adjourn the same from time to time until a quorum shall attend. Except as
provided herein or in the Certificate of Incorporation or as required by law, a
majority of such quorum shall decide any questions that may come before the
meeting.
SECTION 7. PARTICIPATING IN MEETING BY CONFERENCE TELEPHONE
Members of the Board of Directors, or any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar equipment by means of which all persons participating in
the meeting can hear each other at the same time and such participation shall
constitute presence in person at such meeting.
SECTION 8. DIVIDENDS
Anything in these By-Laws to the contrary notwithstanding, the
declaration of dividends or other distributions on the capital stock of the
Corporation, whether in cash or property (other than the dividend preference
payable on any Preferred Stock of the Corporation outstanding from time to
time), may be authorized only by vote of in excess of 75 percent of the
directors present at a meeting duly called at which a quorum is present.
ARTICLE III
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. ELECTION
The Board of Directors may appoint an Executive Committee and other
committees composed of two or more of its members, and may appoint one of the
members of each such committee to the office of chairman thereof. Members of the
committees of the Board of Directors shall hold office for a term of one year
and until their successors are appointed and qualify or until they shall cease
to be directors.
SECTION 2. POWERS
Subject to such limitations as may from time to time be established
by resolution of the Board of Directors, the Executive Committee shall have any
and may exercise all of the powers of the Board of Directors when the Board of
Directors is not in
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session except that it shall have no power to (a) declare dividends, (b) issue
stock of the Corporation, (c) recommend to the stockholders any action which
requires stockholder approval, (d) alter, amend or repeal any resolution of the
Board of Directors relating to the Executive Committee, or (e) take any other
action which legally may be taken only by the Board of Directors. Other
committees of the Board of Directors shall have such powers as shall be properly
delegated to them by the Board of Directors.
SECTION 3. VACANCIES
If the office of any member of any committee becomes vacant by
death, resignation, or otherwise, such vacancy may be filled from the members of
the Board by the Board of Directors.
SECTION 4. SUBSTITUTE MEMBERS
In the event that a member of any committee is absent from a meeting
of the committee, the members of the committee present at the meeting whether or
not they constitute a quorum may appoint another director to act in place of the
absent member.
SECTION 5. MEETINGS AND NOTICE OF MEETINGS
The Executive Committee shall meet from time to time on call of the
Chairman of the Board, or on call of any three or more members of the Executive
Committee, for the transaction of any business.
Notice of every meeting of the Executive Committee shall be given to
each member, by (a) deposit in the mail at least seventy-two hours before the
meeting, or (b) telephonic or telefacsimile communication directly with such
person, the dispatch of a telegraphic communication to his address, or actual
delivery to his address, at least forty-eight hours before the meeting. If given
to a member by mail, telegraph or actual delivery to his address, such notice
shall be sent or delivered to his business or residential address as shown on
the records of the Secretary or an Assistant Secretary of the Corporation, or to
such other address as shall have been furnished to the Secretary or an Assistant
Secretary of the Corporation by him for this purpose. Such notice need not
include a statement of the business to be transacted at, or the purpose of, any
such meeting.
All other committees of the Board of Directors shall meet at such
times and upon such notice as they may determine.
SECTION 6. QUORUM; ACTION AT MEETINGS
At any meeting of any committee, however called, a majority of the
members shall constitute a quorum for the transaction of business. A majority of
such quorum shall decide any questions that may come before the meeting.
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<PAGE> 9
ARTICLE IV
OFFICERS
SECTION 1. ELECTION AND NUMBER
The Board of Directors may appoint one of its number as Chairman of
the Board. The Board of Directors shall appoint a President from among the
directors, and a Secretary and a Treasurer, who need not be directors. The Board
of Directors may also appoint one or more Executive Vice Presidents, Senior Vice
Presidents and/or Vice Presidents, who need not be directors. All officers of
the Corporation shall hold office at the pleasure of the Board of Directors. Any
two or more offices, except those of President and Vice President, may, at the
discretion of the Board of Directors, be held by the same person. The Board of
Directors may from time to time appoint such other officers and agents with such
powers and duties as the Board may prescribe.
SECTION 2. CHAIRMAN OF THE BOARD
The Chairman of the Board shall preside at all meetings of the Board
of Directors and shall perform such other duties and exercise such other powers
as may be assigned to him from time to time by the Board of Directors.
SECTION 3. PRESIDENT
The President shall be the chief executive officer and the chief
operating officer of the Corporation. The President shall preside at all
meetings of stockholders and, in the absence of the Chairman of the Board, shall
preside at all meetings of the Board of Directors. Subject to the control of the
Board of Directors, the President shall have direct power and authority over the
business and affairs of the Corporation. The President shall perform such other
duties and exercise such other powers as may be assigned to him from time to
time by the Board of Directors.
SECTION 4. EXECUTIVE VICE PRESIDENTS
The Executive Vice President or Executive Vice Presidents shall
perform the duties of the President in his absence or during his disability to
act. In addition, the Executive Vice President or Executive Vice Presidents
shall perform the duties and exercise the powers usually incident to their
respective offices and/or such other duties and powers as may be properly
assigned to them from time to time by the Board of Directors, the Chairman of
the Board or the President.
SECTION 5. SENIOR VICE PRESIDENTS
The Senior Vice President or Senior Vice Presidents shall perform
the duties of the Executive Vice President or Executive Vice Presidents in his
or their absence or disability to act. In addition, the Senior Vice President or
Senior Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
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Chairman of the Board, the President or any Executive Vice President having
supervisory authority over them.
SECTION 6. VICE PRESIDENTS
The Vice President or Vice Presidents shall perform the duties of
the Senior Vice President or Senior Vice Presidents in his or their absence or
disability to act. In addition, the Vice President or Vice Presidents shall
perform the duties and exercise the powers usually incident to their respective
offices and such other duties and powers as may be properly assigned to them
from time to time by the Board of Directors, the Chairman of the Board, the
President or any Executive Vice President or Senior Vice President having
supervisory authority over them.
SECTION 7. SECRETARY
The Secretary shall issue notices of meetings, keep the minutes of
the Board of Directors and its committees, have charge of the corporate seal,
and perform such other duties and exercise such other powers as are usually
incident to such office or are properly assigned thereto by the Board of
Directors, the Chairman of the Board, the President or any Executive Vice
President or Senior Vice President or Vice President having supervisory
authority over him.
SECTION 8. TREASURER
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies as the Board of Directors or the Executive Committee from time
to time shall designate. He shall sign or countersign such instruments as
require his signature, shall perform all such duties and have all such powers as
are usually incident to such office or are properly assigned to him by the Board
of Directors, the Chairman of the Board, the President or any Executive Vice
President or Senior Vice President or Vice President having supervisory
authority over him, and may be required to give bond for the faithful
performance of his duties in such sum and with such surety as may be required by
the Board of Directors.
SECTION 9. CONTROLLER
The Controller shall be responsible for the accounting policies and
practices of the Corporation, maintain its financial records, collect and
consolidate the financial results of its subsidiaries and other operating units,
prepare its financial reports, determine the amount and source of the funds
required to meet its financial obligations, and perform such other duties and
exercise such other powers as are usually incident to such office or are
properly assigned thereto by the Board of Directors, the Chairman of the Board,
the President or any Executive Vice President or Senior Vice President or Vice
President having supervisory authority over him.
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SECTION 10. ASSISTANT SECRETARY; ASSISTANT TREASURER
The Board of Directors may appoint one or more assistant secretaries
and one or more assistant treasurers, or one appointee to both such positions,
which officers shall have such powers and shall perform such duties as are
provided in these By-Laws to the Secretary or Treasurer, as the case may be, or
as are properly assigned thereto by the Board of Directors, the Chairman of the
Board, the President, the Secretary or Treasurer as the case may be, or any
other officer having supervisory authority over them.
ARTICLE V
FISCAL YEAR
The fiscal year of the Corporation shall end on the thirty-first day
of December in each year, or on such other day as may be fixed from time to time
by the Board of Directors.
ARTICLE VI
SEAL
The Board of Directors shall provide a suitable seal, containing the
name of the Corporation, which seal shall be in the charge of the Secretary or
an Assistant Secretary.
ARTICLE VII
STOCK
SECTION 1. STOCK OF THE CORPORATION
Shares of stock of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide that some or all
of a class or series of stock shall be uncertificated shares. Certificates
representing shares of stock of the Corporation shall be issued in such form as
may be approved by the Board of Directors and shall be signed, manually or by
facsimile, by the Chairman of the Board, President, or an Executive Vice
President or Senior Vice President or Vice President and by the Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary, and sealed with the seal
of the Corporation or a facsimile thereof.
SECTION 2. TRANSFERS
The Board of Directors shall have power and authority to make all
such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of stock of the Corporation. The Board of Directors
may appoint Transfer Agents and Registrars thereof.
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SECTION 3. RECORD DATE; CLOSING OF TRANSFER BOOKS
The Board of Directors may fix a record date or direct that the
stock transfer books be closed for a stated period for the purpose of making any
proper determination with respect to stockholders, including which stockholders
are entitled to notice of or to vote at a meeting or any adjournment thereof,
receive payment of any dividend or other distribution, or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock. The record date may not be more than sixty nor less than
ten days before the date on which the action requiring the determination will be
taken; the transfer books may not be closed for a period longer than twenty
days; and, in the case of a meeting of stockholders, the closing of the transfer
books shall be at least ten days before the date of the meeting.
SECTION 4. LOST CERTIFICATES
The Board of Directors may determine the conditions upon which a new
certificate of stock will be issued to replace a certificate which is alleged to
have been lost, stolen, mutilated or destroyed, and the Board of Directors may
delegate to any officer of the Corporation the power to make such determinations
and to cause such replacement certificates to be issued.
SECTION 5. WARRANTS
The foregoing provisions relative to certificates of stock shall
also apply to allotment certificates or other certificates or warrants
representing rights with respect to stock in the Corporation, which certificates
or warrants may be issued from time to time by a vote of the Board of Directors
in such form as they may approve.
SECTION 6. STOCK LEDGER
The Corporation shall maintain a stock ledger which contains the
name and address of each stockholder and the number of shares of stock of each
class which the stockholder holds. The stock ledger may be in written form or in
any other form which can be converted within a reasonable time into written form
for visual inspection. The original stock ledger shall be kept at the office of
the Corporation's Transfer Agent.
ARTICLE VIII
SIGNATURES
SECTION 1. NEGOTIABLE INSTRUMENTS
All checks, drafts, notes, or other obligations of the Corporation
shall be signed (a) by any two officers of the Corporation of the rank of
Chairman of the Board, President, Executive Vice President, Senior Vice
President or Vice President, (b) by the Chairman of the Board, President, any
Executive Vice President or any Senior Vice President or any Vice President, and
by the Treasurer or Assistant Treasurer or Secretary
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or Assistant Secretary, or (c) as otherwise authorized by the Board of Directors
or the Executive Committee; provided, however, that bonds, debentures or notes
issued under a mortgage indenture or trust agreement with a bank or trust
company as trustee and coupons attached pertaining to any such bonds, debentures
or notes may be executed manually or by facsimile.
SECTION 2. STOCK TRANSFERS
All endorsements, assignments, transfers, stock powers or other
instruments of transfer of securities standing in the name of the Corporation
shall be executed for and in the name of the Corporation (a) by any two officers
of the Corporation of the rank of Chairman of the Board, President, Executive
Vice President, Senior Vice President or Vice President, or (b) by the Chairman
of the Board, President, any Executive Vice President or any Senior Vice
President or any Vice President, and by the Secretary or any Assistant
Secretary, or (c) as otherwise authorized by the Board of Directors.
ARTICLE IX
WAIVER OF NOTICE OF MEETINGS
SECTION 1. STOCKHOLDERS
Notice of the time, place and/or purpose of any meeting of
stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy; and if any stockholder shall, in a
writing filed with the records of the meeting, either before or after the
holding thereof, waive notice of any stockholders' meeting, notice thereof need
not be given to him.
SECTION 2. DIRECTORS
Notice of any meeting of the Board of Directors or of any committee
thereof need not be given to any director if he shall attend such meeting in
person, or shall in a writing filed with the records of the meeting, either
before or after the holding thereof, waive such notice; and any meeting of the
Board of Directors or of any committee thereof shall be a legal meeting without
any notice thereof having been given if all such directors shall be present at
such meeting.
ARTICLE X
VOTING OF STOCKS
Unless otherwise ordered by the Board of Directors, the Chairman of
the Board, the President, any Executive Vice President or any Senior Vice
President or any Vice President of this Corporation shall have full power and
authority, on behalf of the Corporation, to attend, act and vote at any meeting
of the stockholders of any corporation in which this Corporation may hold stock
and at such meeting may exercise any or all
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rights and powers incident to the ownership of such stock and which as owner
thereof the Corporation might exercise if present and to execute on behalf of
the Corporation a proxy or proxies empowering others to act as aforesaid. The
Board of Directors by resolution from time to time may confer like powers upon
any other person or persons.
ARTICLE XI
CHECKS, NOTES, ETC.
All checks on the Corporation's bank accounts and all drafts, bills
of exchange and promissory notes, and all acceptances, obligations and other
instruments for the payment of money, shall be signed by such person or persons
as shall be authorized to do so from time to time by the Board of Directors or
by the committee or officer or officers of the Corporation to whom the Board
shall have delegated the power to authorize such signing; provided, however,
that the signature of any person so authorized on checks and drafts drawn on the
Corporation's dividend and special accounts may be in facsimile if the Board of
Directors or such committee or officer or officers, whichever shall have
authorized such person to sign such checks or drafts, shall have authorized such
person to sign in facsimile, and provided further that in case notes or other
instruments for the payment of money (other than notes, bonds or debentures
issued under a trust instrument of the Corporation) are required to be signed by
two persons, the signature thereon of only one of the persons signing any such
note or other instrument may be in facsimile, and that in the case of notes,
bonds or debentures issued under a trust instrument of the Corporation and
required to be signed by two officers of the Corporation, the signatures of both
such officers may be in facsimile if specifically authorized and directed by the
Board of Directors of the Corporation and if such notes, bonds or debentures are
required to be authenticated by a corporate trustee which is a party to the
trust instrument and provided further that in case any person or persons who
shall have signed any such note or other instrument, either manually or in
facsimile, shall have ceased to be a person or persons so authorized to sign any
such note or other instrument, whether because of death or by reason of any
other fact or circumstance, before such note or other instrument shall have been
delivered by the Corporation, such note or other instrument may, nevertheless,
be adopted by the Corporation and be issued and delivered as though the person
or persons who so signed such note or other instrument had not ceased to be such
a person or persons.
ARTICLE XII
OFFICES
The Corporation may have offices outside the State of Delaware at
such places as shall be determined from time to time by the Board of Directors.
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ARTICLE XIII
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, (a)
these By-Laws may be amended, altered or repealed by the stockholders at any
annual or special meeting by the affirmative vote of at least 75 percent of the
voting power of the outstanding shares of Voting Stock and (b) these By-Laws may
be amended, altered or repealed by the Board of Directors by the affirmative
vote of a majority of the Whole Board.
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Exhibit 10.1
TAX SHARING AGREEMENT
AMONG
ALLEGHANY CORPORATION
AND
CHICAGO TITLE CORPORATION
<PAGE> 2
TAX SHARING AGREEMENT
This Tax Sharing Agreement ("Agreement") is entered into as of April
__, 1998, by and among Alleghany Corporation, a Delaware corporation
("Alleghany"), and Chicago Title Corporation, a Delaware corporation ("Chicago
Title").
RECITALS
WHEREAS, Alleghany is the common parent of an affiliated group of
corporations filing a consolidated Federal income tax return, which affiliated
group includes Chicago Title and Trust Company ("CT&T"); and
WHEREAS, The Chicago Trust Company ("TCTC") organized a new
corporation ("Newco"), and TCTC transferred all of the assets used in the
conduct of its land trust and land release business (the "Land Trust Business")
to Newco and Newco assumed all of the liabilities of, or relating to, the Land
Trust Business (the "Land Trust Contribution"); and
WHEREAS, TCTC distributed all of the shares of Newco to Alleghany
Asset Management, Inc. ("AAM"), and AAM distributed all of the Newco shares to
CT&T (together, the "Newco Distributions"); and
WHEREAS, CT&T has distributed all of the outstanding shares of
AAM to Alleghany (the "AAM Distribution"); and
WHEREAS, Alleghany will contribute all of the outstanding shares of
CT&T to Chicago Title, a newly-formed subsidiary of Alleghany (the date of such
contribution being the
<PAGE> 3
"CT&T Contribution Date"), and thereafter Alleghany will distribute all of the
outstanding shares of Chicago Title to Alleghany's shareholders (the "Chicago
Title Distribution"); and
WHEREAS, the Newco Distributions, the AAM Distribution and the
Chicago Title Distribution are all intended to qualify as tax-free distributions
under Section 355 of the Internal Revenue Code of 1986, as amended ("Code"); and
WHEREAS, the parties desire to provide for, and agree upon, the
allocation between them of liabilities for all Taxes (as hereinafter defined)
arising prior to, as a result of, and subsequent to the transactions
contemplated by the Newco Distributions, the AAM Distribution and the Chicago
Title Distribution, and to provide for and agree upon other matters relating to
Taxes.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereby agree as follows:
SECTION 1. Definition of Terms.
(a) Defined Terms. In addition to the capitalized terms otherwise
defined herein, the following terms shall have the following meaning:
"AAM Group" means AAM and each corporation which on the date of the
AAM Distribution was a member of the "affiliated group" of which AAM would be
the "common parent" (as such terms are defined or used in Section 1504(a) of the
Code), determined as if AAM were owned by individuals.
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<PAGE> 4
"Alleghany Consolidated Return" means any consolidated Federal
income tax return for the Alleghany Group.
"Alleghany Group" means Alleghany and all corporations which at the
time of reference would be members of the "affiliated group" of which Alleghany
is the "common parent" (as such terms are defined or used in Section 1504(a) of
the Code), so that on the day after the Chicago Title Distribution Date, the
term "Alleghany Group" excludes any entity that is then a member of the Chicago
Title Group.
"Business Day" shall mean any day other than a Saturday, a Sunday or
a day on which banks in New York, New York are authorized or obligated by law or
executive order to be closed for the transaction of business.
"Chicago Title Consolidated Tax Liability" means the hypothetical liability for
the Taxes imposed by Subtitle A or F of the Code which the Chicago Title Group
would have for the Tax Period of reference if the Chicago Title Group had always
filed its own consolidated Federal income tax return, computed by assuming that
(i) the Chicago Title Group was subject to Tax on all of its taxable income at
the applicable maximum federal income tax rates specified in the Code, (ii)
intercompany transactions between members of the Chicago Title Group and the
Alleghany Group that would be deferred under Treasury Regulation Section
1.1502-13 are deferred and will be taken into account at the earlier of the time
provided under Treasury Regulation Section 1.1502-13 or on the Chicago Title
Distribution Date, (iii) any excess loss accounts (pursuant to Treasury
Regulation Section 1.1502-19) with respect to any stock of a member of the
Chicago Title Group shall be taken into account on the Chicago Title
Distribution
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Date, and (iv) with respect to any Pre-Distribution Period, in the case of any
item of income, gain, loss, deduction or credit that is computed or subject to a
limitation only on a consolidated basis, including but not limited to,
charitable contributions, capital losses, foreign tax credit, research and
experimentation credit and Section 1231 gains and losses, such items shall be
taken into account by Chicago Title only if, and to the extent (determined by
Alleghany on any reasonable basis) that, such items are taken into account, and
actually effects, the amount of the liability for Tax of the Alleghany Group for
the Tax Period of reference.
"Chicago Title Distribution Date" means the date as of which
Alleghany exchanges with, or distributes to, its shareholders sufficient common
stock of Chicago Title as a result of which Chicago Title ceases to be a member
of the Alleghany Group as of the end of such day pursuant to Treasury Regulation
Section 1.1502-76(b)(1)(ii).
"Chicago Title Group" means, as the case may be, (i) Chicago Title
and those corporations which on the day after the Chicago Title Distribution
Date would be members of the "affiliated group" of which Chicago Title would be
the "common parent" (as such terms are defined or used in Section 1504(a) of the
Code), determined as if Chicago Title were owned by individuals, and (ii) with
respect to any Tax Period which includes or ends prior to the CT&T Contribution
Date, CT&T and those corporations which at and for the time of reference would
be members of the "affiliated group" of which CT&T would be the "common parent"
(as such terms are defined or used in Section 1504(a) of the Code), determined
as if CT&T were owned by individuals. Notwithstanding the foregoing, no member
of the AAM Group shall be treated as having ever been a member of the Chicago
Title Group, and Newco shall be treated as having always been a member of the
Chicago Title Group (but the foregoing shall not be construed as
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<PAGE> 6
conferring any liability upon the Chicago Title Group for any Tax imposed by
Subtitle A or Subtitle F of the Code with respect to the Land Trust Business
prior to the date of the Land Trust Contribution).
"Consolidated or Combined State Tax" means any Tax imposed by any
State or any political subdivision thereof which is (i) imposed on, or measured
by, gross or net receipts, income, capital or net worth, including State and
local franchise or similar Taxes measured by net income, and (ii) computed on a
consolidated, unitary or combined basis by reference to the assets and/or
activities of members of both the Alleghany Group and the Chicago Title Group.
Liability for telecommunications, gross receipts (other than taxes on gross
receipts that are imposed in lieu of a tax on net receipts), transactional
taxes, and sales and use taxes, or other similar types of transactional taxes
shall not be considered a Consolidated or Combined State Tax for purposes of
this Agreement.
"Payment Date" means the due date for any required installment of
estimated Taxes determined under Section 6655 of the Code, the due date
(determined without regard to extensions) for filing the Alleghany Consolidated
Return determined under Section 6072 of the Code, and the date the Alleghany
Consolidated Return is filed.
"Post-Distribution Period" means any Tax Period beginning on the day
after the Chicago Title Distribution Date, and, in the case of any Straddle
Period, the portion of such Straddle Period beginning on the day after the
Chicago Title Distribution Date.
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"Pre-Distribution Period" means any Tax Period ending on or before
the Chicago Title Distribution Date, and, in the case of any Straddle Period,
the portion of such Straddle Period ending on the Chicago Title Distribution
Date.
"Ruling Request" means the letter, dated November 12, 1997,
submitted on behalf of Alleghany to the Internal Revenue Service requesting a
letter ruling regarding certain income tax consequences of the AAM Distribution
and the Chicago Title Distribution (including all attachments, exhibits, and
other materials submitted with such ruling request letter), and all amendments
or supplements to such ruling request letter.
"Straddle Period" means any Tax Period that begins on or before and
ends after the Chicago Title Distribution Date.
"Tax" or "Taxes" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, severance, occupation, service, sales, use, license, lease, transfer,
import, export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in respect
of the foregoing.
"Tax Law" means any law (other than the Code) of any governmental
entity or political subdivision thereof relating to any Tax.
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"Tax Period" means, with respect to any Tax, the period for which
the Tax is reported as provided under the Code or other applicable Tax Law.
"Treasury Regulations" means the regulations promulgated from time
to time under the Code as in effect for the relevant Tax Period.
(b) Interpretation of Terms. Unless otherwise indicated, the words
and concepts used in this Agreement shall be given the same definitions and
meanings ascribed to them by the Code, the Treasury Regulations or other Tax
Law. Any alteration, modification, addition, deletion, or other change in the
applicable provisions of the Code, the Treasury Regulations or other Tax Law
shall automatically be applicable to this Agreement mutatis mutandis. Unless
otherwise indicated, all references herein to a particular section of the Code,
the Treasury Regulations or other Tax Law shall include any successor provision
designated by a different or additional section reference.
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SECTION 2. Allocation of Tax Liabilities.
2.01 Chicago Title Liability. For each Tax Period for which any
member of the Chicago Title Group was also a member of the Alleghany Group,
Chicago Title shall be liable for, and shall indemnify and hold harmless
Alleghany and each member of the Alleghany Group (excluding any member of the
Chicago Title Group) from and against, the amount of (a) the Chicago Title
Consolidated Tax Liability for the Tax Period of reference over (b) the net
amount theretofore paid by the Chicago Title Group to Alleghany on account of
the Chicago Title Consolidated Tax Liability for the Tax Period of reference.
2.02 Alleghany Liability. Provided that Chicago Title and the
members of the Chicago Title Group have performed all of their obligations under
this Agreement, Alleghany shall be liable for, and shall indemnify and hold
harmless Chicago Title and each member of the Chicago Title Group from and
against any liability for Taxes of the Alleghany Group imposed by Subtitle A or
F of the Code.
2.03 AAM Liability. Except as otherwise provided herein with respect
to Consolidated or Combined State Income Taxes and as may be required to allow
CT&T to exclude from its income pursuant to Treasury Regulation
1.1502-13(f)(2)(ii) any dividend from AAM, AAM shall be treated as having never
been a member of the Chicago Title Group, and, except as specifically provided
herein, Chicago Title shall have no liability for, and shall be indemnified and
be held harmless from, the liability for Taxes of AAM or any member of the AAM
Group imposed by Subtitle A or F of the Code.
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2.04 Allocation of All Other Taxes. Except as provided in Section
2.05, all Taxes other than those specifically allocated pursuant to Sections
2.01 through 2.03 shall be allocated based on the legal entity on which the
legal incidence of the Tax is imposed.
2.05 Chicago Title Liability for Transaction and Certain Other
Taxes.
Except as otherwise specifically provided in this Agreement, Chicago
Title shall be liable for, and shall indemnify and hold harmless Alleghany from
and against any liability for, Taxes arising from the Land Trust Contribution,
the Newco Distributions, the AAM Distribution or the Chicago Title Distribution
as follows:
(a) any sales, use, stock, real property or other transfer Taxes
imposed on the transfers occurring in connection with, or pursuant to, the
Land Trust Contribution, the Newco Distributions and the Chicago Title
Distribution;
(b) any Tax resulting from any income or gain recognized by the
Chicago Title Group under Treasury Regulation Sections 1.1502-13 or
1.1502-19 (or any corresponding provisions of other applicable Tax Laws)
as a result of the Chicago Title Distribution; and
(c) any Tax resulting for any reason whatsoever from any income or
gain recognized by Alleghany as a result of either the contribution of
CT&T to Chicago Title or the Chicago Title Distribution failing to qualify
for tax-free treatment under Sections 351, 355, 361, 368 or other
provisions of the Code (as contemplated in the Ruling Request) or other
applicable Tax Laws;
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(d) any Tax resulting from any income or gain recognized by
Alleghany (including any member of the AAM Group) as a result of the AAM
Distribution failing to qualify for tax-free treatment under Sections 351,
355, 361, 368 or other provisions of the Code (as contemplated in the
Ruling Request) or other applicable Tax Laws by reason of the inaccuracy
of any factual statements or representations relating to Chicago Title or
any member of the Chicago Title Group in connection with the Ruling
Request, or from any breach of Chicago Title's representations or
covenants under Section 9 or any Chicago Title Tainting Act (as defined in
Section 9) by Chicago Title or any member of the Chicago Title Group; and
(e) any Tax resulting for any reason whatsoever from any income or
gain recognized by Alleghany (including any member of the AAM Group) as a result
of either the Land Trust Contribution or the Newco Distributions failing to
qualify for tax-free treatment under Sections 351, 355, 361, 368 or other
provisions of the Code or other applicable Tax laws.
2.06 General Method of Proration. In determining the Tax for the
Pre-Distribution Period and the Post-Distribution Period, items of income, gain,
loss, deduction, and credit shall be apportioned between such periods based upon
a closing of the books for Tax purposes and in accordance with the principles of
Treasury Regulation Section 1.1502-76(b), as reasonably interpreted and applied
by Alleghany and Chicago Title. For this purpose, Chicago Title's books for
accounting and Tax purposes shall close at the close of business on the Chicago
Title Distribution Date. No election shall be made under Treasury Regulation
Section 1.1502-76(b)(2)(ii) (relating to ratable allocation of a year's items),
and Treasury Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably
allocate the items (other than extraordinary
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items, including, without limiting the generality of the foregoing, compensation
items) for the month which includes the Chicago Title Distribution Date. Any
items of income, gain, loss, deduction and credit relating to the Chicago Title
Distribution shall be treated as an extraordinary item described in Treasury
Regulation Section 1.1502-76(b)(2)(ii)(C) and shall be allocated to the
Pre-Distribution Period, and any Taxes related to such items shall be treated
under Treasury Regulation Section 1.1502-76(b)(2)(iv) as relating to such
extraordinary item and shall be allocated to the Pre-Distribution Period.
2.07 Consolidated or Combined State Taxes for Straddle Periods. Any
Consolidated or Combined State Taxes for a Straddle Period shall be allocated
between the members of the Alleghany Group and the Chicago Title Group first on
the basis of, and to the extent, that the receipts, income, capital or net worth
of a member resulted in, or increased, any Consolidated or Combined State Taxes.
Any remaining Consolidated or Combined State Taxes for a Straddle Period shall
be allocated among the members on the basis on which each member's relative
attribute (whether positive or negative) was taken into account in determining
the amount of any Consolidated or Combined State Tax contributed to the
remainder of the Consolidated or Combined State Taxes for the Straddle Period.
2.08 Adjustment of Tax Liability. If any item of income, gain, loss,
expense, deduction or credit that enters into the computation of the Chicago
Title Consolidated Tax Liability or the Consolidated or Combined State Taxes for
the Straddle Period is changed or adjusted by the Internal Revenue Service or by
a State or local tax authority and such change or adjustment is part of a final
settlement with the Internal Revenue Service or a State or local tax authority
that is binding on all parties or, if applicable, a final judicial decision upon
the
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expiration of the time for the decision to be appealed (a "final
determination"), Alleghany shall make such payments to Chicago Title or Chicago
Title shall make such payments to Alleghany (including interest, penalties and
additions to Tax imposed on the Alleghany Group or any member of the Alleghany
Group) in connection with the adjustment or change as may be necessary to adjust
the payments between Chicago Title and Alleghany to reflect payments that would
have been made under Sections 2.01 through 2.07 of this Agreement had the
adjustments as finally determined been taken into account in determining the
amount of the payments under Sections 2.01 through 2.07. A payment required
under this Section 2.08 shall be due and payable ten (10) Business Days
following the date that one party gives notice to the other party that a payment
is due. Notice under this Section 2.08 shall include a copy of the notice of
deficiency or other written communication from a Tax authority describing the
final determination and, if appropriate or necessary, detailed calculations
supporting the amount due.
SECTION 3. Preparation and Filing of Tax Returns.
3.01 Alleghany Consolidated Returns. The Alleghany Consolidated
Return required to be filed for any Tax Period shall be prepared by Alleghany.
For any prior Tax Period for which the Alleghany Consolidated Return has not
been filed by the Chicago Title Distribution Date and for the Tax Period which
includes the Chicago Title Distribution Date, Chicago Title shall provide
Alleghany with (i) a true and correct tax return for the Chicago Title Group,
together with an accompanying computation of Tax liability of the Chicago Title
Group, (ii) separate tax returns for each member of the Chicago Title Group
together with accompanying computations of the separate return Tax liabilities
of each member of the Chicago Title Group, and (iii) a reconciliation of book
income to Federal taxable income for each member of the
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Chicago Title Group. Chicago Title agrees to use reasonable efforts in good
faith to provide Alleghany with such returns and computations no later than the
first day of the sixth month following the end of the Tax Period to which such
returns and computations relate, but in any event shall provide such returns and
computations to Alleghany no later than the fifteenth day of the seventh month
following the end of the Tax Period to which such returns and computations
relate.
3.02 Consolidated or Combined State Tax Returns. Any returns
reporting Consolidated or Combined State Tax for any Pre-Distribution Period and
any Straddle Period shall be prepared and filed when due (including extensions)
by the person obligated to file such return of Consolidated or Combined State
Tax under the applicable Tax Law. Alleghany and Chicago Title shall provide, and
shall cause the members of their respective affiliated groups to provide,
assistance and shall cooperate with one another in accordance with Section 5
with respect to the preparation and filing of any return reporting Consolidated
or Combined State Tax, including providing information required to be provided
in Section 5, for Pre-Distribution Periods or Straddle Periods not filed by the
Chicago Title Distribution Date.
3.03 Manner of Filing. All returns of Tax filed, or caused to be
filed, by Alleghany or Chicago Title after the Chicago Title Distribution Date
shall be (in the absence of a controlling change in law, facts or
circumstances), (a) prepared on a basis that is consistent with the Ruling
Request and any letter ruling of the Internal Revenue Service obtained by
Alleghany in connection with the AAM Distribution and the Chicago Title
Distribution, (b) with respect to any Tax Period that includes the Chicago Title
Distribution Date, filed on a timely basis (including permitted extensions of
time for filing) by the party responsible for such filing under
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this Agreement and (c) with respect to any Tax Period that includes the Chicago
Title Distribution Date, prepared consistent with past practices, elections,
accounting methods, conventions, and principles of taxation used for the most
recent taxable periods for which the Tax returns involving similar items have
been filed prior to the Chicago Title Distribution Date. With respect to all
Pre-Distribution Tax Periods and the Tax Period which includes the Chicago Title
Distribution Date, all elections that are available to the Alleghany Group under
the Treasury Regulations relating to the filing of consolidated Federal income
tax returns and all Tax return filing positions for all Tax Periods shall be
made by Alleghany in its sole discretion.
SECTION 4. Tax Payments.
4.01 Payment of Taxes with Respect to Alleghany Consolidated Returns
Filed After the Chicago Title Distribution Date. In the case of any Alleghany
Consolidated Return the due date for which (including extensions) is after the
Chicago Title Distribution Date, at least ten (10) Business Days prior to any
Payment Date, Chicago Title shall compute and submit to Alleghany its estimate
of the amount of the Chicago Title Consolidated Tax Liability for the Tax Period
which would be required to be paid by Chicago Title on such Payment Date if the
Chicago Title Group were a separate affiliated group, assuming that the required
payment was sufficient to avoid incurring any addition to tax under Section 6655
of the Code by reason of an underpayment by a "large corporation" within the
meaning of Section 6655(g)(2) of the Code. The amount so estimated shall be
consistent with the elections under Section 6655(d) and (e) of the Code made or
to be made by Alleghany, in its sole discretion, for such taxable year.
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Alleghany shall review the estimated amount as calculated by Chicago
Title, and Alleghany shall conclusively determine in good faith the amount of
Tax required to be paid by Chicago Title on that Payment Date. Alleghany shall
notify Chicago Title in writing at least three (3) Business Days prior to any
Payment Date of the amount of Tax required to be paid by Chicago Title to
Alleghany prior to such Payment Date. Within one (1) business day preceding any
Payment Date, Chicago Title will pay to Alleghany the excess (if any) of:
(i) the Chicago Title Consolidated Tax Liability determined as of
such Payment Date with respect to the applicable Tax Period, over
(ii) the cumulative payments with respect to such Tax Period prior
to such Payment Date made by Chicago Title or by CT&T.
4.02 Agreement Regarding Cumulative 1997 and 1998 Federal Income Tax
Payments. Alleghany and Chicago Title agree that, as of the date hereof, the
cumulative payments made, or deemed made for purposes of this Agreement by
Chicago Title with respect to the year 1997 is $___________, and with respect to
the year 1998 is $_________.
4.03 Payment of Consolidated or Combined State Tax Relating to
Returns Filed After the Chicago Title Distribution Date. The provisions of
Section 4.01 shall be equally applicable with respect to any Consolidated or
Combined State Tax relating to any Pre-Distribution Period or Straddle Period.
4.04 Method of Payment. All payments required by this Agreement
shall be made by (i) wire transfer (by no later than 1:00 p.m. Eastern time on
the required date of
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payment) to the appropriate bank account as may from time to time be designated
by the parties for such purpose, provided that on the date of such wire transfer
notice of the transfer is given to the recipient thereof in accordance with
Section 17.01 of this Agreement or (ii) any other method agreed to by the
parties. All payments due under this Agreement shall be deemed to be paid when
available funds are actually received by the payee.
SECTION 5. Assistance and Cooperation. After the Chicago Title
Distribution Date, each of Alleghany and Chicago Title shall cooperate in good
faith (and cause the respective members of their affiliated groups to cooperate)
with each other and with each other's agents, including accounting firms and
legal counsel, in connection with Tax matters relating to the Alleghany Group
and the Chicago Title Group, including (i) preparation and filing of Tax
returns, (ii) determining the liability for, and amount of, any Taxes due
(including estimated Taxes) or the right to and amount of any refund of Taxes,
(iii) examinations of Tax returns, (iv) the determination of the basis of the
stock of any corporation, and (v) any administrative or judicial proceeding in
respect of Taxes assessed or proposed to be assessed. Each of Alleghany and
Chicago Title shall also make available to each other, as reasonably requested
and available, personnel (including officers, directors, employees and agents of
Alleghany and Chicago Title or members of their respective affiliated group)
responsible for preparing, maintaining, and interpreting information and
documents relevant to Taxes, and personnel reasonably required as witnesses or
for purposes of providing information or documents in connection with any
administrative or judicial proceeding relating to Taxes. Any information or
documents provided under this Section 5 shall be kept confidential by the person
receiving the information or
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documents, except as may otherwise be necessary in connection with the filing of
Tax returns or in connection with any administrative or judicial proceeding
relating to Taxes.
SECTION 6. Tax Records.
6.01 Retention of Tax Records. Each of Alleghany and Chicago Title
shall, and shall cause the members of their respective affiliated groups, to
preserve and keep all reports of Taxes due, any claims for refund of Taxes paid,
any information return with respect to Taxes, or any other similar report,
statement, declaration, or document required to be filed under the Code or other
Tax Law, including any attachments, exhibits, or other materials submitted with
any of the foregoing, and including any amendments or supplements to any of the
foregoing ("Tax Returns"), Tax Return workpapers, documentation relating to any
audit, review, examination, or any other administrative or judicial proceeding
with the purpose or effect of redetermining Taxes, and any other books of
account or records required to be maintained under the Code or other applicable
Tax Laws or under any record retention agreement with any Tax authority ("Tax
Records") exclusively relating to the assets and activities of their respective
affiliated groups for Pre-Distribution Tax Periods and any Straddle Periods for
so long as the contents thereof may become material in the administration of any
matter under the Code or other applicable Tax Law, but in any event until the
later of (i) the expiration of any applicable statutes of limitation, and (ii)
seven years after the Chicago Title Distribution Date. If, prior to the
expiration of the applicable statute of limitation and such seven-year period,
Alleghany or Chicago Title reasonably determines that any Tax Records which it
is required to preserve and keep under this Section 6 are no longer material in
the administration of any matter under the Code or other applicable Tax Law,
Alleghany or Chicago Title, as the case may be, may dispose, or may permit
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the members of their respective affiliated groups to dispose, of such records
upon 90 days' prior notice to the other party. Such notice shall include a list
of the records to be disposed of describing in reasonable detail each file,
book, or other record accumulation being disposed. The notified person shall
have the opportunity, at its cost and expense, to copy or remove, within such
90-day period, all or any part of such Tax Records.
6.02 Access to Tax Records. Alleghany and Chicago Title shall make,
and shall cause the members of their respective affiliated groups to make,
available to each other for inspection and copying during normal business hours
upon reasonable notice all Tax Records in their possession to the extent
reasonably required by the other party in connection with the preparation of Tax
Returns, audits, litigation, the determination of basis, or the resolution of
items under this Agreement.
SECTION 7. Tax Contests.
7.01 Notice. Each of Alleghany or Chicago Title, as the case may be,
shall provide prompt notice to the other of any pending or threatened Tax audit,
assessment or proceeding or other Tax contest of which it or any member of their
respective affiliated groups receives any written communication related to Taxes
for Tax Periods for which Alleghany or Chicago Title is, or may be, indemnified
by the other party hereunder. Such notice shall contain factual information (to
the extent known) describing any asserted Tax liability in reasonable detail and
shall be accompanied by copies of any notice and other documents received from
any Tax authority in respect of any such matters. If an indemnified party
receives any written communication of an asserted Tax liability with respect to
a matter for which it is to be
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indemnified hereunder and such party fails to give the indemnifying party prompt
notice of such asserted Tax liability, then (i) if the indemnifying party is
precluded from contesting the asserted Tax liability in any forum as a result of
the failure to give prompt notice, the indemnifying party shall have no
obligation to indemnify the indemnified party for any Taxes arising out of such
asserted Tax liability, and (ii) if the indemnifying party is not precluded from
contesting the asserted Tax liability in any forum, but such failure to give
prompt notice results in a monetary detriment to the indemnifying party, then
any amount which the indemnifying party is otherwise required to pay the
indemnified party pursuant to this Agreement shall be reduced by the amount of
such detriment.
7.02 Control of Tax Contests. Alleghany shall have full
responsibility and discretion in handling, settling or contesting any Tax audit
or contest involving a Tax reported on the Alleghany Consolidated Return;
provided, however, that with respect to any Tax for which Chicago Title has
liability under this Agreement, Alleghany shall consult with, and consider in
good faith any suggestions of, Chicago Title, shall keep Chicago Title informed
as to the progress of any Tax audit or contest and, if requested by Chicago
Title, shall consult with, and consider in good faith any recommendation by,
Chicago Title (or its counsel) concerning the conduct of such Tax audit or
contest.
In the case of any return involving any Combined or Consolidated
State Tax, the person responsible under the Tax Law for the preparation and
filing of such return shall have full responsibility and discretion in handling,
settling or contesting any Tax audit or contest involving any Combined or
Consolidated State Tax; provided, however, that the person with such
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responsibility shall consult with, and consider in good faith any suggestions
of, the other with respect to any Tax for which such other person has liability
under this Agreement.
SECTION 8. Effective Date; Termination of Prior Tax Sharing
Agreements. This Agreement shall be effective on the Chicago Title Distribution
Date. Immediately prior to the Chicago Title Distribution Date, any written or
oral agreement or any other arrangements relating to the allocation of Taxes
existing between Alleghany and any member of the Alleghany Group and any member
of the Chicago Title Group (other than this Agreement) shall be terminated, and
neither party shall thereafter have any liability or obligation (whether in
respect of past or future Taxes) to the other under any prior tax allocation
agreement.
SECTION 9. No Inconsistent Actions.
9.01 Chicago Title Agreements. Chicago Title covenants and agrees
that it will not take any action, and it will cause each member of the Chicago
Title Group to refrain from taking any action, which may be inconsistent with
the Tax treatment of the AAM Distribution or the Chicago Title Distribution as
contemplated in the Ruling Request (any such action is referred to in this
Section 9 as a "Chicago Title Tainting Act"), unless (i) Chicago Title either
(A) obtains a ruling with respect to the Tainting Act from the Internal Revenue
Service or other applicable Tax Authority that is reasonably satisfactory to
Alleghany (except that neither Chicago Title nor any member of the Chicago Title
Group shall submit any such ruling request if Alleghany determines in good faith
that filing such request might have a materially adverse effect upon Alleghany),
or (B) obtains an unqualified opinion of independent nationally recognized tax
counsel acceptable to Alleghany, on a basis of assumed facts and representations
consistent with
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the facts at the time of such action, that such Tainting Act will not adversely
affect the Tax treatment of the AAM Distribution or the Chicago Title
Distribution as contemplated in the Ruling Request, or (ii) Alleghany consents
in writing to such Tainting Act, which consent shall be granted or withheld in
the sole and absolute discretion of Alleghany.
Without limiting the foregoing, during the two-year period following
the Chicago Title Distribution Date, unless clause (i) or (ii) of the preceding
paragraph is satisfied with respect to the applicable action, neither Chicago
Title nor CT&T will (a) liquidate or merge with or into any other corporation;
(b) issue more than 20 percent, by vote or value, of its capital stock in one or
more transactions; (c) redeem, purchase or otherwise reacquire more than five
(5) percent, by vote or value, of its capital stock in one or more transactions
(other than in connection with future employee benefit plans or pursuant to a
future market purchase program involving five (5) percent or less of its
publicly traded stock); (d) sell, exchange, distribute or otherwise dispose of,
other than in the ordinary course of business, more than 25 percent of the
assets constituting the trades or businesses relied upon in the Ruling Request
to satisfy Section 355(b) of the Code; or (e) discontinue or cause to be
discontinued the active conduct of the trades or businesses relied upon in the
Ruling Request to satisfy Section 355(b) of the Code.
9.02 No Inconsistent Plan or Intent. Chicago Title represents and
warrants that neither Chicago Title nor any of the members of the Chicago Title
Group has any plan or intent to take any action which is inconsistent with any
factual statements or representations in the Ruling Request. Regardless of any
change in circumstances, Chicago Title covenants and agrees that Chicago Title
will not take, and it will cause the members of the Chicago Title Group to
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refrain from taking, any such inconsistent action on or before the second
anniversary of the Chicago Title Distribution Date, other than as permitted in
this Section 9.
9.03 Chicago Title Indemnity. Notwithstanding anything to the
contrary in this Agreement, Chicago Title shall be solely liable for, and shall
indemnify and hold harmless Alleghany and members of the Alleghany Group
(including members of the AAM Group) from any Tax (a) resulting from a Chicago
Title Tainting Act by Chicago Title or the members of the Chicago Title Group,
regardless of whether clause (i) or (ii) of Section 9.01 was satisfied with
respect to such Tainting Act and (b) on, based upon, or resulting from, the Land
Trust Contribution and the Newco Distributions.
9.04 Exclusion From Indemnity. Notwithstanding the provisions of
Section 2.05 and this Section 9, Chicago Title shall have no liability for, and
shall not be obligated to indemnify and hold harmless Alleghany and members of
the Alleghany Group (including members of the AAM Group) from any Tax which
results solely and directly from, and then only to the extent attributable to,
(a) any errors or omissions in the factual statements or representations made in
the Ruling Request relating to Alleghany or members of the Alleghany Group,
excluding the Chicago Title Group, or (b) the taking, or the failure to take, by
Alleghany or any member of the AAM Group after the Date of the AAM Distribution
of any action which is inconsistent with any factual statements or
representations relating to Alleghany or, as to actions or inaction's after the
Date of the AAM Distribution, by any members of the AAM Group, in the Ruling
Request (any error or omission in clause (a) or the taking or failure to take in
clause (b) being referred to herein as an "Alleghany Tainting Act."). Chicago
Title shall be relieved of its liability for, or its obligation to indemnify
hereunder only if, or to the extent that, Chicago Title
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would have had no liability, or its liability would have been reduced, had no
Alleghany Tainting Act occurred. For this purpose, no account shall be taken of
the increased possibility of discovery caused by reason of any Alleghany
Tainting Act nor the effect of any other act (including by way of illustration
and not by way of limitation, any extension by Alleghany of any statute of
limitations).
SECTION 10. Carrybacks.
10.01 Waiver of Carrybacks. Chicago Title agrees that Chicago Title
shall make all available elections to waive or relinquish the right to claim in,
or carryback to, any Tax Period for which any member of the Chicago Title Group
was also a member of the Alleghany Group arising in a Post-Distribution Period,
and Chicago Title shall make no affirmative election to claim any such carryback
of any net operating loss, net capital loss, unused or excess tax credit, or
other similar deductible or creditable Tax items which may or must be carried
from any Post-Distribution Period back to a Pre-Distribution Period under the
Code.
10.02 Permitted Carrybacks. If notwithstanding the making of all
available elections, Chicago Title is required to claim in, or carryback to, any
Tax Period for which any member of the Chicago Title Group was also a member of
Alleghany any deductible or creditable Tax items from any Post-Distribution
Period (a "carryback item"), then Alleghany shall pay to Chicago Title promptly
after the same is received (or credited against any other Tax obligation of
Alleghany) the amount of any refund of Tax in a Pre-Distribution Period received
(credited against another Tax) attributable to a carryback item; provided,
however, that the amount of such refund payable to Chicago Title shall not
exceed the reduction in the Chicago
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Title Consolidated Tax Liability for the Pre-Distribution Period attributable to
the carryback item.
SECTION 11. Survival of Obligations. The representations,
warranties, covenants and agreements set forth in this Agreement shall be
unconditional and absolute and shall remain in effect without limitation as to
time.
SECTION 12. Treatment of Payments; Tax Gross Up.
12.01 Treatment of Tax Indemnity Payments. In the absence of any
change in tax treatment under the Code or other applicable Tax Law, any Tax
indemnity payments made by Alleghany or Chicago Title under Sections 2 or 9,
shall be reported for Tax purposes by the payor and the recipient as
distributions or capital contributions, as appropriate, occurring immediately
before the Chicago Title Distribution Date, but only to the extent the payment
does not relate to a Tax allocated to the payor in accordance with Treasury
Regulation Section 1.1502-33(d) (or under corresponding principles of other
applicable Tax Laws).
12.02 Tax Gross-Up. If notwithstanding the manner in which Tax
indemnity payments were reported, there is an adjustment to the Tax liability of
Alleghany or Chicago Title as a result of its receipt or accrual of a payment
pursuant to this Agreement, such payment shall be appropriately adjusted so that
the amount of such payment, reduced by the amount of all Taxes payable with
respect to the receipt or accrual thereof (but taking into account all
correlative Tax savings resulting from the payment of such Taxes), shall equal
the amount of the payment which the company receiving such payment would
otherwise be entitled to receive pursuant to this Agreement.
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SECTION 13. Disagreements and Disputes.
13.01 Disagreements as to Calculations, Returns, etc. If after good
faith negotiations Alleghany and Chicago Title cannot agree on the application
of this Agreement to the matters referred to in Sections 2.06, 2.08, 3.03,
10.01, 10.02 and 12.02, then such matter (and only such matters) will be
referred to a nationally recognized accounting firm acceptable to both Alleghany
and Chicago Title (the "Accounting Firm"). The Accounting Firm shall furnish
written notice to Alleghany and Chicago Title of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days after
its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on Alleghany and Chicago Title.
In accordance with Section 16, each of Alleghany and Chicago Title shall pay its
own fees and expenses (including the fees and expenses of its representatives)
incurred in connection with the referral of the matter to the Accounting Firm.
All fees and expenses of the Accounting Firm in connection with such referral
shall be shared equally by Alleghany and Chicago Title.
SECTION 14. Late Payments. Any amount owed by one party to another
party under this Agreement which is not paid when due shall bear interest at the
base rate on corporate loans charged by Chase Manhattan Bank, N.A., New York,
New York from time to time, compounded daily on the basis of a year of 365 or
366 (as applicable) days and actual days elapsed, plus two (2) percentage
points, compounded semiannually, from the due date of the payment to the date
paid. To the extent interest required to be paid under this Section 14
duplicates interest required to be paid under any other provision of this
Agreement, interest shall
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be computed at the higher of the interest rate provided under this Section 14 or
the interest rate provided under such other provision.
SECTION 15. Setoff. Notwithstanding anything to the contrary in this
Agreement, each of Alleghany and Chicago Title has the right to collect payments
under this Agreement that are more than sixty (60) calendar days past due by
setoff against payments due to the other party under this Agreement or any other
agreement between them. Notwithstanding the preceding sentence, in the event and
to the extent that any payment to be made under this Agreement is in dispute
between the parties and the disputed matter is subject to the dispute resolution
procedure set forth in Section 13 of this Agreement, the setoff provision of
this Section 15 shall not apply to the extent of the disputed amount.
SECTION 16. Expenses. Except as provided in Section 13, each of
Alleghany and Chicago Title and members of their respective affiliated groups
shall bear their own expenses incurred in connection with preparation of Tax
returns, Tax contests, and other matters related to Taxes under the provisions
of this Agreement.
SECTION 17. General Provisions.
17.01 Addresses and Notices. Any notice, demand, request or report
required or permitted to be given or made to any party under this Agreement
shall be in writing and shall be deemed given or made when delivered to a party
or when sent by first class mail or by other commercially reasonable means of
written communication (including delivery by an internationally recognized
courier service or by facsimile transmission) to the party at the party's
address as follows:
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If to Alleghany, at: Alleghany Corporation
375 Park Avenue
New York, New York 10152
Attn: General Counsel
Telecopy number: (212) 759-3295
with a copy to: Donovan Leisure Newton & Irvine
30 Rockefeller Plaza
New York, New York 10112
Attn: Richard D. Belford, Esq.
Telecopy number: (212) 632-3315
If to Chicago Title, at: Chicago Title Corp.
171 North Clark Street
Chicago, Illinois 60601
Attn: General Counsel
Telecopy number: (312) 223-5912
with a copy to: Chicago Title Corp.
171 North Clark Street
Chicago, Illinois 60601
Attn: Chief Financial Officer
Telecopy number: (312) 223-3377
A party may change the address for receiving notices under this
Agreement by providing written notice of the change of address to the other
parties.
17.02 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and assigns.
17.03 Waiver. No failure by any party to insist upon the strict
performance of any obligation under this Agreement or to exercise any right or
remedy under this Agreement shall constitute waiver of any such obligation,
right, or remedy or any other obligation, rights, or remedies under this
Agreement.
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17.04 Invalidity of Provisions. If any provision of this Agreement
is or becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein shall
not be affected thereby.
17.05 Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking action as
may be necessary or appropriate to achieve the purposes of this Agreement,
including the execution and delivery to the other parties and their Affiliates
and representatives of such powers of attorney or other authorizing
documentation as is reasonably necessary or appropriate in connection with Tax
contests (or portions thereof) under the control of such other parties in
accordance with Section 7.
17.06 Integration. This Agreement constitutes the entire agreement
among the parties pertaining to the subject matter of this Agreement and
supersedes all prior agreements and understanding pertaining thereto.
17.07 Construction. The language in all parts of this Agreement
shall in all cases be construed according to its fair meaning and shall not be
strictly construed for or against any party.
17.08 No Double Recovery; Subrogation. No provision of this
Agreement shall be construed to provide an indemnity or other recovery for any
costs, damages, or other amounts for which the damaged party has been fully
compensated under any other provision of this Agreement or under any other
agreement or action at law or equity. Unless expressly required in this
Agreement, a party shall not be required to exhaust all remedies available under
other agreements or at law or equity before recovering under the remedies
provided in this Agreement.
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Subject to any limitations provided in this Agreement, the indemnifying party
shall be subrogated to all rights of the indemnified party for recovery from any
third party.
17.09 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
17.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts executed in and to be performed in that State.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers as of the date set forth above.
ALLEGHANY CORPORATION
By:_______________________________
Title:
CHICAGO TITLE CORP.
By:_______________________________
Title:
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Exhibit 10.3
CHICAGO TITLE CORPORATION
1998 LONG-TERM INCENTIVE PLAN
ARTICLE 1
GENERAL
1.1 Purpose. The purpose of the Chicago Title Corporation 1998
Long-Term Incentive Plan (the "Plan") is to promote the longer-term financial
success of Chicago Title Corporation (the "Corporation") by (i) attracting,
retaining and rewarding individuals who can and do contribute to such success;
(ii) motivating Participants, by means of appropriate incentives, to achieve
long-range goals; and (iii) further identifying Participants' interests with
those of the Corporation's other shareholders through compensation that is based
on the Corporation's Common Stock.
1.2 Administration of the Plan. The Plan shall be administered by
the Compensation Committee of the Board (the "Committee"). The Committee shall
be selected by the Board, and shall consist of two or more members of the Board.
The Committee's powers and authority include, but are not limited to, selecting
from among the Eligible Individuals those persons who shall receive Awards;
determining the types and terms and conditions of all Awards granted; permitting
transferability of Awards to third parties; interpreting the Plan's provisions;
and administering the Plan in a manner that is consistent with its purpose. Any
interpretation of the Plan by the Committee and any decision made by it under
the Plan is final and binding. Except to the extent prohibited by applicable law
or the applicable rules of a stock exchange, the Committee may allocate all or
any portion of its responsibilities and powers to any one or more of its members
and may delegate all or any part of its responsibilities and powers to any
person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time.
1.3 Participation. Subject to the terms and conditions of the Plan,
the Committee shall determine and designate, from time to time, from among the
Eligible Individuals, those persons who will be granted one or more Awards under
the Plan, and thereby become participants ("Participants") in the Plan. In the
discretion of the Committee, a Participant may be granted any Award permitted
under the provisions of the Plan.
1.4 Effective Date and Term of Plan. The Plan shall be effective as
of the date that it is approved by Alleghany Corporation, as the sole
shareholder of the Corporation (the "Effective Date"). No Awards may be granted
under the Plan after the close of business on April 30, 2003.
1.5 Defined Terms. Capitalized terms in the Plan shall be as defined
in the Plan (including the definition provisions of Article 8 of the Plan).
<PAGE> 2
ARTICLE 2
TYPES OF AWARDS
2.1 General. An Award may be granted singularly, in
combination with another Award(s) or in tandem whereby exercise or vesting of
one Award held by a Participant cancels another Award held by the Participant.
Awards may be granted as alternatives to or replacement of awards outstanding
under the Plan, or any other plan or arrangement of the Corporation or a Related
Company (including a plan or arrangement of a business or entity, all or a
portion of which is acquired by the Corporation or a Related Company). Every
Award shall be subject to such conditions, restrictions and contingencies as the
Committee shall determine. These may include completion of specified periods of
continuous service in the employ of the Corporation or its Related Companies
and/or the achievement of specified business and/or personal performance goals,
and may provide for the forfeiture of all or any portion of such Award in
specified circumstances. The Committee may also specify by whom and/or in what
manner the accomplishment of such performance goals (if any) shall be
determined.
2.2 Certain Qualifying Awards. The Committee, in its sole
discretion, may grant an Award to any Participant with the intent that such
Award qualifies as "performance-based compensation" under Section 162(m) of the
Code, as amended (a "Qualifying Award"). The right to receive (or retain) any
Award granted as a Qualifying Award, other than Options and Stock Appreciation
Rights granted at Option Prices and Exercise Prices, respectively, of not less
than 100% of Fair Market Value on the date of grant, shall be conditional upon
the achievement of performance goals established by the Committee in writing at
the time such award is granted. Such performance goals, which may vary from
Participant to Participant and from Qualifying Award to Qualifying Award, shall
be based upon the attainment of specific amounts of, or increases 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, return on equity or assets
or total return to stockholders, whether applicable to the Corporation or any
relevant subsidiary or business unit or entity in which the Corporation has a
significant investment, or any other company or companies, or any combination
thereof as the Committee may deem appropriate. Prior to the payment of any Award
granted as a Qualifying Award, the Committee shall 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 in the aggregate exceed (i) Common
Stock-based Awards (pursuant to Sections 2.3, 2.4 and 2.5 hereof) for 150,000
shares of Common Stock (whether payable in cash or Common Stock), subject to
adjustment as provided in Section 3.2 hereof, (ii) a Tax Bonus payable with
respect to the Common Stock-based Awards described in clause (i), and (iii) cash
payments (other than Tax Bonuses) of $1,000,000.
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<PAGE> 3
2.3 Options.
(a) The grant of an option (an "Option") entitles the Participant to
purchase shares of Common Stock at an exercise price per share which is
specified by the Committee (the "Option Price").
(b) Upon exercise of an Option, the Option Price may be paid by
means of a cash payment or such other means as the Committee may from time
to time permit, including (i) tendering (either actually or by
attestation) shares of Common Stock purchased upon exercise of the Option,
with such shares valued at Fair Market Value at the time of exercise, (ii)
authorizing a third party to sell shares of Common Stock (or a sufficient
portion thereof) acquired upon exercise of the Option and to remit to the
Corporation a sufficient portion of the sale proceeds to pay for all the
shares of Common Stock acquired through such exercise or (iii) any
combination of the above.
(c) The Corporation may, if the Committee so determines, accept the
surrender by a Participant, or the personal representative of a
Participant, of an Option, in consideration of a payment by the
Corporation equal to the difference obtained by subtracting the aggregate
Option Price from the aggregate Fair Market Value of the Common Stock
covered by the Option on the date of such surrender, such payment to be in
cash, or, if the Committee so provides, in shares of Common Stock valued
at Fair Market Value on the date of such surrender, or partly in shares of
Common Stock and partly in cash.
(d) An Option granted by the Committee to a Participant who is a key
employee of the Corporation and its subsidiaries (within the meaning of
Section 424(f) of the Code) may be designated as an ISO. The terms of any
Option granted as an ISO shall comply in all respects with the provisions
of Section 422 of the Code.
2.4 Stock Appreciation Rights. A stock appreciation right (a "Stock
Appreciation Right") is a right to receive a payment equal to the excess of the
aggregate Fair Market Value at time of exercise of a specified number of shares
of Common Stock over the aggregate exercise price of the Stock Appreciation
Rights being exercised. Such payment shall be made in cash, or, if the Committee
so provides, in shares of Common Stock valued at Fair Market Value on the date
of exercise of the Stock Appreciation Right, or partly in shares of Common Stock
and partly in cash. The Committee shall establish an exercise price in
connection with each grant of a Stock Appreciation Right (the "Exercise Price").
2.5 Stock Awards. A stock award ("Stock Award") is a grant of shares
of Common Stock or of a right to receive shares of Common Stock (or their cash
equivalent or a combination of both) in the future.
2.6 Cash Awards. A cash award ("Cash Award") is a right denominated
in cash or cash units to receive a payment, which may be in the form of cash,
shares of Common Stock or a combination of both, in the future.
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<PAGE> 4
2.7 Tax Bonuses. The Committee is authorized, subject to limitations
under applicable law, to grant Tax Bonuses to Participants. The Committee shall
determine the terms and conditions of such Awards of Tax Bonuses.
2.8. Agreements. An Award under the Plan may, in the Committee's
discretion, be evidenced by an agreement (the "Agreement"), which may contain
such terms and conditions as may be approved by the Committee, and shall be
executed by an officer on behalf of the Corporation and by the Participant.
ARTICLE 3
SHARES SUBJECT TO THE PLAN
3.1 Maximum Shares Available for Delivery. Subject to adjustment as
provided in Section 3.2 hereof, the maximum number of shares of Common Stock
that may be delivered to Participants and their beneficiaries under the Plan
shall be 2,230,000 shares of Common Stock, of which (i) a maximum of 1,580,000
shares may be issued in connection with Awards granted pursuant to Sections 2.3
and 2.4 (relating to Options and Stock Appreciation Rights) and (ii) a maximum
of 650,000 shares may be issued in connection with Awards granted pursuant to
Section 2.5 (relating to Stock Awards). In addition, any shares of Common Stock
granted under the Plan which are forfeited back to the Corporation because of
the failure to meet an Award contingency or condition shall again be available
for delivery pursuant to new Awards granted under the Plan. Any shares of Common
Stock covered by an Award (or portion of an Award) granted under the Plan which
is forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been delivered for purposes of determining the maximum number of shares of
Common Stock available for delivery under the Plan. Likewise, if any Option is
exercised by tendering shares of Common Stock, either actually or by
attestation, to the Corporation as full or partial payment in connection with
the exercise of an Option under this Plan, only the number of shares of Common
Stock issued net of the shares of Common Stock tendered shall be deemed
delivered for purposes of determining the maximum number of shares of Common
Stock available for delivery under the Plan. Similarly, if an Option shall be
surrendered as provided in Section 2.3(c) hereof, only the number of shares of
Common Stock (if any) paid in consideration of such surrender, but not the
shares which had been covered by the Option, shall be deemed delivered for
purposes of determining the maximum number of shares of Common Stock available
for delivery under the Plan. Shares of Common Stock to be delivered or purchased
under the Plan may be either authorized but unissued shares of Common Stock or
shares of Common Stock held by the Corporation as treasury shares.
3.2. Changes in Capital Structure. In the event of any corporate
transaction involving the Corporation (including, without limitation, any
subdivision or combination or exchange of the outstanding shares of Common
Stock, stock dividend, stock split, spin-off, split-off, recapitalization,
capital reorganization, liquidation, reclassification of shares of Common Stock,
merger, consolidation, extraordinary cash dividend, or sale, lease or transfer
of
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substantially all of the assets of the Corporation), the Committee shall make
such equitable adjustments as it may deem appropriate in the Plan and the Awards
thereunder. Action by the Committee may include adjustment of: (i) the number
and kind of shares which may be delivered under the Plan; (ii) the number and
kind of shares subject to outstanding Awards; (iii) the maximum number of shares
of Common Stock with respect to which Qualifying Awards may be granted to any
Participant in any calendar year under Section 2.2 hereof; and (iv) the Option
Prices of outstanding Options and the Exercise Prices of outstanding Stock
Appreciation Rights; as well as any other adjustments that the Committee
determines to be equitable.
3.3 Change in Control. In the event of a Change in Control, all
outstanding Options and Stock Appreciation Rights shall become immediately
exercisable in full, and any Stock Awards shall immediately vest or shall become
immediately payable in full.
3.4 Tender Offers and Exchange Offers. In the event of any tender
offer or exchange offer, by any person other than the Corporation, for shares of
Common Stock, the Committee may make such adjustments in outstanding Awards and
authorize such further action as it may deem appropriate to enable the
recipients of outstanding Awards to avail themselves of the benefits of such
offer, including, without limitation, acceleration of the exercise date of
outstanding Options and/or Stock Appreciation Rights so that they become
immediately exercisable in whole or in part, or offering to acquire all or any
portion of specified categories of Options for a price determined pursuant to
Section 2.3(c) hereof, or acceleration of the payment of outstanding Awards
payable, in whole or in part, in shares of Common Stock.
3.5 Limitation on Discretion to Make Adjustments. Notwithstanding
any provision of this Article 3 to the contrary, no adjustment shall be made in
any outstanding Qualifying Award to the extent that such adjustment would
adversely affect the status of that Qualifying Award as "performance-based
compensation" under Section 162(m) of the Code or cause the Plan to violate
Section 422(b)(1) of the Code with respect to ISOs.
ARTICLE 4
MISCELLANEOUS
4.1. Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by a Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations as the Committee
shall require.
4.2 Limitation of Implied Rights.
(a) No Eligible Individual shall have any claim or right to be
granted any Award under the Plan.
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(b) A Participant shall have no rights as a holder of Common Stock
by reason of Awards under the Plan, unless and until certificates for
shares of Common Stock are issued to the Participant or the issuance of
such shares of Common Stock is effected on a non-certificate basis.
(c) Neither the Plan nor any action taken thereunder shall be
construed as giving any employee any right to be retained in the employ of
the Corporation or any subsidiary.
4.3. Costs and Expenses. All costs and expenses incurred in
administering the Plan shall be borne by the Corporation.
4.4. Unfunded Plan. The Plan shall be unfunded. The Corporation
shall not be required to establish any special or separate fund nor to make any
other segregation of assets to assure the payment of any Award under the Plan.
4.5. Gender and Number. Where the context admits, words in any
gender shall include any other gender, words in the singular shall include the
plural and the plural shall include the singular.
4.6. Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan shall be pledged, encumbered,
or hypothecated to, or in favor of, or subject to any lien, obligation, or
liability of such Participants to any party other than the Corporation or any
Related Company, or assigned or transferred by such Participant otherwise than
by will or the laws of descent and distribution, and such Awards and rights
shall be exercisable during the lifetime of the Participant only by the
Participant or his or her guardian or legal representative. Notwithstanding the
foregoing, the Committee may, in its discretion, provide that Awards or other
rights or interests of a Participant granted pursuant to the Plan (other than an
ISO) be transferable, without consideration, to immediate family members (i.e.,
children, grandchildren or spouse), to trusts for the benefit of such immediate
family members and to partnerships in which such family members are the only
partners. The Committee may attach to such transferability feature such terms
and conditions as it deems advisable. In addition, a Participant may, in the
manner established by the Committee, designate a beneficiary (which may be a
person or a trust) to exercise the rights of the Participant, and to receive any
distribution, with respect to any Award upon the death of the Participant. A
beneficiary, guardian, legal representative or other person claiming any rights
under the Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any Award Agreement applicable to such Participant,
except as otherwise determined by the Committee, and to any additional
restrictions deemed necessary or appropriate by the Committee.
ARTICLE 5
PLAN AMENDMENT AND TERMINATION
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5.1. Amendment, Modification and Termination. The Board or the
Committee may at any time and from time to time alter, amend, suspend or
terminate the Plan in whole or in part.
5.2. Awards Previously Granted. No termination, amendment or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
ARTICLE 6
AWARD SETTLEMENTS AND PAYMENTS
6.1. Payments. Awards may be settled through cash payments, the
delivery of shares of Common Stock, the granting of replacement Awards, or any
combination thereof as the Committee shall determine. No fractional shares of
Common Stock shall be issued or delivered pursuant to the Plan or any Award, and
the Committee shall determine whether cash shall be paid or transferred in lieu
of any fractional shares of Common Stock, or whether such fractional shares of
Common Stock or any rights thereto shall be canceled. Any Award settlement,
including payment deferrals, may be subject to such conditions, restrictions and
contingencies as the Committee shall determine. The Committee may permit or
require the deferral of any Award payment, subject to such rules and procedures
as it may establish, which may include provisions for the payment or crediting
of interest, or dividend equivalents, including converting such credits into
deferred Common Stock equivalents.
6.2. Limit on Distribution. Distribution of shares of Common Stock
or other amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Corporation
shall have no liability to deliver any shares of Common Stock under the
Plan or make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws (including,
without limitation, the requirements of the Securities Act of 1933), and
the applicable requirements of any securities exchange or similar entity.
(b) To the extent that the Plan provides for issuance of stock
certificates to reflect the issuance of shares of Common Stock, the
issuance may be effected on a non-certificated basis, to the extent not
prohibited by applicable law or the applicable rules of any stock
exchange.
6.3. Tax Withholding. Whenever the Corporation proposes or is
required to distribute Common Stock under the Plan, the Corporation may require
the recipient to remit to the Corporation an amount sufficient to satisfy any
Federal, state and local tax withholding requirements prior to the issuance of
such shares or, in the discretion of the Committee, the Corporation may permit
to be delivered, or may withhold from the shares to be delivered, shares
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sufficient to satisfy all or a portion of such tax withholding requirements.
Whenever under the Plan payments are to be made in cash, such payments may be
net of an amount sufficient to satisfy any Federal, state and local tax
withholding requirements.
ARTICLE 7
GOVERNING LAW
7.1 Law Governing. The validity and construction of the Plan and any
Agreements entered into hereunder shall be governed by the laws of the State of
Delaware.
ARTICLE 8
DEFINED TERMS
8.1 Definitions. For purposes of the Plan, the terms listed below
shall be defined as follows:
(a) Award. The term "Award" means any award or benefit granted to
any Participant under the Plan, including, without limitation, the grant
of Options (including ISOs), Stock Appreciation Rights, Stock
Awards, Cash Awards and Tax Bonuses.
(b) Board. The term "Board" means the Board of Directors of the
Corporation.
(c) Change in Control. The term "Change in Control" of the
Corporation means:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act)
of fifty percent (50%) or more of either (A) the then
outstanding shares of capital stock of the Corporation (the
"Outstanding Corporation Capital Stock") or (B) the
combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in
the election of directors (the "Corporation Voting
Securities") in a tender offer or exchange offer made to
all of the stockholders of the Corporation (provided,
however, that a Change in Control shall not include any of
the following transactions: (1) any acquisition by or from
the Corporation or any of its subsidiaries, (2) any
acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Corporation or any of its
subsidiaries, or (3) any acquisition by any corporation
with respect to
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<PAGE> 9
which, following such acquisition, more than fifty percent
(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 entitled to
vote generally in the election of directors 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
Corporation Capital Stock and Corporation Voting Securities
immediately prior to such acquisition, in substantially the
same proportion as their ownership immediately prior to such
acquisition of the Outstanding Corporation Capital Stock and
Corporation Voting Securities, as the case may be); or
(ii) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation (a "Business
Combination") with respect to which all or substantially
all of the individuals and entities who were the respective
beneficial owners of the Outstanding Corporation Capital
Stock and Corporation Voting Securities immediately prior
to such Business Combination do not, following such
Business Combination, beneficially own, directly or
indirectly, more than fifty percent (50%) of, respectively,
the then outstanding shares of capital stock and the
combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from the Business Combination, in substantially the same
proportion as their ownership immediately prior to such
Business Combination of the Outstanding Corporation Capital
Stock and Corporation Voting Securities, as the case may
be; or
(iii) Approval by the stockholders of the Corporation of a sale or
other disposition of all or substantially all of the assets of
the Corporation, other than to a corporation with respect to
which, following such sale or disposition, more than fifty
percent (50%) of, respectively, the then outstanding shares of
capital stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors 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 Corporation Capital Stock and Corporation
Voting Securities 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 Corporation Capital Stock and Corporation Voting
Securities, as the case may be; or
(iv) Approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
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Any other provision of this definition to the contrary
notwithstanding, "Change of Control" shall not include any
transaction described in paragraph (i), (ii) or (iii) above where,
in connection with such transaction, the affected Participant or any
party acting in concert with the affected Participant substantially
increases his or its, as the case may be, ownership interest in the
Corporation or a successor to the Corporation.
(d) Code. The term "Code" means the Internal Revenue Code of 1986,
as amended. A reference to any provision of the Code shall include
reference to any successor provision of the Code.
(e) Common Stock. The term "Common Stock" means shares of common
stock of the Corporation, par value $1.00 per share.
(f) Eligible Individual. The term "Eligible Individual" means any
director or employee of the Corporation or a Related Company, and any
other person providing services to the Corporation or a Related Company.
(g) Fair Market Value. The "Fair Market Value" of the Common Stock
on a particular date is the mean of the high and low sales price of a
share of Common Stock on such date as reported on the stock exchange or
market on which the Common Stock is primarily traded, or if no sale is
made on such date, the weighted average of the mean of the high and low
sales prices of a share of Common Stock on the next preceding day and the
next succeeding day on which such sales were made as reported on the stock
exchange or market on which the Common Stock is primarily traded.
(h) ISO. The term "ISO" means any Option designated as an incentive
stock option within the meaning of Section 422 of the Code.
(i) Related Company. The term "Related Company" means (i) any
corporation, partnership, joint venture or other entity during any period
in which the Corporation owns, directly or indirectly, at least fifty
percent (50%) of the voting power of all classes of stock of the entity
entitled to vote; and (ii) any corporation, partnership, joint venture or
other entity during any period in which at least fifty percent (50%) of
the voting or profits interest is owned, directly or indirectly, by the
Corporation, or by any entity that is a Related Company by reason of
clause (i) next above.
(j) Tax Bonus. The term "Tax Bonus" means a payment in cash, in the
year in which an amount is included in the gross income of a Participant
in respect of an Award, of an amount equal to the federal, foreign, if
any, and applicable state and local income and employment tax liabilities
payable by the Participant as a result of (i) the amount included in gross
income in respect of the Award (without regard to the Tax Bonus) and (ii)
the payment of the Tax Bonus and the amount in this clause (ii). For
purposes of determining the amount to be paid to the Participant pursuant
to the preceding sentence, the Participant shall be deemed to pay federal,
foreign, if any, and
-10-
<PAGE> 11
state and local income taxes at the highest marginal rate of tax imposed
upon ordinary income for the year in which an amount in respect of the
Award is included in gross income, after giving effect to any deductions
therefrom or credits available with respect to the payment of any such
taxes.
-11-
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF CHICAGO TITLE CORPORATION
AS OF THE SPIN-OFF DATE
Chicago Title and Trust Company (Illinois)
Chicago Title Insurance Company (Missouri)
Alexander Title Agency, Inc. (Virginia)
CATCO, Inc. (Oklahoma - 50%)
Chicago Title Company (California)
Tri-Safe, Inc. (California - 25%)
Chicago Title Company of Alameda County (California)
Chicago Title Insurance Company of Puerto Rico
(Puerto Rico - 99.2%)
Chicago Title of Colorado, Inc. (Colorado)
Creative Land Services, Inc. (Minnesota)
Johnson County Title Company (Kansas)
Lender's Posting and Publishing Company, Inc. (Delaware)
Liberty Title Company (Minnesota)
McHenry County Title Company (Illinois)
Meade Title Agency, Inc. (Ohio)
Service Title of Virginia, Inc. (Virginia - 30%)
CTP, Inc. (Florida - 16%)
Dallas Seven Index, Inc. (Texas - 14%)
SKLD, Inc. (Colorado - 12.91%)
Title Data, Inc. (Texas - 6.25%)
Diversified Information Services Corporation (Arizona - 30%)
Standard Title Company of America, Inc. (Illinois - 25%)
WesTitle Agency, Inc. (Arizona)
Real Estate Index, Inc. (Illinois)
McLean County Title Company (Illinois)
LaSalle County Title LLC (Illinois - 60%)
Spring Services Corporation (California)
Spring Services Texas, Inc. (Texas)
TPO, Inc. (Oklahoma)
Title and Trust Company (Idaho)
Baton Rouge Title Company, Inc. (Louisiana)
The Title Company of Canada, Ltd.
First Title and Abstract (Florida)
Imaged Library Co., LLC (Washington - 50%)
Yuma Title and Trust Company (Arizona)
Sentry Systems, Inc. (Arizona)
Yuma Title Agency (Arizona)
Chicago Title and Trust Company Foundation (Illinois)(1)
Title Accounting Services Corporation (Illinois)
Iowa Land Services Corporation (Iowa)
LC Investment Corporation (Indiana)
The Lake County Trust Company (Indiana)
RealInfo, LLC (Illinois - 50%)
Ticor Financial Company (California)
Chicago Title Agency of Central Ohio (Ohio)
- ------------------------------------
(1) A charitable foundation in which Chicago Title and Trust Company
possesses no ownership interest.
<PAGE> 2
Washington Title Company (Washington)
Heritage American Insurance Services (California)
Decator Title Company (Illinois - 60%)
Chicago Title Flood Services, Inc. (Delaware)
Chicago Title Credit Services, Inc. (Delaware)
Chicago Title Market Intelligence, Inc. (Massachusetts)
TT Acquisition Corp. (Texas)
Security Union Title Insurance Company (California)
Land Title of Pierce County (Washington)
Northwest Equities, Inc. (Texas)
Guardian Title Company of Houston (Texas)
RJW Development Company (New Jersey)
Chicago Title Insurance Company of Oregon (Oregon)
Real Estate Exchange, Inc. (Oregon)
Title-Tax, Inc. (California)
Ticor Title Insurance Company (California)
Commonwealth Title Co. (Washington)
Universal Mortgage Services, Inc. (Delaware)
