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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . to . . . . . . .
Commission file number 001-13995
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CHICAGO TITLE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
---------------
Delaware
(State or Other
Jurisdiction of 36-4217886
Incorporation or (I.R.S. Employer
Organization) Identification Number)
171 North Clark Street
Chicago, Illinois 60601
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (888) 431-4288
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value per New York Stock Exchange
share (Name of Each Exchange on Which
(Title of Each Class) Registered)
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of shares of Common Stock of Chicago Title
Corporation held by non-affiliates of the Registrant on March 1, 1999 (based on
the closing price of $33.75 on such date as reported on the New York Stock
Exchange) was approximately $590,411,295. As of March 1, 1999, 21,919,789 shares
of Common Stock, $1.00 par value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part(s) of this Report:
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Annual Report to Stockholders of Part I and Part II
Chicago Title Corporation for the year 1998
Proxy Statement relating to Annual Meeting Part III
of Stockholders of Chicago Title Corporation
to be held on April 27, 1999
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Chicago Title Corporation
Annual Report on Form 10-K
for the Year ended December 31, 1998
Table of Contents
Page
----
PART I
Item 1. Business......................................................1
Item 2. Properties...................................................11
Item 3. Legal Proceedings............................................12
Item 4. Submission of Matters to a Vote of Security Holders..........12
Supplemental Item. Executive Officers of the Registrant.............12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................14
Item 6. Selected Financial Data......................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.........................................................14
Item 8. Financial Statements and Supplementary Data..................14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................14
PART III
Item 10. Directors and Executive Officers of the Registrant...........15
Item 11. Executive Compensation.......................................15
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................15
Item 13. Certain Relationships and Related Transactions...............15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.....................................................16
Signatures
Index to Financial Statement Schedules
Financial Statement Schedules
Independent Auditors' Report on Financial Statement Schedule
Index to Exhibits
Exhibits
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PART I
Item 1. Business.
Chicago Title Corporation ("Chicago Title") is one of the nation's largest
providers of title insurance and real estate-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 340
full service offices and approximately 4,100 policy-issuing agents in 49 states,
Puerto Rico, the Virgin Islands, Guam, and Canada. Chicago Title believes that
its brand name, national distribution network, financial position and
experienced management have enabled it to become one of the premier companies
participating in the title insurance and real estate-related services industry.
Chicago Title's strategy is to improve its market share and earnings growth by:
(i) focusing its marketing efforts to serve three distinct customer sectors --
Institutional Partners, Core Local Operations, and National Commercial and
Industrial ("National C&I"); (ii) pursuing growth opportunities, including
selective acquisitions; and (iii) generating operating efficiencies and cost
improvements through promotion of best practices throughout the organization and
investments in technology, such as the development of an "electronic spine,"
that will more fully integrate Chicago Title's services and offices.
Chicago Title was organized as a Delaware corporation in March 1998 and
was a wholly owned subsidiary of Alleghany Corporation ("Alleghany"). On June
17, 1998, Chicago Title was spun off from Alleghany (the "Spin-Off") and became
an independent, publicly traded company. In connection with the Spin-Off, the
common stock of Chicago Title was listed on the New York Stock Exchange under
the ticker symbol "CTZ." Chicago Title's principal executive offices are located
at 171 North Clark Street, Chicago, Illinois, 60601 and its telephone number is
(888) 431-4288.
Chicago Title is the public holding company for Chicago Title and Trust
Company ("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. CT&T and CTI are headquartered in Chicago.
Security Union Title Insurance Company ("Security Union"), acquired in 1987, and
Ticor Title Insurance Company ("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
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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.
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 to a real estate transaction.
Chicago Title also provides other information management-based real
estate-related services. Chicago Title Flood Services, Inc., acquired in 1995,
provides certifications as to the flood zone status of properties 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 state-licensed contract
appraisers. Chicago Title made several acquisitions of companies offering real
estate-related services in 1998. Universal Mortgage Services, Inc., now known as
Chicago Title Field Services, Inc., provides property inspection, preservation
and maintenance services nationwide. Consolidated Reconveyance Company, now
operating as a division of CTI, furnishes foreclosure and reconveyance services
to institutional lenders. Westfall & Company provides mortgage services in the
residential mortgage business. Finally, Escondido Escrow and Ranch & Coast
Escrow are two of the largest and most experienced escrow providers in
California. The former is also one of the leading timeshare escrow organizations
in the nation.
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 copies of land title and deed information 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.
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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 with 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 reports, policies and commitments. Title insurers also face costs
associated with the establishment, operation and maintenance of title plants, or
with gaining access to title plants owned by others.
In addition to title production and risk assumption, the industry provides
associated real estate closing, escrow and disbursement services such as
managing escrow accounts, clearing liens and preparing and filing closing
documents. More broadly defined, the title insurance industry also includes
other real estate-related services such as property valuation, credit reporting,
field inspection and foreclosure and reconveyance services.
Strategy
During 1997, Chicago Title undertook an in-depth analysis that assessed
changes within the rapidly evolving title industry. 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 selective acquisitions; and (iii)
generating operating efficiencies and cost improvements through promotion of
best practices throughout the organization and investments in technology, such
as the development of an "electronic spine," that will more 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.
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 consistency and cost. Toward this end,
the CastleLink(SM) 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,
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credit reporting, property valuation and default management 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.
Growth Opportunities. Chicago Title believes that important market
segments of the title insurance industry remain fragmented and that 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 that 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, property
valuation and default management products. Acquisitions under this initiative
are directed toward selective companies intended either to broaden Chicago
Title's array of product offerings or to bolster Chicago Title's presence in
certain higher growth title insurance markets. This acquisition program has been
funded from Chicago Title's internally generated cash flow.
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 investments in
technology, including the development of an "electronic spine" that will enable
Chicago Title to receive, track, produce, deliver and bill an order for any
product in any location. Integrating the company electronically will improve
customer service while enhancing Chicago Title's ability to consolidate
facilities and allocate staffing more efficiently. Through December 31, 1998,
Chicago Title had spent approximately $3.8 million and management currently
estimates that costs aggregating approximately an additional $17 million will be
incurred in connection with construction of the electronic spine. These costs
are expected to be incurred over a three-year period and will be funded from
internally generated cash flow.
Financial Ratings
The principal title insurance subsidiaries -- CTI, Security Union and
Ticor Title -- carry 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
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assigned an insurance financial strength rating of "A2" to CTI, "A3" to Ticor
Title and "Baa1" to Security Union.
These ratings reflect the rating agencies' current opinions of the
claims-paying ability, financial strength and operating performance of the rated
subsidiary, as well as its ability to meet its obligations to policyholders. The
factors addressed by these ratings are of concern to policyholders, agents and
intermediaries, and are not evaluations directed toward the protection of
investors in Chicago Title common stock. Such ratings should not be relied on
when making an investment decision regarding Chicago Title common stock.
Investment Operations
Investments held by Chicago Title or any of its subsidiaries must comply
with the insurance laws of the state of incorporation of the company holding the
investment; relevant states are Missouri, California and Oregon. These laws
prescribe the kind, quality and concentration of investments that 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 (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.
The following table summarizes the investments of Chicago Title, excluding
cash, as of December 31, 1998, with all investments carried at fair value in its
financial statements prepared in accordance with generally accepted accounting
principles (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Cost or Cost Fair Value
----------------------- ----------------------
Amount Percentage Amount Percentage
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments $ 194,952 16.7% $ 194,952 16.3%
Corporate bonds 137,021 11.7% 139,241 11.7%
United States government
and government agency bonds 259,348 22.2% 268,807 22.5%
Mortgage- and asset-backed securities 195,051 16.7% 198,355 16.6%
Municipal bonds 333,773 28.5% 340,604 28.5%
Foreign bonds 2,674 0.2% 2,700 0.2%
Redeemable preferred stock 13,613 1.2% 14,005 1.2%
Equity securities 33,079 2.8% 35,464 3.0%
---------- ----- ---------- -----
Total $1,169,511 100.0% $1,194,128 100.0%
========== ===== ========== =====
</TABLE>
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The following table indicates the composition of the long-term fixed
maturities portfolio, including preferred stock, as of December 31, 1998 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 $863,971 89.6%
NAIC 2 65,046 6.7%
NAIC 3 17,004 1.8%
NAIC 4 3,686 0.4%
NAIC A, L & P3 (Redeemable preferred stock) 14,005 1.5%
-------- -----
Total $963,712 100.0%
======== =====
</TABLE>
The following table indicates the composition of the fixed maturities
portfolio, including preferred stock, by years until contractual maturity as of
December 31, 1998 (dollars in thousands); contractual maturities will differ
from expected 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* $159,201 16.5%
Over one year through five years 425,975 44.2%
Over five years through ten years 141,599 14.7%
Over ten years 38,582 4.0%
Mortgage- and asset-backed 198,355 20.6%
-------- -----
Total $963,712 100.0%
======== =====
</TABLE>
- ----------
* Included in this category are $14,005 of redeemable preferred stock.
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 $265
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 97 percent of all securities rated
investment grade by
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Moody's. Chicago Title has no interest rate swaps or other material derivative
financial instruments outstanding. The duration of the short-term and fixed
income securities in Chicago Title's portfolio is approximately 2.4 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 2.4 percent in the fair 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
structure than liabilities. This relatively short portfolio maturity structure
is maintained so that investment income responds to changes in the level of
interest rates, offsetting to some degree the cyclicality of title insurance
operations. However, Chicago Title regularly re-examines its portfolio
strategies and periodically modifies asset allocation and bond portfolio
maturity based on the market outlook, interest rates and/or title insurance
operating conditions.
Reserve for Title Losses
Generally, title insurance claim rates are lower than for other types of
insurance because title insurance policies typically insure against prior events
affecting the quality of real estate titles, rather than against unforeseen, and
therefore less avoidable, 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 ("LAE"), including legal
defense costs. 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 event 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 well after issuance.
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.
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IBNR reserves are also established for very large or unusual claims that
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 exposures, there
is inherent uncertainty in estimating reserves. Actual losses may differ,
perhaps substantially, from reserves on Chicago Title's financial statements,
which could have a material effect on Chicago Title's financial condition and
results of operations. Based on current information, management believes the
reserve for title losses at December 31, 1998 is adequate.
CTI, Ticor Title and Security Union each have generally restricted the
size of any one risk of loss that they will retain to $140 million, $80 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. For these losses, the reinsurers
will pay 90 percent of the loss amount from $12.5 million to $62.5 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). In connection with the
Spin-Off, Alleghany transferred the benefit of its rights in respect of such
indemnification to Chicago Title. 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 Chicago Title, 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.
Business Conditions; Seasonality
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 very volatile, revenue levels
for Chicago Title can also be volatile. As business volume for the real
estate-related businesses is correlated to mortgage loan
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origination volumes, revenues for these businesses tend to be impacted by
economic factors in a fashion similar to the title industry.
Due to lower interest rates in the second half of 1995, the volume of
refinancing transactions was 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. In 1997, particularly in the second half of
the year, low inflation, low unemployment rates and low interest rates in the
United States resulted in exceptional growth in the commercial and industrial
sector and a resurgence in residential resale and refinancing transactions.
These nearly ideal economic conditions continued throughout 1998. Records
were set for both new and existing home sales in 1998. Declines in mortgage
interest rates spurred two significant spikes in the volume of residential
refinancings during the year--in the first and fourth quarters. Despite some
turbulence in the commercial mortgage-backed security market in the second half
of the year, revenue from commercial and industrial transactions also reached
new heights.
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 interest rates due to the impact that the cost of financing has on
the volume of real estate transactions.
Title insurance premiums are recognized as revenues principally at the
time of the real estate closing. 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 share on a regional basis. Based on 1997 revenues reported in
statutory filings, CTI, Security Union, Ticor Title, LandAmerica Financial Group
("LandAmerica"), First American Title Insurance Company ("First American"),
Stewart Title Insurance Co., Fidelity National Title Insurance Co., and Old
Republic Title Insurance Group, Inc. together accounted for about 90% of all
title insurance revenues. Chicago Title's title insurance subsidiaries had
statutory title revenues representing in the aggregate 20.3% of the industry
total. By comparison, LandAmerica had 21.8%, followed by First American at
21.0%. LandAmerica was formed in February 1998 when Lawyers Title Insurance
Company ("Lawyers") acquired the title insurance units of Reliance Group
Holdings, Inc.
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("Reliance"). The 1997 market share shown above for LandAmerica represents the
combined market shares of Lawyers and Reliance. 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,
field inspection and foreclosure and reconveyance services businesses face
significant competition from other similar real estate service providers. In
addition, 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 regulations.
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.
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<PAGE> 14
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.
CT&T and its subsidiaries are subject to a consent agreement with the
Federal Trade Commission (the "FTC") effective July 22, 1991 and amended in July
1996 and February 1999, which settled certain antitrust objections raised by the
FTC in respect of the acquisition of Ticor Title by CT&T. 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,
CT&T and its subsidiaries are required to give prior notification to the FTC of
any acquisitions of an ownership interest in a title plant serving the same
geographic area as a plant in which CT&T or any of its subsidiaries already has
an ownership interest. CT&T 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. CT&T 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
agreement.
While the real-estate related services companies generally 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, 1998, Chicago Title had approximately 10,550 employees,
including full-time and part-time employees.
Item 2. Properties.
CT&T leases about 282,000 square feet for the headquarters and operations
of Chicago Title, CT&T and CTI in the Chicago Title and Trust Center, a 49-story
office complex at 171 North Clark Street in Chicago, Illinois. Of this space,
about 45,000 square feet is subleased to CT&T's former subsidiary, The Chicago
Trust Company.
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 600
locations throughout the United States, primarily for CTI, Security Union and
Ticor Title full-service and satellite branch office operations.
11
<PAGE> 15
Item 3. Legal Proceedings.
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, the provision was adequate as of December 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
Supplemental Item. Executive Officers of the Registrant.
The name, age, position and five-year business history of each executive
officer of Chicago Title as of March 1, 1999 are as follows. Except for Mr.
Iannaccone, who was elected to his position at Chicago Title in October 1998,
each of the following executive officers was elected to the positions at Chicago
Title indicated below in June 1998 in anticipation of the Spin-Off.
Business Experience
Name Age Current Position During the Last Five Years
- ---- --- ---------------- --------------------------
John Rau 50 President and President and Chief
Chief Executive Officer Executive Officer, CT&T
and CTI, since January
1997; Dean, School of
Business at Indiana
University (education),
prior thereto.
Thomas H. Hodges 53 Executive Vice Executive Vice President,
President CT&T, since October 1997;
Executive Vice President,
First Chicago NBD Corp
(banking), from January
1995 to December 1996;
Senior Vice President,
First Chicago NBD Corp.,
prior thereto.
Louis A. Iannaccone 50 Executive Vice Senior Vice President and
President and Chief Information
Chief Technology and Officer, Long Island
Information Officer Bancorp, from May 1994
until October 1997; Vice
President and Division
Information Officer,
Chase Manhattan Bank,
prior thereto.
12
<PAGE> 16
Michael J. Keller* 50 Executive Vice Executive Vice President,
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 Executive Vice President and
President, Chief Administrative Officer,
Chief Administrative CT&T, since January 1998, and
Officer and Chief Chief Financial Officer,
Financial Officer CT&T, since March 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.
Paul T. Sands, Jr. 55 Executive Vice Executive Vice President,
President, General Counsel and
General Counsel and Secretary, CT&T, and
Secretary Executive Vice President
and General Counsel, CTI,
since January 1997;
Senior Vice President,
CTI and CT&T, prior
thereto.
Christopher Abbinante 48 Senior Vice President Senior Vice President and
and Manager, Eastern Manager, Eastern
Division Division, CTI.
William T. 52 Senior Vice President Senior Vice President and
Halvorsen, Jr. and Manager, Western Manager, Western
Division Division, CTI.
- ----------
* Mr. Keller left Chicago Title in March 1999.
13
<PAGE> 17
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
The information required by this Item 5 with respect to the market price
of and dividends on Chicago Title's common stock and related stockholder matters
is incorporated by reference from page 21 of Chicago Title's Annual Report to
Stockholders for the year 1998, filed as Exhibit 13 hereto.
Chicago Title did not sell any Chicago Title common stock during 1998 that
was not registered under the Securities Act of 1933, as amended.
Item 6. Selected Financial Data.
The information required by this Item 6 is incorporated by reference from
page 20 of Chicago Title's Annual Report to Stockholders for the year 1998,
filed as Exhibit 13 hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this Item 7 is incorporated by reference from
pages 22 through 30 of Chicago Title's Annual Report to Stockholders for the
year 1998, filed as Exhibit 13 hereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item 7A is incorporated by reference from
pages 30 through 31 of Chicago Title's Annual Report to Stockholders for the
year 1998, filed as Exhibit 13 hereto.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is incorporated by reference from
pages 34 through 57 of Chicago Title's Annual Report to Stockholders for the
year 1998, filed as Exhibit 13 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
14
<PAGE> 18
PART III
Item 10. Directors and Executive Officers of the Registrant.
As permitted by General Instruction G(3), information concerning the
executive officers of Chicago Title is set forth as a supplemental item included
in Part I of this Form 10-K Report under the caption "Executive Officers of the
Registrant." Information concerning the directors of Chicago Title is
incorporated by reference from pages 4 through 7 of Chicago Title's Proxy
Statement, filed or to be filed in connection with its Annual Meeting of
Stockholders to be held on April 27, 1999. Information concerning compliance
with the reporting requirements under Section 16 of the Securities Exchange Act
of 1934, as amended, is incorporated by reference from page 8 of Chicago Title's
Proxy Statement, filed or to be filed in connection with its Annual Meeting of
Stockholders to be held on April 27, 1999.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference from
pages 8 through 15 of Chicago Title's Proxy Statement, filed or to be filed in
connection with its Annual Meeting of Stockholders to be held on April 27, 1999.
The information set forth beginning with the third full paragraph of page 16
through page 20 of Chicago Title's Proxy Statement, filed or to be filed in
connection with its Annual Meeting of Stockholders to be held on April 27, 1999,
is not "filed" as a part hereof.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 12 is incorporated by reference from
pages 2 through 3, and from page 7, of Chicago Title's Proxy Statement, filed or
to be filed in connection with its Annual Meeting of Stockholders to be held on
April 27, 1999.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item 13 is incorporated by reference from
page 9 and from page 15 through the second full paragraph of page 16 of Chicago
Title's Proxy Statement, filed or to be filed in connection with its Annual
Meeting of Stockholders to be held on April 27, 1999.
15
<PAGE> 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
The consolidated financial statements of Chicago Title and
subsidiaries, together with the report thereon of KPMG LLP, independent
auditors, are incorporated by reference from the Annual Report to Stockholders
for the year 1998 into Item 8 of this Report.
2. Financial Statement Schedules.
The schedules relating to the consolidated financial statements of
Chicago Title and subsidiaries, together with the report thereon of KPMG LLP,
independent auditors, are detailed in a separate index herein.
3. Exhibits.
The following are filed as exhibits to this Report:
Exhibit Number Description
- -------------- -----------
2.1(a) Distribution Agreement dated as of June 16, 1998 by and
between Alleghany and Chicago Title (the "Spin-Off
Distribution Agreement") filed as Exhibit 2.1(a) to Chicago
Title's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
2.1(b) List of Contents of Exhibits to the Spin-Off Distribution
Agreement filed as Exhibit 2.1(b) to Chicago Title's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
3.1 Certificate of Incorporation of Chicago Title, as filed with
the Delaware Secretary of State on March 26, 1998, filed as
Exhibit 3.1 to Chicago Title's Registration Statement on
Form 10, as amended (Securities and Exchange Commission File
No. 001-13995), is incorporated herein by reference.
16
<PAGE> 20
3.2 By-Laws of Chicago Title, filed as Exhibit 3.2 to Chicago
Title's Registration Statement on Form S-8 (Registration No.
333-74133), is incorporated herein by reference.
8.1 Internal Revenue Service Ruling Letter, dated March 19,
1998, filed as Exhibit 8.1 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
10.1 Tax Sharing Agreement dated as of June 17, 1998 by and among
Alleghany and Chicago Title, filed as Exhibit 10.2 to
Chicago Title's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
10.2 Revolving Loan and Credit Agreement dated as of May 29, 1998
among CT&T, certain commercial lending institutions and
LaSalle National Bank, filed as Exhibit 10.1 to Chicago
Title's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
10.3(a) Credit Agreement, dated as of March 29, 1996, among CT&T, an
Illinois corporation, the various financial institutions as
are or may become parties thereto, and The Chase Manhattan
Bank, N.A. as administrative agent, filed as Exhibit 10.2(a)
to Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
10.3(b) First Amendment effective as of June 17, 1998 among CT&T, an
Illinois corporation, the lenders listed on the signature
pages thereto, and The Chase Manhattan Bank, N.A. as
administrative agent, filed as Exhibit 10.2(b) to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
17
<PAGE> 21
*10.4 Chicago Title Corporation 1998 Long-Term Incentive Plan,
filed as Exhibit 10.3 to Chicago Title's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Securities
and Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.5 Chicago Title Corporation Directors' Stock Option Plan,
filed as Exhibit 10.4 to Chicago Title's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Securities
and Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.6 Chicago Title Corporation Directors' Equity Compensation
Plan, filed as Exhibit 10.5 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.7 Amended and Restated Employment Agreement dated as of June
16, 1998 among Chicago Title, CT&T and John Rau, filed as
Exhibit 10.5 to Chicago Title's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (Securities and
Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.8 Letter Agreement dated August 21, 1997 between CT&T and
Thomas H. Hodges.
*10.9 Letter Agreement dated January 20, 1997 between CT&T and
Michael Keller.
*10.10 Letter Agreement dated December 3, 1997 between CT&T and
Peter G. Leemputte.
*10.11 Agreement between CT&T and Alan N. Prince, dated as of July
29, 1996, as amended on September 23, 1997, filed as Exhibit
10.13 to Chicago Title's Registration Statement on Form 10,
as amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
- ----------
* Compensatory plan or arrangement.
18
<PAGE> 22
*10.12 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 (Securities and Exchange Commission File No. 1-9371),
is incorporated herein by reference.
*10.13 CT&T Executive Performance Unit Incentive Plan of 1995
("1995 Plan"), adopted and effective as of January 1, 1995,
filed as Exhibit 10.7 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(a) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and John Rau, filed as Exhibit 10.6(a)
to Chicago Title's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(b) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Thomas H. Hodges, filed as Exhibit
10.6(b) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(c) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Michael J. Keller, filed as Exhibit
10.6(c) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(d) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Peter G. Leemputte, filed as Exhibit
10.6(d) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
- ----------
* Compensatory plan or arrangement.
19
<PAGE> 23
*10.14(e) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Paul T. Sands, Jr., filed as Exhibit
10.6(e) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(f) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Christopher Abbinante, filed as
Exhibit 10.6(f) to Chicago Title's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (Securities and
Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.14(g) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and William Halvorsen, filed as Exhibit
10.6(g) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.15 CT&T Quality Business Management Incentive Program for
Senior Corporate Officers, filed as Exhibit 10.8 to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
*10.16 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 (Securities
and Exchange Commission File No. 1-9371), is incorporated
herein by reference.
*10.17 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's Annual Report on Form 10-K for
the year ended December 31, 1990 (Securities and Exchange
Commission File No. 1-9371), is incorporated herein by
reference.
- ----------
* Compensatory plan or arrangement.
20
<PAGE> 24
*10.18 CT&T Excess Benefits Savings Plan, filed as Exhibit 10.11 to
Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
*10.19 CT&T Annual Incentive Plan, filed as Exhibit 10.12 to
Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
*10.20 Chicago Title Corporation and Subsidiaries 1998 Annual
Incentive Plan filed as Exhibit 99 to Chicago Title's
Registration Statement on Form S-8 (Registration No.
333-72831), is incorporated herein by reference.
*10.21 Chicago Title Corporation and Subsidiaries 1999 Annual
Incentive Plan filed as Exhibit 99 to Chicago Title's
Registration Statement on Form S-8 (Registration No.
333-74133), is incorporated herein by reference.
*10.22(a) Form of Chicago Title Corporation and Subsidiaries Deferred
Compensation Plan.
*10.22(b) Form of Trust under Chicago Title Corporation and
Subsidiaries Deferred Compensation Plan dated as of
February 24, 1999 by and between Chicago Title and LaSalle
National Bank.
*10.23 Chicago Title Corporation Employee Stock Purchase Plan,
filed as Exhibit 99 to Chicago Title's Registration
Statement on Form S-8 (Registration No. 333-56839), is
incorporated herein by reference.
- ----------
* Compensatory plan or arrangement.
21
<PAGE> 25
10.24(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 (Securities and Exchange Commission File
No. 1-9371), is incorporated herein by reference.
10.24(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 (Securities and
Exchange Commission File No. 1-9371), is incorporated herein
by reference.
10.24(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 (Securities and Exchange Commission File
No. 1-9371), is incorporated herein by reference.
10.25 Lease dated July 24, 1989 (commencing October 1, 1992,
between Linpro Chicago Land Limited Partnership ("Linpro")
and CT&T, 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 filed as Exhibit 10.20 to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
10.26 Sublease made as of June 9, 1998 by and between CT&T and The
Chicago Trust Company (the "Sublease").
22
<PAGE> 26
10.27 List of Contents of Exhibits to the Sublease.
13 Pages 20 through 31 and pages 34 through 57 of the Annual
Report to Stockholders of Chicago Title for the year 1998.
21 List of subsidiaries of Chicago Title.
23 Consent of KPMG LLP, independent auditors, to the
incorporation by reference of their reports relating to the
financial statements and related schedules of Chicago Title
and subsidiaries in Chicago Title's Registration Statements
on Form S-8 (Registration No. 333-56843), Form S-8
(Registration No. 333-56841), Form S-8 (Registration No.
333-56839), Form S-8 (Registration No. 333-72831) and Form
S-8 (Registration No. 333-74133).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1998.
23
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHICAGO TITLE CORPORATION
-------------------------
(Registrant)
Date: March 30, 1999 By /s/ John Rau
-------------- -----------------------------
John Rau
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 1999 By /s/ John Rau
-------------- -----------------------------
John Rau
President, Chief Executive
Officer and Director
(principal executive
officer)
Date: March 30, 1999 By /s/ Peter G. Leemputte
-------------- -----------------------------
Peter G. Leemputte
Executive Vice President,
Chief Administrative
Officer and Chief Financial
Officer (principal financial
officer)
Date: March 30, 1999 By /s/ Bryan R. Willis
-------------- -----------------------------
Bryan R. Willis
Vice President and
Corporate Controller
(principal accounting
officer)
Date: March 30, 1999 By /s/ Norman R Bobins
-------------- -----------------------------
Norman R Bobins
Director
<PAGE> 28
Date: March 30, 1999 By /s/ John J. Burns, Jr.
-------------- -----------------------------
John J. Burns, Jr.
Director
Date: March 30, 1999 By /s/ Peter H. Dailey
-------------- -----------------------------
Peter H. Dailey
Director
Date: March 30, 1999 By /s/ Robert M. Hart
-------------- -----------------------------
Robert M. Hart
Director
Date: March 30, 1999 By /s/ Philip G. Heasley
-------------- -----------------------------
Philip G. Heasley
Director
Date: March 30, 1999 By /s/ Allan P. Kirby, Jr.
-------------- -----------------------------
Allan P. Kirby, Jr.
Director
Date: March 30, 1999 By /s/ M. Leanne Lachman
-------------- -----------------------------
M. Leanne Lachman
Director
Date: March 30, 1999 By /s/ William K. Lavin
-------------- -----------------------------
William K. Lavin
Director
Date: March 30, 1999 By /s/ Lawrence F. Levy
-------------- -----------------------------
Lawrence F. Levy
Director
Date: March 30, 1999 By /s/ Margaret P. MacKimm
-------------- -----------------------------
Margaret P. MacKimm
Director
<PAGE> 29
Date: March 30, 1999 By /s/ Langdon D. Neal
-------------- -----------------------------
Langdon D. Neal
Director
Date: March 30, 1999 By /s/ Alan N. Prince
-------------- -----------------------------
Alan N. Prince
Director
Date: March 30, 1999 By /s/ Richard P. Toft
-------------- -----------------------------
Richard P. Toft
Director
<PAGE> 30
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULE
II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
All other schedules are omitted since they are not required, are not
applicable, or the required information is set forth in the
financial statements or notes thereto.
<PAGE> 31
SCHEDULE II
CHICAGO TITLE CORPORATION
(PARENT COMPANY ONLY)
Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
=============================================================================================
Assets December 31, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
Cash on hand and in banks $ 273
Marketable securities, available-for-sale:
Fixed maturities, at fair value (amortized cost of $3 in 1998) 3
Receivable due from subsidiaries 6,736
Current federal income taxes recoverable 183
Investments in consolidated subsidiaries 459,219
Other assets 209
- ---------------------------------------------------------------------------------------------
Total assets $ 466,623
=============================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------
Accounts payable $ 404
Deferred income taxes 4,627
- ---------------------------------------------------------------------------------------------
Total liabilities 5,031
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 461,592
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 466,623
=============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Condensed financial statements of the parent company are presented for 1998
only. Chicago Title Corporation was created as a result of a spin-off from its
former parent, Alleghany Corporation, effective June 17, 1998.
See accompanying Independent Auditors' Report.
<PAGE> 32
SCHEDULE II
CHICAGO TITLE CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Income and Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
============================================================================================
Twelve months ended
December 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C>
Revenues:
Dividends from subsidiaries $ 17,500
- --------------------------------------------------------------------------------------------
Total revenues 17,500
- --------------------------------------------------------------------------------------------
Expenses:
Salaries and other employee benefits 3,304
Other operating and administrative expenses 778
- --------------------------------------------------------------------------------------------
Total expenses 4,082
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations before equity in
undistributed pre-tax earnings of consolidated subsidiaries
and income taxes 13,418
Equity in undistributed pre-tax earnings of consolidated
subsidiaries 128,287
Income Taxes 53,536
- --------------------------------------------------------------------------------------------
Net income from continuing operations 88,169
Net income from discontinued operations 9,013
============================================================================================
Net income 97,182
Other comprehensive income of subsidiaries 5,040
- --------------------------------------------------------------------------------------------
Total comprehensive income $ 102,222
============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
See accompanying Independent Auditors' Report.
<PAGE> 33
SCHEDULE II
CHICAGO TITLE CORPORATION
(PARENT COMPANY ONLY)
Condensed Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
============================================================================================
Twelve months ended
December 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 97,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings (82,336)
Depreciation and amortization 3,428
Changes in assets and liabilities (2,097)
- --------------------------------------------------------------------------------------------
Net adjustments (81,005)
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,177
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net purchases of short-term investments (3)
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (3)
- --------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (1,007)
Payment of cash dividends (14,894)
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (15,901)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash 273
Cash at beginning of year --
- --------------------------------------------------------------------------------------------
Cash at end of year $ 273
============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
See accompanying Independent Auditors' Report.
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Chicago Title Corporation:
Under date of February 5, 1999, we reported on the consolidated balance sheets
of Chicago Title Corporation and subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of income, cash flows, and changes in
stockholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements and our report thereon are incorporated by reference in the December
31, 1998 Annual Report on Form 10-K of Chicago Title Corporation. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related supplementary financial statement schedule as listed in Item
14 of such Annual Report on Form 10-K. This supplementary financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on these supplementary financial statement schedule
based on our audits.
In our opinion, such supplementary financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 5, 1999
<PAGE> 35
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
2.1(a) Distribution Agreement dated as of June 16, 1998 by and
between Alleghany and Chicago Title (the "Spin-Off
Distribution Agreement") filed as Exhibit 2.1(a) to Chicago
Title's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
2.1(b) List of Contents of Exhibits to the Spin-Off Distribution
Agreement filed as Exhibit 2.1(b) to Chicago Title's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
3.1 Certificate of Incorporation of Chicago Title, as filed with
the Delaware Secretary of State on March 26, 1998, filed as
Exhibit 3.1 to Chicago Title's Registration Statement on
Form 10, as amended (Securities and Exchange Commission File
No. 001-13995), is incorporated herein by reference.
3.2 By-Laws of Chicago Title, filed as Exhibit 3.2 to Chicago
Title's Registration Statement on Form S-8 (Registration No.
333-74133), is incorporated herein by reference.
8.1 Internal Revenue Service Ruling Letter, dated March 19,
1998, filed as Exhibit 8.1 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
10.1 Tax Sharing Agreement dated as of June 17, 1998 by and among
Alleghany and Chicago Title, filed as Exhibit 10.2 to
Chicago Title's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
<PAGE> 36
10.2 Revolving Loan and Credit Agreement dated as of May 29, 1998
among CT&T, certain commercial lending institutions and
LaSalle National Bank, filed as Exhibit 10.1 to Chicago
Title's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
10.3(a) Credit Agreement, dated as of March 29, 1996, among CT&T, an
Illinois corporation, the various financial institutions as
are or may become parties thereto, and The Chase Manhattan
Bank, N.A. as administrative agent, filed as Exhibit 10.2(a)
to Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
10.3(b) First Amendment effective as of June 17, 1998 among CT&T, an
Illinois corporation, the lenders listed on the signature
pages thereto, and The Chase Manhattan Bank, N.A. as
administrative agent, filed as Exhibit 10.2(b) to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
*10.4 Chicago Title Corporation 1998 Long-Term Incentive Plan,
filed as Exhibit 10.3 to Chicago Title's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Securities
and Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.5 Chicago Title Corporation Directors' Stock Option Plan,
filed as Exhibit 10.4 to Chicago Title's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Securities
and Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.6 Chicago Title Corporation Directors' Equity Compensation
Plan, filed as Exhibit 10.5 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
- ----------
* Compensatory plan or arrangement.
<PAGE> 37
*10.7 Amended and Restated Employment Agreement dated as of June
16, 1998 among Chicago Title, CT&T and John Rau, filed as
Exhibit 10.5 to Chicago Title's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (Securities and
Exchange Commission File No. 001-13995), is incorporated
herein by reference.
*10.8 Letter Agreement dated August 21, 1997 between CT&T and
Thomas H. Hodges.
*10.9 Letter Agreement dated January 20, 1997 between CT&T and
Michael Keller.
*10.10 Letter Agreement dated December 3, 1997 between CT&T and
Peter G. Leemputte.
*10.11 Agreement between CT&T and Alan N. Prince, dated as of July
29, 1996, as amended on September 23, 1997, filed as Exhibit
10.13 to Chicago Title's Registration Statement on Form 10,
as amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
*10.12 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 (Securities and Exchange Commission File No. 1-9371),
is incorporated herein by reference.
*10.13 CT&T Executive Performance Unit Incentive Plan of 1995
("1995 Plan"), adopted and effective as of January 1, 1995,
filed as Exhibit 10.7 to Chicago Title's Registration
Statement on Form 10, as amended (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
- ----------
* Compensatory plan or arrangement.
<PAGE> 38
*10.14(a) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and John Rau, filed as Exhibit 10.6(a)
to Chicago Title's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(b) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Thomas H. Hodges, filed as Exhibit
10.6(b) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(c) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Michael J. Keller, filed as Exhibit
10.6(c) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(d) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Peter G. Leemputte, filed as Exhibit
10.6(d) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(e) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Paul T. Sands, Jr., filed as Exhibit
10.6(e) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.14(f) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and Christopher Abbinante, filed as
Exhibit 10.6(f) to Chicago Title's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (Securities and
Exchange Commission File No. 001-13995), is incorporated
herein by reference.
- ----------
* Compensatory plan or arrangement.
<PAGE> 39
*10.14(g) 1995 Plan Award Agreement dated as of June 16, 1998 among
Chicago Title, CT&T and William Halvorsen, filed as Exhibit
10.6(g) to Chicago Title's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Securities and Exchange
Commission File No. 001-13995), is incorporated herein by
reference.
*10.15 CT&T Quality Business Management Incentive Program for
Senior Corporate Officers, filed as Exhibit 10.8 to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
*10.16 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 (Securities
and Exchange Commission File No. 1-9371), is incorporated
herein by reference.
*10.17 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's Annual Report on Form 10-K for
the year ended December 31, 1990 (Securities and Exchange
Commission File No. 1-9371), is incorporated herein by
reference.
*10.18 CT&T Excess Benefits Savings Plan, filed as Exhibit 10.11 to
Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
*10.19 CT&T Annual Incentive Plan, filed as Exhibit 10.12 to
Chicago Title's Registration Statement on Form 10, as
amended (Securities and Exchange Commission File No.
001-13995), is incorporated herein by reference.
- ----------
* Compensatory plan or arrangement.
<PAGE> 40
*10.20 Chicago Title Corporation and Subsidiaries 1998 Annual
Incentive Plan filed as Exhibit 99 to Chicago Title's
Registration Statement on Form S-8 (Registration No.
333-72831), is incorporated herein by reference.
*10.21 Chicago Title Corporation and Subsidiaries 1999 Annual
Incentive Plan filed as Exhibit 99 to Chicago Title's
Registration Statement on Form S-8 (Registration No.
333-74133), is incorporated herein by reference.
*10.22(a) Form of Chicago Title Corporation and Subsidiaries Deferred
Compensation Plan.
*10.22(b) Form of Trust under Chicago Title Corporation and
Subsidiaries Deferred Compensation Plan dated as of
February 24, 1999 by and between Chicago Title and LaSalle
National Bank.
*10.23 Chicago Title Corporation Employee Stock Purchase Plan,
filed as Exhibit 99 to Chicago Title's Registration
Statement on Form S-8 (Registration No. 333-56839), is
incorporated herein by reference.
10.24(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 (Securities and Exchange Commission File
No. 1-9371), is incorporated herein by reference.
10.24(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 (Securities and
Exchange Commission File No. 1-9371), is incorporated herein
by reference.
- ----------
* Compensatory plan or arrangement.
<PAGE> 41
10.24(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 (Securities and Exchange Commission File
No. 1-9371), is incorporated herein by reference.
10.25 Lease dated July 24, 1989 (commencing October 1, 1992,
between Linpro Chicago Land Limited Partnership ("Linpro")
and CT&T, 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 filed as Exhibit 10.20 to Chicago
Title's Registration Statement on Form 10, as amended
(Securities and Exchange Commission File No. 001-13995), is
incorporated herein by reference.
10.26 Sublease made as of June 9, 1998 by and between CT&T and The
Chicago Trust Company (the "Sublease").
10.27 List of Contents of Exhibits to the Sublease.
13 Pages 20 through 31 and pages 34 through 57 of the Annual
Report to Stockholders of Chicago Title for the year 1998.
21 List of subsidiaries of Chicago Title.
23 Consent of KPMG LLP, independent auditors, to the
incorporation by reference of their reports relating to the
financial statements and related schedules of Chicago Title
and subsidiaries in Chicago Title's Registration Statements
on Form S-8 (Registration No. 333-56843), Form S-8
(Registration No. 333-56841), Form S-8 (Registration No.
333-56839), Form S-8 (Registration No. 333-72831) and Form
S-8 (Registration No. 333-74133).
27 Financial Data Schedule.
<PAGE> 1
Exhibit 10.8
CHICAGO TITLE AND TRUST COMPANY
171 North Clark Street, Chicago, Illinois 60601-3294
August 21, 1997
Mr. Thomas H. Hodges
622 Oak Street
Winnetka, Illinois 60093
Dear Tom:
I want to first say how pleased I am that you will be joining our executive
team at Chicago Title and Trust. I know you will become a key factor in
successfully facing the unique challenges we have.
You understand that this employment offer is subject to confirmation by the
Chairman of Chicago Title and Trust's Personnel Committee, Mr. John Burns, and
ratification of your official title by the Chicago Title and Trust Board of
Directors.
We would like you to join us as an Executive Vice President of Chicago
Title and Trust and of its principal insurance companies. In that capacity, you
will report to me, as President and CEO. Initially, you will be responsible for
directing all commercial sector activities, the company's marketing function,
our international activities, and for leading the company-wide best practices
and performance measurement and improvement initiatives. You may be assigned
other or different duties from time to time by the company's CEO. You will be
paid a base salary of $250,000.00. You will participate in our corporate bonus
program, with a maximum opportunity of 80% of base salary. At least half of your
bonus opportunity will be driven by corporate financial performance and cyclical
margin on the same basis as other senior officers.
You will participate in the company's Long-Term Incentive Program and be
awarded 1600 units for each full four-year cycle of your tenure and pro-rata
amounts for the two cycles that have started prior to your commencement date.
You will also be provided with an agreement that will give you compensation
in the event of the sale, spin-off or acquisition of Chicago Title and Trust, of
the value so generated or indicated in excess of today's book value of Chicago
Title and Trust, (exclusive of Alleghany Asset Management) over $1.0 million of
current book value, on that fraction of the total value represented by $1.0
million of today's book value, exclusive of Alleghany Asset Management. This
special compensation agreement will extend for one year past any involuntary
termination. You will participate in all benefit programs for Chicago Title and
Trust senior officers, including the Executive Salary Continuation Plan.
This letter shall not constitute an employment agreement. In the event of
an involuntary termination of your employment during the first 24 months
following your start date, you will be paid severance of 18 months of your
base salary and bonus at 60% of your base reduced by one half month's base
salary and bonus at 60% of base for each month since the beginning of your
employment. You will be eligible to receive pro-rata shares of your LTIP units
calculated through the date of termination but payable when the unit pools are
paid out.
I am excited and pleased by the prospect of working with you. I look
forward to the many exceptional things I believe we can accomplish together.
Sincerely,
/s/ John Rau
John Rau
President & CEO
Chicago Title & Trust Co.
JR/IMS
Accepted by;
Thomas H. Hodges
/s/ Thomas H. Hodges
.....................
Signature
August 21, 1997
......................
Date
<PAGE> 1
EXHIBIT 10.9
CHICAGO TITLE AND TRUST COMPANY
171 NORTH CLARK STREET, CHICAGO, ILLINOIS 60601-3294
January 20, 1997
Mr. Michael Keller
1816 80th Street
Des Moines, IA 50322
Dear Mike:
Pursuant to our conversations, I am pleased to confirm the following in respect
of your decision to accept employment with Chicago Title and Trust Company:
Your initial base salary will be $225,000. Your base salary will be
subject to review in keeping with other senior officers of the company.
You will participate in the Annual Incentive Plan which offers you a
maximum opportunity of 80% of your base pay. The general target in the
Annual Incentive Plan is one-half of the maximum (40% of base pay), but
more realistically, you could expect 50% of base pay on average over
time if we perform to reasonable expectations.
You will participate in the Executive Section of the Long Term
Incentive plan of 1995 (the year the Plan was effective). This is a
long term unit plan wherein units are granted and run for four years.
Over the period of their lives, they gain value according to the terms
and formula of the Plan. The units are granted to executives and
managers every other year. Our proposal to you includes a grant in each
of the two current cycles of the Plan.
1. A grant of 750 units in the 1995 cycle. These units will pay out in
early 1999, following the close of the books for 1998; and are
expected to have a value of $222/unit, assuming we meet financial
targets for the next two years. This projects a payment to you of
$166,500 in early 1999.
2. A grant of 1500 units in the 1997 cycle. These units will pay out in
early 2001, following the close of the books for 2000; and are
estimated to have a value of $440/unit. However, since we are at the
beginning of that cycle, we have used a value of $350/unit in
constructing this offer. Any improvement above the $350/unit value
which we have assumed will, obviously be to your benefit. Our
assumption projects a payment to you of $525,000 in early 2001. You
will be eligible to participate in the full range of benefits which
is offered to our employees, including medical/dental, life and
accident insurance, short and long term disability, savings and
profit sharing, retirement plans and flexible spending accounts.
Supplemental Executive Salary Continuation and non-qualified
retirement plans are also made available to executives such as
yourself. More detail on these will be provided shortly.
While your election will take place at the actual meeting, the action has
been confirmed by Executive Committee of the Board of Directors. I will contact
you as soon as the election occurs and look forward to a productive
partnership.
Sincerely,
/s/ John Rau
JR:dj
<PAGE> 1
Exhibit 10.10
CHICAGO TITLE AND TRUST COMPANY
171 NORTH CLARK STREET, CHICAGO, ILLINOIS 60601-3294
December 3, 1997
Mr. Peter G. Leemputte
175 Norwich Court
Lake Bluff, IL 60044
Dear Pete:
I am pleased to confirm our offer of employment and to have you join Chicago
Title and Trust Company as Executive Vice President and Chief Administrative
Officer. In this capacity, you will report directly to me and will be
responsible for the following units:
o Audit
o Controller's
o Treasury
o Investment
o Risk Management
o Financial Planning
o Real Estate
o Administrative Services
You will be a member of our Senior Management Policy Committee, and I will also
expect you to provide support and leadership to our initiatives to build a
"balanced scorecard" performance management system and to design supportive and
complementary incentive systems. I will also expect you to work with our field
and business unit managers and to provide me with recommendations to rationalize
field support activities and improve the flow of consistent, reliable
information.
Most importantly, we want you to contribute to the continued evolution of our
strategic thinking and corporate plans and initiatives. As you build depth of
experience with the industry and with the company, it will be our hope that you
can find ways to broaden your involvement with and contribution to the operating
business units of the company.
Compensation
Our assumption is that you will commence employment on January 15, 1998.
Your compensation will consist of:
o Base Salary and Minimum Bonus
o Short and Long Term Incentives
o Sign-On Incentives
o Executive Benefit Programs
<PAGE> 2
December 3, 1997
Page 2
Mr. Peter G. Leemputte
175 Norwich Court
Lake Bluff, IL 60044
The specifics are as follows:
1) Base Salary - Your base salary will be $225,000 for 1998 and no less
than $240,000 for 1999. Your minimum short-term bonus for 1998 will
be $50,000 and $25,000 for 1999.
2) Annual Incentive - You will participate in the company's short-term
executive incentive program on a basis comparable to other senior
officers. Your incentive opportunity will be established at 75 percent
of base salary with the weighting split between corporate financial
results and personal objectives to be set by the CEO. We estimate that
corporate financial results will normally comprise at least 50 percent
of your incentive opportunity.
3) Long-Term Incentive - You will participate in current and future
long-term incentive plans at a level appropriate to your status as a
senior corporate executive. Specifically, you will be awarded 250 units
(representing a one-quarter pro-ration of 1,000 units) for the existing
LTIP covering 1995, 1996, 1997, 1998, and 750 units for the existing
LTIP covering 1997, 1998, 1999, 2000.
4) Signing Incentive - As consideration for foregone bonuses and
incentives and contingent upon your joining us on or before January 15,
1998, you will receive a cash bonus in January 1998 of $250,000.
5) Executive Salary Continuation Plan - You will participate in our
Executive Salary Continuation Plan on its standard terms.
6) Severence - You will serve as an officer of the company "at will."
In the event of your termination, other than for material cause, before
December 31, 1999, you will receive a severance allowance of 18 months'
base salary and target cash bonus ("target" compensation), reduced by
one-half month's target compensation, for each month served. This
provision will expire on December 31, 1999.
7) All Other Benefits - You will participate in our existing benefit
and retirement income programs.
<PAGE> 3
December 3, 1997
Page 3
Mr. Peter G. Leemputte
175 Norwich Court
Lake Bluff, IL 60044
I look forward to working with you in the years ahead and to the very
substantial contribution I know you will make to our success.
Sincerely,
/s/ John Rau
JR/eh
Acknowledged and Accepted:
/s/ Peter G. Leemputte
By: ----------------------------
Peter G. Leemputte
December 8, 1997
Date: ----------------------------
<PAGE> 1
Exhibit 10.22(a)
CHICAGO TITLE CORPORATION
AND SUBSIDIARIES
DEFERRED COMPENSATION PLAN
December 1, 1998
1. Establishment and Purpose. Chicago Title Corporation (Company) hereby
establishes for itself and its subsidiary companies (each an Employer) the
Chicago Title Corporation and Subsidiaries Deferred Compensation Plan
(Plan) effective December 1, 1998. The purpose of the plan is to permit a
select group of management or highly compensated employees of an Employer
the opportunity to defer certain compensation received for services as an
employee.
2. Administration of Plan. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (Committee) in its sole
discretion. The Committee shall have full power and authority to
interpret, construe, administer, amend or terminate the Plan and to
delegate duties to other Employers or other persons; provided however,
neither the amendment to, nor the termination of, the Plan shall operate
to reduce the account value of a Participant in the Plan as of the date of
such amendment or termination. The Committee's interpretation and
construction of the Plan, and all actions taken pursuant to the Plan,
shall be final, conclusive and binding on all persons, for all purposes.
3. Eligibility. Each Employer may make recommendations to the Committee of
the employees described in paragraph 1 who shall be eligible to
participate in the Plan and the Committee shall approve all proposed
Participants in its sole discretion.
4. Deferral of Compensation. Each eligible Participant may elect to defer the
receipt of commissions, bonuses, incentive compensation and other
compensatory amounts (whether in the form of cash or Common Stock of the
Company, other than annual base salary) approved by the Committee to be
received from an Employer during the next following calendar year (or in
the case of a Participant initially eligible for the Plan, during the next
following month and for the balance of such calendar year) or, if provided
by the Committee, earned after the date of such election, by completing an
election form approved by the Committee, as the form may be amended from
time to time. A sample election form is attached as Exhibit A.
The election made by a Participant shall be irrevocable for the first
calendar year with respect to which the election is made. The election
made by a Participant shall remain in effect for each successive calendar
year unless the Participant (i) files with the Committee a notice of
discontinuance of Plan participation (which may be
<PAGE> 2
filed at any time to be effective at the commencement of the next calendar
month) or (ii) files with the Committee a new election at least 30 days
before the beginning of a successive calendar year. Otherwise, the
Participant's election shall be irrevocable with respect to each such
successive calendar year.
5. Deferred Accounts. The Company shall establish a separate bookkeeping
account in the name of each Participant and reflecting deferred
compensation otherwise payable by an Employer. Amounts deferred by a
Participant pursuant to the Plan shall be credited to the appropriate
account effective as soon as administratively practical after the time
such amounts would have been payable to the Participant by an Employer in
the absence of an election to defer.
Each deferred account in the name of a Participant shall thereafter be
adjusted for investment return as provided in Section 6 below.
6. Investment Return. Each Participant's account shall be deemed invested in
accordance with either (a) or (b) below as designated by the Participant
in the election form:
(a) Amounts deferred may be credited with interest at a rate equal to
the three-month London Interbank Offered Rate (LIBOR) published in
The Wall Street Journal (WSJ) plus 1.0% per annum. For any calendar
quarter three-month LIBOR will be determined at the beginning of the
quarter effective as of January 1, April 1, July 1 or October 1, as
applicable. If January 1, April 1, July 1 or October 1 of any year
is not a day for which LIBOR is published in the WSJ, then
three-month LIBOR will be determined as of the next succeeding day
which is a day for which LIBOR is published in the WSJ. LIBOR will
be applied on the basis of actual days elapsed over a year
consisting of 360 days. Interest will be credited to each
Participant's account quarterly at the end of the day immediately
preceding the day on which a new three-month LIBOR becomes
effective. If three-month LIBOR is no longer published in the WSJ,
then the Committee shall solely determine an alternative source for
such rate information.
(b) Amounts deferred may be deemed invested in shares of common stock of
Chicago Title Corporation, par value $1.00 per share (the "Common
Stock") with the number of whole and fractional shares credited to
the Participant's account to be based on the closing price of the
Common Stock on the trading date immediately preceding the date of
any deemed investment or reinvestment in the Common Stock. Any
dividend or distribution payable with respect to the Common Stock
shall be reflected for
<PAGE> 3
the Participant's account as a deemed reinvestment in the Common
Stock, unless otherwise provided by the Committee.
(c) Subject to Committee approval and such rules as may be established
by the Committee, a Participant may elect, by giving thirty days'
advance written notice before the beginning of each calendar year,
to transfer amounts credited under subparagraph (a) above to
subparagraph (b), and vice versa, as of the first trading day of
such year.
(d) The Company may, in its sole discretion, establish an irrevocable
grantor trust for the purpose of funding its obligations to pay
deferred compensation benefits under the Plan. The Company shall not
be required to invest the assets of any such trust in the same
manner as the Participant's investment election in accordance with
paragraphs (a) or (b) above, but the Company may do so in its
discretion. The establishment and funding by the Company of any such
trust shall not affect the unfunded status of the Plan, as provided
in Section 10 below.
7. Event of Distribution. The election form executed by a Participant in
accordance with Section 4 above shall contain not only a designation of
compensation to be deferred but also the events elected by the Participant
the occurrence of which will result in distribution of such accounts. Such
election, once made, shall be irrevocable. A Participant may elect one of
the following distribution events:
(a) The Participant's termination of employment or retirement from the
Company's controlled group of companies (within the meaning of
Section 414(b) of the Internal Revenue Code of 1986, as amended) or
(b) Such other event as shall be specified by the Participant; provided
that no such election shall defer the commencement of distributions
(i) beyond the Participant's attainment of age 65 or, if later,
termination of employment or retirement from the Company's
controlled group of companies or (ii) for a period shorter than two
full calendar years following the year of deferral (other than by
termination of employment or retirement).
Notwithstanding the foregoing, in the event of a change in control of the
Company (as defined in the Company's stock option plan), all deferred
amounts (and earnings credited thereon) will be paid immediately to or on
behalf of Participants and no further deferrals will be permitted under
the Plan.
8. Payment of Distribution. A Participant may elect to receive a distribution
of account value in accordance with the following. Such election shall be
made at the same time and in the same manner as provided in Section 4
above:
<PAGE> 4
(a) In a cash lump sum as soon as practicable following the occurrence
of the distribution event for accounts invested under paragraph
6(a), or in an in-kind payment of Common Stock for accounts invested
under paragraph 6(b), as soon as practicable following a
distribution event; or
(b) In substantially equal annual installment payments (in cash or in
kind, as applicable as provided in paragraph (a) above) over a
period not to exceed 10 years and commencing on the January first
following such distribution event. In the event an installment
method is elected, undistributed sums will continue to be invested
as provided in Section 6 of the Plan.
9. Hardship. Notwithstanding any provision herein to the contrary, in cases
of unforeseeable emergency, a Participant may request the payment of all
or any part of the Participant's account value by reason of financial
hardship, to the extent reasonably necessary to satisfy the emergency
need. The Committee will determine whether, in its sole judgment, such
financial hardship has occurred, and if it has, may grant such request
subject to such conditions as it, in its sole discretion, may determine.
Any amount so paid may not be returned to an account under the Plan.
For purposes of this paragraph "unforeseeable emergency" shall be defined
as an unanticipated emergency that is caused by an event beyond the
control of the Participant and that would result in severe financial
hardship to the individual if early withdrawal were not permitted. The
determination of whether a severe financial hardship exists shall be made
in a manner consistent with section 1.457-2(h)(4) and (5) of the Income
Tax Regulations or other regulations, rulings or guidance issued by the
Internal Revenue Service.
10. Unfunded Status of Accounts. The account of each Participant shall
constitute only a bookkeeping account of the Company for the purpose of
computing entitlements under the Plan. A Participant's interest and rights
in and to such accounts and the value represented thereby shall only be
that of an unsecured general creditor of the Employers. A Participant
shall have no interest in any assets of the Company or an Employer. The
Company may in its discretion establish an irrevocable grantor trust to
hold common stock of Chicago Title Corporation but such trust shall
constitute an unfunded arrangement and the assets of such trust shall be
subject to the claims of creditors of the Company or Employer in the event
of insolvency.
11. Beneficiary. Each Participant shall designate from time to time in writing
on an election form filed with the Committee, one or more beneficiaries of
the Participant's interest under the Plan in the event of death. If a
Participant does not designate a beneficiary or such beneficiary does not
survive the Participant, then
<PAGE> 5
Plan proceeds will be paid to the Participant's estate or legal
representative. Payments to beneficiaries will be made in the same form of
distribution as elected by the Participant under "Form of Distribution" on
the Election Form.
12. Recordkeeping. The Company shall furnish to each Participant a statement
of account not less than annually.
13. Amendment and Termination. Subject to the provisions of Section 2 above,
the Committee reserves the right to amend or terminate the Plan at any
time for any reason.
14. Governing Law. This Plan shall be governed by and construed in accordance
with the laws of the State of Delaware.
15. Arbitration . In the event of any dispute between the Participant and the
Company which is not governed by the language of the Plan and which is
irreconcilable after the good faith efforts of the parties to resolve such
issue, the matter shall be submitted to a mandatory arbitration under the
auspices of the American Arbitration Association with the expense thereof
to be borne equally by the affected parties.
16. Tax Withholding. All compensation deferred and distributable pursuant to
the Plan shall be subject to applicable tax withholding requirements, and
the Company is authorized to reduce the amount deferred, or the value of
any account or distribution under the Plan to the extent necessary to
satisfy such tax withholding obligations.
CHICAGO TITLE CORPORATION
By:
<PAGE> 1
Exhibit 10.22(b)
TRUST UNDER CHICAGO TITLE CORPORATION
AND SUBSIDIARIES DEFERRED COMPENSATION PLAN
THIS TRUST AGREEMENT, made effective as of February 24, 1999, by and
between Chicago Title Corporation (the "Company") and LaSalle National Bank, a
national banking association (the "Trustee"),
WITNESSETH:
WHEREAS, the Company has adopted the Chicago Title Corporation and
Subsidiaries Deferred Compensation Plan (the "Plan"); and
WHEREAS, the Company has incurred or expects to incur liability
under the terms of such Plan with respect to the individuals participating in
such Plan; and
WHEREAS, the Company wishes to establish a trust (hereinafter called
"the Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of the Company's or other Employer's creditors in the
event of the Company's or other Employer's Insolvency, as herein defined, until
paid to Plan participants and their beneficiaries in such manner and at such
times as specified in the Plan; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;
and
WHEREAS, it is the intention of the Company to make contributions to
the Trust to provide itself with a source of funds to assist it in the meeting
of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1
Establishment of Trust
1.1 The Company hereby deposits with the Trustee in trust such cash,
common stock of the Company par value $1.00 per share ("Common Stock") and such
other property acceptable to the Trustee, which shall be held, administered and
disposed of by the Trustee as provided in this Trust Agreement.
<PAGE> 2
1.2 The Trust hereby established shall be irrevocable.
1.3 The Trust is intended to be a grantor trust, of which the
Company is the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and
shall be construed accordingly.
1.4 The principal of the Trust, and any dividends or earnings
thereon, shall be held separate and apart from other funds of the Company and
shall be used exclusively for the uses and purposes of Plan participants and
general creditors as herein set forth. Plan participants and their beneficiaries
shall have no preferred claim on, or any beneficial ownership interest in, any
assets of the Trust. Any rights created under the Plan and this Trust Agreement
shall be mere unsecured contractual rights of Plan participants and their
beneficiaries against the Company. Any assets held by the Trust will be subject
to the claims of the Company's general creditors under federal and state law in
the event of Insolvency, as defined in Section 3.1 herein.
1.5 The Company, in its sole discretion, may at any time, or from
time to time, deposit additional cash, Common Stock other property in trust with
the Trustee to augment the principal to be held, administered and disposed of by
the Trustee as provided in this Trust Agreement. Dividends paid on Common Stock
and cash held by the Trustee shall first be applied to pay the expenses of
administration of the Trust and Plan and then shall be applied to purchase
additional Common Stock of the Company if so directed by the Company. Neither
the Trustee nor any Plan participant or beneficiary shall have any right to
compel such additional deposits.
Section 2
Payments to Plan Participants and Their Beneficiaries
2.1 The Company shall deliver to the Trustee a schedule (the
"Payment Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or other
instructions acceptable to the Trustee for determining the amounts so payable,
the form in which such amount is to be paid (as provided for or available under
the Plan), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, the Trustee shall make payments to the Plan
participants and their beneficiaries in accordance with such Payment Schedule.
The Company shall direct the Trustee as to the amounts required to be withheld
from such payments for any federal, state or local taxes that may be required to
be withheld with respect to the payment of benefits pursuant to the terms of the
Plan. The Trustee shall pay such amounts withheld to the Company for reporting
and forwarding to the appropriate taxing authorities, unless such amounts have
been
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<PAGE> 3
reported, withheld and paid directly by the Company. The Company may direct the
Trustee to sell Common Stock to satisfy such tax liability but, at the Company's
direction, such Common Stock shall be sold to the Company.
2.2 The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan shall be determined by the Company or
by such Committee the Company shall designate under the Plan, and any claim for
such benefits shall be considered and reviewed under the procedures set out in
the Plan.
2.3 The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan. The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plan, the Company shall make the balance of each such payment as it
falls due. The Trustee shall notify the Company where principal and earnings are
not sufficient.
Section 3
Trustee Responsibility Regarding Payments
to Trust Beneficiary When Company is Insolvent
3.1 The Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the Company
is unable to pay its debts as they become due, or (ii) the Company is subject to
a pending proceeding as a debtor under the United States Bankruptcy Code.
3.2 At all times during the continuance of this Trust, as provided
in Section 1.4 hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below:
(a) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing
of the Company's Insolvency. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee that
the Company has become Insolvent, the Trustee shall determine
whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of
benefits to Plan participants or their
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<PAGE> 4
beneficiaries.
(b) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether
the Company is Insolvent. The Trustee may in all events rely
on such evidence concerning the Company's solvency as may be
furnished to the Trustee and that pro-vides the Trustee with a
reasonable basis for making a determination concerning the
Company's solvency.
(c) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to Plan
participants or their beneficiaries and shall hold the assets
of the Trust for the benefit of the Company's general
creditors. Nothing in the Trust Agreement shall in any way
diminish any rights of Plan participants or their
beneficiaries to pur-sue their rights as general creditors of
the Company with respect to benefits due under the Plan or
otherwise.
(d) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with
Sec-tion 2 of this Trust Agreement only after the Trustee has
determined that the Company is not Insolvent (or is no longer
Insolvent).
(e) The provisions of this Section 3 shall apply separately to
each other Employer of Plan participants under the Plan in the
event of the Insolvency of such Employer employing such
participants.
(f) In carrying out its responsibilities under this Section 3.2,
the Trustee shall retain independent public accountants
(including the Company's independent public accountants) to
make any determinations of Insolvency and may conclusively
rely on the opinion of such independent public accountants
with respect to the determination of the Company's or other
Employer's Insolvency.
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<PAGE> 5
3.3 Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3.2
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
Section 4
Payments to the Company
Except as provided in Section 3 and Section 9 hereof, after the
Trust has become irrevocable, the Company shall have no right or power to direct
the Trustee to return to the Company or to divert to others any of the Trust
assets before all payment of benefits have been made to Plan participants and
their beneficiaries pursuant to the terms of the Plan.
Section 5
Investment Authority
The assets of the Trust may be invested in Common Stock (including
stock or rights to acquire stock) or obligations issued by the Company, as
directed by the Company. All rights associated with assets of the Trust shall be
exercised by the Trustee or the person designated by the Trustee, and shall in
no event be exercisable by or rest with Plan participants. The Company shall
have the right at any time, and from time to time in its sole discretion, to
substitute assets of equal fair market value for any asset held by the Trust.
This right is exercisable by the Company in a nonfiduciary capacity without the
approval or consent of any person in a fiduciary capacity.
Section 6
Disposition of Income
During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
-5-
<PAGE> 6
Section 7
Accounting by the Trustee
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
the Company and the Trustee. Within 90 days following the close of each fiscal
year and within 120 days after the removal or resignation of the Trustee, the
Trustee shall deliver to the Company a written account of its administration of
the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
Section 8
Responsibility of the Trustee
8.1 The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Plan Committee or Company which is
contemplated by, and in conformity with, the terms of the Plan or this Trust and
is given in writing by the Plan Committee or Company. In the event of a dispute
between the Company and a party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
8.2 If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
the Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, the Trustee may obtain payment from the Trust.
8.3 The Trustee may consult with legal counsel (who may also be
counsel for the Company) with respect to any of its duties or obligations
hereunder.
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<PAGE> 7
8.4 The Trustee may hire agents, accountants, investment advisors,
or other professionals to assist it in performing any of its duties or
obligations hereunder.
8.5 The Trustee shall have, without exclusion, all powers conferred
on Trustees by applicable law, unless expressly provided otherwise herein.
8.6 Notwithstanding any powers granted to the Trustee pursuant to
this Trust Agreement or by applicable law, the Trustee shall not have any power
that could give this Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of section 301.7701-2 of the Procedure
and Administrative Regulations promulgated pursuant to the Internal Revenue
Code.
8.7 Except for the Trustee's gross negligence or willful misconduct,
the Trustee shall not be liable hereunder for any loss or diminution of the
Trust Fund resulting from any action taken or omitted. The Company shall
indemnify the Trustee and defend it and hold it harmless from and against any
and all costs, expenses and liabilities arising out of or in connection with the
performance of the Trustee's duties arising hereunder (but excluding costs
arising from the Trustee's gross negligence or willful misconduct in the
performance of its responsibilities hereunder). If the Company does not pay such
costs, expenses and liabilities in a reasonably timely manner, Trustee may
obtain payment from the Trust. This Section shall survive the termination of
this Agreement.
8.8 Notwithstanding any other provision of this Trust to the
contrary, the Trustee does not guarantee payment of any amount which may become
due and payable to a Participant or his or her beneficiary. The Trustee shall
have no responsibility for the disclosure to Participants regarding the terms of
the Plan or of this Trust, or for the validity thereof. The Trustee shall not be
responsible for administrative functions under the Plan and shall have only such
responsibilities under this Trust Agreement as are specifically set forth
herein. The Trustee will be under no obligation or liability to anyone with
respect to any failure on the part of the Company, Committee, the Plan or the
Company's independent public accounting firm or any Participant to perform any
of their respective obligations under the Plan or this Trust. Nothing in this
Trust shall be construed as requiring the Trustee to make any payment in excess
of the amounts held in the Trust Fund at the time of such payment or otherwise
to risk or expend its own funds.
Section 9
Compensation and Expenses of the Trustee
The Trustee shall be paid such reasonable compensation as shall from
time to time be agreed upon by the Company and the Trustee. Such compensation
and all
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<PAGE> 8
expenses of administration of the Trust and Plan, including attorneys' fees and
independent public accounting fees under Section 3.2, shall be withdrawn by the
Trustee out of the Trust Fund unless paid by the Company.
Section 10
Resignation and Removal of the Trustee
10.1 The Trustee may resign at any time by written notice to the
Company, which shall be effective 30 days after receipt of such notice unless
the Company and the Trustee agree otherwise. The Trustee may be removed by the
Company on 30 days notice or upon shorter notice accepted by the Trustee.
10.2 Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 30 days after receipt of notice
of resignation, removal or transfer, unless the Company extends the time limit.
If the Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under this Section. If no such appointment has been made, the Trustee
may apply to a court of competent jurisdiction for appointment of a successor or
for instructions. All expenses of the Trustee in connection with the preceding
shall be allowed as administrative expenses of the Trust.
Section 11
Appointment of Successor
If the Trustee resigns or is removed in accordance with Section 10
hereof, the Company may appoint any third party, such as a bank trust department
or other party that may be granted corporate trustee powers under state law, as
a successor to replace the Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by the Company or the successor Trustee to evidence the
transfer. The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and
the Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes
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<PAGE> 9
successor Trustee.
Section 12
Amendment or Termination
12.1 This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the Trust
revocable after it has become irrevocable in accordance with Section 1.2 hereof.
12.2 The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan; provided that, upon written approval of participants
or beneficiaries entitled to payment of benefits pursuant to the terms of the
Plan, the Company may terminate this Trust prior to the time all benefit
payments under the Plan have been made. All assets in the Trust at termination
shall be returned to the Company. This Trust Agreement may not be amended by the
Company for one year following a change in control, as defined in the Plan, and
all amounts due under the Plan will become immediately payable.
Section 13
Miscellaneous
13.1 Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
13.2 Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
13.3 This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois.
-9-
<PAGE> 10
IN WITNESS WHEREOF, this instrument has been executed this _________ day
of ________________, 1999.
COMPANY:
Attest:
By:
TRUSTEE:
Attest:
By:
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<PAGE> 1
Exhibit 10.26
SUBLEASE
This Sublease is made as of the 9th day of June, 1998 by and between
Chicago Title and Trust Company, an Illinois corporation ("Sublessor") and The
Chicago Trust Company an Illinois corporation ("Sublessee").
WITNESSETH:
WHEREAS, pursuant to a lease dated July 24, 1989 (Commencing October 1,
1992, hereinafter referred to as the "Original Lease"), 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 true and complete copies of which
are annexed hereto as Exhibit A (said Original Lease and the First and Second
Amendments and all letter agreements being hereinafter collectively called the
"Prime Lease"), Linpro Chicago Land Limited Partnership ("Linpro") leased to
Sublessor certain premises designated therein and located in the building known
as 171 North Clark Street Chicago, Illinois (such building being hereinafter
called the "Building"); and
WHEREAS, Equity Office Holdings, L.L.C. (the "Prime Landlord") has
succeeded to the interest of 161 North Clark Street Limited Partnership,
successor in interest to Linpro under the Prime Lease.
WHEREAS, Sublessor desires to sublet to Sublessee and Sublessee desires to
sublease from Sublessor a portion of the premises demised to Sublessor in and by
the Prime Lease;
NOW THEREFORE, in consideration of the premises, mutual covenants,
agreements and provisions contained herein and subject thereto, the parties
hereto agree as follows:
1. Demised Premises. Sublessor hereby subleases to Sublessee and Sublessee
hereby hires and takes from Sublessor for the applicable term as set forth
in paragraph two below, the following premises in the Building:
a. All of the ninth (9th) floor consisting of 28,522 rentable square
feet as shown on Exhibit B attached hereto and incorporated herein
by this reference (the "9th Floor Space").
<PAGE> 2
b. A portion of the tenth (10th) floor of the Building consisting of
18,921 rentable square feet in the portion of the 10th floor
cross-hatched on Exhibit C attached hereto and incorporated herein
by this reference (the "10th Floor Space").
c. A portion of Lower Level (LL3) of the Building consisting of 1,165
rentable square feet in the portion of LL3 cross-hatched on Exhibit
D attached hereto and incorporated herein by this reference (the
"LL3 Space").
The 9th Floor Space, 10th Floor Space, and LL3 Space are hereinafter
referred to as the "Premises."
2. Term. Sublessor hereby subleases the Premises to Sublessee and Sublessee
hereby hires and takes the Premises for a term of 14 1/4 years, commencing
June 9, 1998 (the "Commencement Date") and expiring September 29, 2012
(the "Termination date").
3. Use. The Premises shall be used as executive, administrative, general and
clerical offices for the conduct of Sublessee's business, which business
shall not be prejudicial to the reputation of, or reflect unfavorably on,
the Building so as to detract from it as a location for an outstanding
type of business occupancy, including activities incidental thereto, and
for no other purpose.
4. Base Rent.
a. Sublessee shall pay monthly to Sublessor, in advance, without
demand, set off or deduction, commencing on the Commencement Date
and on the first day of each and every calendar month thereafter
during the term hereof, the sums as set forth on Exhibit E attached
hereto and incorporated herein by this reference ("Base Rent").
b. If the Commencement Date shall occur on a day other than the first
day of a calendar month, then the Base Rent to be paid hereunder for
the first month shall be adjusted to reflect only those days during
such month that this Sublease is in effect. If this Sublease shall
expire or terminate with respect to any portion of the Premises on a
day other than the last day of a calendar month, then the Base Rent
payable for that month with respect to such portion of the Premises
shall be adjusted to reflect only those days during such month that
this Sublease was in effect with respect to such portion of the
Premises.
5. Additional Rent. Sublessee shall pay to Sublessor, as Additional Rent, its
proportionate share of any increase in the rent payable by Sublessor to
Prime Landlord pursuant to paragraph 2 of the Prime Lease. Sublessee's
proportionate share shall be in the same proportion as the Premises bears
to the amount of space leased pursuant to the Prime Lease as such amount
of Space leased by Sublessor may change from time to time. As of
2
<PAGE> 3
the date of sublease execution, such proportionate share is equal to
17.89%. Sublessee and Sublessor shall adjust such payments of Additional
Rent between them annually, according to the procedure set forth in
paragraph 2 of the Prime Lease.
Relative to the payment of its proportionate share of real estate taxes,
Sublessee shall pay its proportionate share to Sublessor at the time Prime
Landlord bills Sublessor for Sublessor's proportionate share of real
estate taxes pursuant to the terms of paragraph 2 of the Prime Lease.
In the event this Sublease shall expire or terminate other than on the
last day of a calendar month, any additional rent to which Sublessor is
entitled with respect to the calendar month in which this Sublease expires
or terminates shall be prorated and apportioned. If, and to the extent
that, Sublessor receives a refund from Prime Landlord of any additional
rent which is allocable to additional rent already paid by Sublessee,
Sublessor shall refund same to Sublessee within fifteen (15) business days
after Sublessor's receipt thereof. The provisions of this paragraph 5
shall survive the expiration or termination of the Sublease.
6. Incorporation By Reference.
a. This is a Sublease and is subject and subordinate to the terms,
covenants and provisions of the Prime Lease and to the lien of any
mortgage or mortgages which may now or hereafter encumber or
otherwise affect the real estate (including the Building) of which
the Premises form a part or any leasehold interest therein.
b. Sublessor represents that the Prime Lease is in full force and
effect, that there are no existing defaults under the Prime Lease on
the part of Sublessor as tenant thereunder nor does the Prime
Landlord claim that there is any existing default thereunder on the
part of the Sublessor and that no event has occurred which, with the
giving of notice and/or the passage of time or otherwise, will
constitute a default thereunder. Sublessor agrees that each of the
aforesaid representations shall also be true as of the date of the
commencement of the term of this Sublease. Sublessor covenants not
to permit the continuance of any default under the Prime Lease
beyond the applicable grace period specified therein for curing the
same.
c. Sublessee hereby assumes and agrees to be bound by and observe,
fulfill and perform, fully, faithfully and promptly, all the
provisions, terms, covenants, conditions and obligations provided in
the Prime Lease to bind and/or to be observed, fulfilled and/or
performed by Sublessee thereunder to the extent they apply to all or
any portion of the Premises, except as amended by this Sublease. All
of the terms, covenants, conditions and agreements of the Prime
Lease, except such as are, by their nature or purpose, inapplicable
and inappropriate to the subleasing of the Premises, pursuant to
this Sublease or are inconsistent with or
3
<PAGE> 4
modified or excluded by any of the provisions of this Sublease, are
hereby adapted to, incorporated in and made part of this Sublease
with the same force and effect as though set forth herein in full;
provided, however, that for all purposes of this Sublease, whenever
the word "Landlord" appears in the above-mentioned Prime Lease, it
shall be deemed to read "Sublessor"; whenever the word "Tenant"
appears in said Prime Lease, it shall be deemed to read "Sublessee";
and whenever the word "Lease" appears in said provisions, it shall
be deemed to read "Sublease".
d. The performance by Prime Landlord of its obligations under the Prime
Lease shall, for all purposes of this Sublease, be deemed to be the
performance of such obligations by Sublessor under the articles of
the Prime Lease incorporated herein by reference, and Sublessor's
obligations under said articles so incorporated herein shall be
limited to the extent to which such obligations are performed by the
Prime Landlord under the Prime Lease. Notwithstanding the foregoing,
Sublessor shall use its best efforts to assure that the Prime
Landlord performs its obligations under the Prime Lease.
7. Assignment and Subletting. Sublessee shall not assign this Sublease or
sublet all or any part of the Premises without the prior written consent
of Sublessor, and any attempted assignment or sub-subletting in
contravention of this provision shall, at Sublessor's option, be null and
void and of no force and effect. In the event Sublessee desires to assign
or sublet all or any portion of the Premises (the "Intended
Sublet/Assignment Space") Sublessee shall first notify Sublessor of its
desire to do so and Sublessor shall have thirty (30) days from the receipt
of said notice to notify Sublessor that it will recapture the Intended
Sublet/Assignment Space for its own use. If the Sublessor does exercise
its rights hereunder to recapture the Intended Sublet/Assignment Space,
this Sublease shall terminate as to the Intended Sublet/Assignment Space
only. Failure by Sublessor to exercise such right of recapture within the
thirty (30) day time period shall be deemed a waiver of such right by
Sublessor. If Sublessor does not exercise its right of recapture hereunder
and Sublessee shall have first obtained the consent thereto of the Prime
Landlord, Sublessor shall not withhold its consent to any assignment of
the Sublease or subletting of the Premises by Sublessee.
8. Covenant of Quiet Enjoyment. Sublessor covenants that upon Sublessee
paying the rent and additional rent and observing and performing all the
terms, covenants and conditions hereof on Sublessee's part to be observed
and performed, Sublessee may peaceably and quietly enjoy the Premises
without disturbance by Sublessor or anyone claiming by, through or under
Sublessor.
9. Prime Landlord's Consent. This Sublease is contingent upon Sublessor's
promptly securing the prior consent thereto of the Prime Landlord in the
form attached as Exhibit F. The cost, if any, of obtaining such consent
shall be borne by Sublessor.
4
<PAGE> 5
10. Prime Lease. Sublessor shall not surrender the Prime Lease nor consent to
any modification thereof affecting the Premises without the prior written
consent of Sublessee (which consent shall not be unreasonably withheld).
Sublessor shall promptly forward to Sublessee copies of all notices
received by it which relate to Sublessee's occupancy of the Premises.
11. As Is. No warranties or representations, expressed or implied, are made or
intended to be made by Sublessor with respect to the Premises or the
Sublease. Sublessee has inspected the Premises and accepts the same "as
is," in its condition at the date hereof. Sublessor shall have no
obligation to perform any alterations, decorations or other work in or
about the Premises. Sublessee acknowledges that it is responsible for all
alterations required for Sublessee's occupancy and further acknowledges
that all such alterations will be completed in compliance with the Prime
Lease. At the expiration or earlier termination of this Sublease,
Sublessee shall surrender possession of the Premises to Sublessor in the
same condition as it is existing on the Commencement Date, except for
normal wear and tear and damage by insured casualty, and except for any
modifications or changes to the Premises that Sublessor and Prime Landlord
have approved and agreed in writing may remain after the termination of
this Sublease.
12. Indemnity. Sublessee shall indemnify Sublessor against and save it
harmless from any liability, cost or expense, including reasonable
attorneys' fees, in connection with any and all claims made on behalf of
or by any person, firm or corporation for personal injury, death or
property damage arising from or in connection with the use or occupancy of
the Premises or from any breach or default by Sublessee of any of the
terms, covenants and conditions of this Sublease.
13. Notices. Any notices required or desired to be given hereunder shall be in
writing and shall be either delivered by hand or sent via registered mail,
return receipt requested, to be effective upon delivery if hand-delivered,
or up no mailing if mailed, to the parties addressed as follows, or to
such other address as the parties may by written notice designate:
Sublessor: Chicago Title and Trust Company
171 N. Clark Street
Chicago, IL 60601
Attn: Vice President/Real Estate
Sublessee: The Chicago Trust Company
171 N. Clark Street
Chicago, IL 60601
Attn: Senior Vice President and Chief Financial Officer
5
<PAGE> 6
14. Default. In the event Sublessee shall default in the full performance of
any of the terms, covenants and conditions on its part to be performed
under this Sublease, then Sublessor shall have the same rights and
remedies with respect to such default as are given to Prime Landlord under
the Prime Lease with respect to defaults by Sublessor, as tenant under the
Prime Lease.
Notwithstanding the foregoing, this Sublease is separate from and
subordinate to the Prime Lease. Anything contained in any provision of
this Sublease to the contrary notwithstanding, Sublessee agrees, with
respect to the Premises, to comply with and remedy any default within the
period allowed to Sublessor as tenant under the Prime Lease.
If Sublessor shall default in the payment of any rent due under the Prime
Lease, Prime Landlord is hereby authorized to collect any rents due or
accruing under this Sublease and to apply the net amounts so collected to
Base Rent and Additional Rent reserved under the Prime Lease, and
Sublessee shall be entitled to apply the net amount so paid to Prime
Landlord to Base Rent and Additional Rent due hereunder. The receipt by
Prime Landlord of any amounts from Sublessee shall not be deemed or
construed as releasing Sublessor from its obligations under the Prime
Lease or the acceptance of Sublessee as a direct tenant.
15. Insurance. Sublessee shall maintain with respect to the Premises the
insurance, if any, required to be maintained under the Prime Lease. Each
such policy shall provide that it cannot be canceled except upon thirty
(30) days' prior notice to Sublessor and Prime Landlord and shall name
Sublessor, Prime Landlord and Prime Landlord's managing agent, if any, as
insured parties thereunder, and a copy or certificate thereof shall be
delivered to Sublessor and Prime Landlord prior to the Commencement Date
for space included in the Premises, and thereafter not less than
twenty-five (25) days prior to the expiration of the policy then in
effect.
16. Waiver of Subrogation. Whenever (a) any loss, cost, damage, injury or
expense resulting from fire, explosion or any other casualty or occurrence
normally covered by fire and extended coverage insurance is incurred by
either party to this Sublease in connection with the Premises, and (b)
such party is then covered in whole or in part by insurance with respect
to such loss, cost, damage, injury or expenses, then the party so insured
hereby releases the other party from any liability it may have on account
of such loss, cost, damage or expense, to the extent of any amount
recovered by reason of such insurance, and waives any right of subrogation
which might otherwise exist in or accrue to any person on account thereof,
provided that such release of liability and waiver of the right of
subrogation shall not be operative in any case where the effect thereof
would be to invalidate such insurance coverage or increase the cost
thereof provided that, in the case of increased cost, the other party
shall have the right, within thirty (30) days
6
<PAGE> 7
following written notice, to pay such increased cost, thereupon keeping
such release and waiver in full force and effect).
17. Requirements of Law. Sublessee shall comply with all laws and ordinances
and all rules, orders or regulations (present, future, ordinary,
extraordinary, foreseen or unforeseen) of any governmental authority or of
the Board of Fire Underwriters (or any successor thereto), at any time
duly issued and in force, attributable to any work (including, without
limitation, alteration work to prepare the Premises for occupancy by
Sublessee), installation, occupancy, use or manner of use by Sublessee of
the Premises or any part thereof. Sublessee shall procure and maintain all
licenses and permits required for its business.
18. Captions. The captions are inserted only as a matter of convenience and
for reference and in no way define, limit or describe the scope of this
Sublease nor the intent of any provision hereof.
19. Governing Law. This Sublease shall be governed by and construed and
enforced in accordance with the internal laws of the State of Illinois
applicable to contracts made and to be wholly performed within such State
and without preference to the conflicts or choice of laws rules of such
State.
20. Amendments and Waiver. This Sublease may not be amended, nor may
compliance with any provision be waived, except by a written instrument
signed by the parties hereto specifying such waiver or modification.
21. Complete Agreement. This Sublease, including all exhibits and agreements
referred to herein, constitutes the entire agreement between the parties
hereto and no earlier statements or prior written matter shall have any
force or effect. Sublessee acknowledges it is not relying on any
representations or agreements other than those contained in this Sublease.
This Sublease shall not be modified, canceled or amended except by written
instrument executed by both parties.
22. Successors and Assigns. The covenants, conditions and agreements contained
in this Sublease shall bind and inure to the benefit of Sublessor and
Sublessee and their respective successors and, except as otherwise
provided in this Sublease, their assigns.
7
<PAGE> 8
IN WITNESS WHEREOF, this Sublease has been duly executed as of the day and
year first hereinabove written.
Sublessor: CHICAGO TITLE AND TRUST COMPANY
Attest: /s/ Kenneth C. Ferraro By: /s/ Paul T. Sands, Jr.
---------------------- ---------------------------
Ass't. Secretary Its: Executive Vice President
Sublessee: THE CHICAGO TRUST COMPANY
Attest: /s/ Thomas J. Adams By: /s/ Seymour A. Newman
---------------------- ---------------------------
Its: Senior Vice President
8
<PAGE> 1
Exhibit 10.27
LIST OF CONTENTS OF EXHIBITS TO SUBLEASE
Exhibit A Lease dated July 24,1989, 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 Decembr 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.
Exhibit B Schematic Drawing of Ninth Floor of 171 North Clark Street,
Chicago, Illinois.
Exhibit C Schematic Drawing of Tenth Floor of 171 North Clark Street,
Chicago, Illinois.
Exhibit D Schematic Drawing of Lower Level of 171 North Clark Street,
Chicago, Illinois.
Exhibit E Base Rent Payment Schedule.
Exhibit F Form of Landlord's Consent to Sublease.
<PAGE> 1
Exhibit 13
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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
the consolidated financial statements, the notes thereto and Management's
Discussion and Analysis included elsewhere in this report.
<TABLE>
<CAPTION>
As of and for the years ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Operating results data:
Revenues:
Title, escrow, trust and other revenue $ 1,861,463 $ 1,411,496 $ 1,278,590 $ 1,082,008 $ 1,283,970
Investment income 63,837 52,266 47,658 46,661 44,913
Net realized investment gains (losses) 1,409 3,684 1,436 3,697 (5,447)
----------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,926,709 1,467,446 1,327,684 1,132,366 1,323,436
Expenses:
Salaries and other employee benefits 619,814 454,648 411,815 344,767 368,097
Commissions paid to agents 648,023 526,324 484,351 420,555 549,990
Provision for title losses 123,920 102,324 83,023 81,385 94,845
Interest expense 4,707 4,644 5,566 6,456 6,859
Other operating and
administrative expenses 388,540 295,903 273,236 242,380 244,655
--------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,785,004 1,383,843 1,257,991 1,095,543 1,264,446
----------------------------------------------------------------------------------------------------------------------------------
Operating income from continuing
operations before income taxes 141,705 83,603 69,693 36,823 58,990
Income taxes 53,536 27,894 23,115 11,889 18,854
- ------------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 88,169 55,709 46,578 24,934 40,136
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends paid $ 31,703 $ 32,105 $ 30,000 $ 29,515 $ 66,527
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets $ 1,881,759 $ 1,702,207 $ 1,482,697 $ 1,447,351 $ 1,389,700
Notes payable and other obligations 21,648 32,443 43,282 55,043 64,441
Basic and diluted earnings per share
from continuing operations: $ 4.03 $ 2.54 $ 2.13 $ 1.14 $ 1.83
Average number of shares outstanding: 21,902,304 21,906,651 21,906,651 21,906,651 21,906,651
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 2
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Market Prices and Dividends
Chicago Title was spun off and became an independent, publicly traded
company on June 17, 1998. Its common stock began regular way trading on the New
York Stock Exchange (ticker symbol CTZ) on June 18, 1998, and high and low stock
prices and dividends in 1998 since that date were as follows:
<TABLE>
<CAPTION>
1998
------------------------------
Second Third Fourth
Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Prices:
High $47.38 $51.44 $47.94
Low 44.50 35.00 37.50
Cash dividends declared and paid per share $ -- $ 0.34 $ 0.34
</TABLE>
As of January 31, 1999, there were approximately 10,400 individual holders
of common stock.
Chicago Title's title insurance subsidiaries are restricted as to the
amount of dividends that may be paid without the prior approval of insurance
regulatory authorities in the states in which such subsidiaries are
incorporated. The maximum amount of dividends that these subsidiaries may pay in
1999 without prior regulatory approval is approximately $80.2 million.
While Chicago Title expects to continue its policy of paying regular
quarterly cash dividends, future dividends will be dependent on future earnings,
financial condition, capital requirements and regulatory restrictions.
21
<PAGE> 3
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Management's Discussion and Analysis
1998: The Year in Review
Overview
In June 1998, Chicago Title was spun off from its parent Alleghany
Corporation (Alleghany) and became an independent, publicly traded company. The
title industry is undergoing a period of consolidation and rapid change and, as
an independent company, Chicago Title is able to focus on operating efficiencies
and strategic initiatives that are required to succeed in a changing
marketplace. The spin-off was also intended to foster development of an
entrepreneurial culture at Chicago Title. Chicago Title is now able to provide
equity-based compensation and incentives that enable it to retain and recruit
senior management and to motivate employees throughout the organization.
Net Income
Chicago Title capitalized on opportunities presented by an exceptionally
healthy real estate market and reported a strong increase in net income from
continuing operations in 1998. Exclusive of after-tax spin-off and related
management restructuring costs, net income from continuing operations rose 97.0
percent from the prior year level on an increase in total revenue of 31.3
percent. Net income from continuing operations recorded in 1997 increased by
19.6 percent from Chicago Title's results in 1996 on an increase in total
revenue of 10.5 percent
Operating Revenues
Chicago Title's business is highly dependent upon the volume of real
estate transactions occurring within the market. In turn, the volume of real
estate transactions is highly sensitive to interest rate levels and general
economic conditions. Because these factors can be volatile, revenue levels for
Chicago Title can also be volatile.
Premiums and related fees are determined by competitive factors and in
many states are also subject to regulation. Revenues earned by Chicago Title's
direct operations are principally recognized at the time of the real estate
closing. 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.
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 interest rates due to the impact that the cost of financing has on
the volume of real estate transactions.
Investment Income
In addition to income from title insurance premiums and related fees,
Chicago Title earns interest and dividend 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.
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 and maintenance of title plants.
Chicago Title's principal variable expense is commissions paid to agents.
Chicago Title regularly reviews the performance of its agents, adjusting
commission levels or canceling agents that do not meet objectives.
Chicago Title's next largest category of expense is salaries and other
employee benefits. Due to the volatility of real estate transaction volumes
driving Chicago Title's revenue, proper management of staff levels and other
components of labor expense is critical to the optimization of operating
results. To increase the sensitivity of employee-related costs to changing
business conditions, Chicago Title strives to emphasize variable forms of
compensation such as commissions, bonuses and incentive compensation programs
for large segments of the employee population.
The most significant components of other operating and administrative
expenses are occupancy, purchased property information, computer-related
expenses, telecommunications and supplies.
22
<PAGE> 4
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Provision for Title Losses
Generally, title insurance claim rates are lower than for other types of
insurance because title insurance policies typically insure against prior events
affecting the quality of real estate titles, rather than against unforeseen, and
therefore less avoidable, 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 (LAE), including legal
defense costs. 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 event 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 well after issuance.
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 that
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 exposures. there
is inherent uncertainty in estimating reserves. Actual losses may differ,
perhaps substantially, from reserves on Chicago Title's financial statements,
which could have a material effect on Chicago Title's financial condition and
results of operations. Based on current information, management believes the
reserve for title losses at December 31, 1998, is adequate.
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.
Year 2000 Issues
Overview
As the year 2000 approaches, many computer systems worldwide have the
potential to malfunction or produce incorrect information due to programming
limitations relating to the storage and manipulation of dates. For efficiency
and to economize storage space, computer manufacturers and software designers
often omitted the first two digits of the year when referring to dates in their
programs. Consequently, if not corrected, these programs will read the year 2000
(00 according to the computer) as the year 1900. Many programs utilized by
Chicago Title and its subsidiaries use only two digits to identify the year, and
failure to remediate this situation could lead to a disruption in the business
operations of Chicago Title.
In response to "Year 2000" concerns, Chicago Title has adopted a six-phase
corporate plan for itself and its subsidiaries entitled "Planning for Year 2000"
(the Year 2000 Plan). The Year 2000 Plan was designed to help determine the
extent of Year 2000 issues within each of its information technology and
non-information technology systems and to facilitate remedial action. The six
phases of the Year 2000 Plan are: (i) inventory, (ii) assessment, (iii)
remediation, (iv) system testing, (v) implementation, and (vi) audit. Included
within the scope of this plan are centrally developed systems utilized on a
company-wide basis in title plants, title production units, claims processing,
human resources and financial management; decentralized systems; and systems
that function through third-party relationships.
23
<PAGE> 5
Chicago Title Corporation and Subsidiaries 1998 Annual Report
The Year 2000 Committee, composed of representatives from the Internal
Audit, Information Services and General Counsel's Departments at Chicago Title,
directs and monitors Chicago Title's Year 2000 compliance activities.
Information Technology
Inventory and Assessment
Chicago Title completed an initial inventory of its information technology
systems in 1997. Evaluations were done of centrally supported business critical
and non-critical systems as well as the integrated communications between
certain systems. This review also covered all equipment in the central data
center, including hardware, software and databases.
Decentralized systems have been identified and evaluated at the local and
regional levels based upon responses to a comprehensive questionnaire developed
and distributed by the Information Services Department (the Field Office
Survey), which requests that field offices determine the business criticality of
any systems that may have been locally developed or acquired. Field office
managers are required to update their responses to the Field Office Survey on a
monthly basis. These responses are being sent to the Internal Audit Department
for review and for use in ongoing audit activities.
The Field Office Survey specifically directs field office managers to
review and report the Year 2000 status of all hardware used in the field
offices, which consists mainly of personal computers (PCs). Each major PC
manufacturer has been requested to provide certification of the Year 2000
compliance of its specific models, and an inventory is underway to insure that
certifications have been received. Information regarding the Year 2000 readiness
of such models has been posted on the Intranet (which is Chicago Title's
computerized internal communications system). In addition, several software
packages have been identified which could test Year 2000 preparedness of all of
the hardware and the software programs installed on these PCs. The field offices
are being encouraged to purchase and to run this software on all local hardware
and software programs used in regular business operations.
Business critical operations which interface with computer hardware,
software or databases of third-party service providers, customers and agents
have been identified. Chicago Title has requested written certification of Year
2000 compliance from key third-party service providers, customers and agents
that interface with its business systems, and continues its efforts to survey
their Year 2000 readiness.
Due diligence efforts for recent acquisitions have included verification
of Year 2000 readiness, estimated expenditures toward Year 2000 compliance and
certification of internal and external systems.
Remediation
Modifications to centrally developed and supported systems are 75 percent
complete. Modifications to the remaining systems, several of which are business
critical, remain to be completed and are currently scheduled for completion by
the end of the second quarter of 1999.
As previously mentioned, field offices are being asked to provide monthly
updates on the Year 2000 readiness of those systems developed or acquired
locally. Use of the PC evaluation software on field office PCs may result in the
identification of more equipment which will require replacement. As a result,
additional funding for renovation or replacement of local systems may also be
required. It is expected that this process will be completed by the end of the
first quarter of 1999.
Chicago Title has been receiving information from its key service
providers, customers and agents about their efforts relating to Year 2000
readiness. Although such information generally indicates that the systems of
Chicago Title's key vendors, customers and agents will be ready for Year 2000,
there can be no assurance that such systems will be remediated on a timely
basis.
System Testing
Testing of centrally supported applications is 70 percent complete.
Off-site end-to-end application tests of the data transfer between integrated
business critical systems has been scheduled for May 1999 and will be repeated
in August 1999. Additional testing, where necessary to conform to Federal
Financial Institutions Examination Council (FFIEC) guidelines, is expected to be
completed during the first half of 1999. FFIEC guidelines have been adopted by
various regulatory and licensing authorities and are considered by them when
performing on-site audits of Chicago Title. Central documentation libraries are
being created to make test plans and test results more readily available to
auditors for these authorities.
24
<PAGE> 6
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Testing methodologies used for locally developed or acquired systems have
been at the discretion of field office management. The Field Office Survey
continuously requests additional information on testing of business critical
local systems and equipment.
Implementation
35 percent of all systems modified to be Year 2000 compliant have been
installed and are currently in use. The remaining systems will be installed as
testing and user sign-off is completed, which is expected by the end of the
second quarter of 1999. Significant hardware purchases for Year 2000 compliance
of central systems have been completed. Additional expenditures for field office
hardware may be required as verification of locally developed or acquired
systems is completed.
Audit
The final phase of the Year 2000 Plan consists of continuous monitoring of
Chicago Title's remediation efforts. The completion of milestones and the
satisfaction of objectives defined in the Year 2000 Plan will provide
checkpoints to assess the status of Chicago Title's Year 2000 readiness. Audits
of central systems and local and regional audits are being conducted by the
Internal Audit and Information Services Departments.
Non-Information Technology
Chicago Title has completed its inventory and assessment of
non-information technology systems to determine to what extent such systems are
in need of Year 2000 remediation. Chicago Title has identified the operations of
its facilities (elevators, heating and air conditioning units and the like),
office equipment (such as copiers, facsimile machines, telephones and
voicemail), telephone and data lines and the supply of electrical power as
examples of non-information technology upon which Chicago Title is dependent.
However, Chicago Title is not more dependent on these technologies than other
businesses in the United States. Chicago Title has received certifications from
the owner of its headquarters building that the building's systems are Year 2000
compliant.
Chicago Title has not identified any Year 2000 problems associated with
its non-information technology systems that have not either been remediated or
replaced, or scheduled to be remediated or replaced prior to January 1, 2000, or
that are likely to pose any material risks to Chicago Title's direct business
operations.
Costs for Year 2000 Remediation
In respect of remediation of central systems, Chicago Title spent an
estimated $2.8 million through the end of 1998, and expects to spend
approximately $350,000 in 1999. To remediate local systems, Chicago Title spent
approximately $1.4 million through the end of 1998, and expenditures in 1999 are
expected to be about $4.0 million. The source of these sums is corporate
operating funds. Chicago Title does not separately track the cost and time its
own internal employees spend on the Year 2000 project because such costs are
principally the related payroll costs for its Information Services Department
There may be other, non-material costs which have also not been separately
tracked.
Risks Related to Year 2000 Issues
Chicago Title's operations are heavily dependent upon its information
technology business systems. Although not reasonably likely to occur, Chicago
Title believes that a possible worst case scenario could result from a
combination of failures in its business critical information technology systems
coupled with failures in the real estate transaction and banking businesses
generally. Chicago Title believes that such failures could create obstacles to
providing certain services, such as production of title insurance policies,
settlement of real estate transactions and disbursement of funds. In such a
scenario, Chicago Title might be forced to rely on the manual or typewritten
processing of transactions, or, if feasible, to shift processing to other
company systems or third-party data processing vendors. Such problems could have
a material adverse effect on Chicago Title's operations in that it could lead to
a decline in its volume of business or an increase in its costs, the extent of
which are not estimable. However, any such failure would be likely to impact
others in the industry as well, and Chicago Title has no reason to believe that
it would be any more adversely affected than other title insurance companies.
25
<PAGE> 7
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Contingency Planning
In response to the possibility that Year 2000 failures might occur,
contingency planning is in progress at each of the corporate, regional and local
levels. Three types of events demanding contingency plans are identified in the
Year 2000 Plan: catastrophic events, such as failure of the national power grid;
major events, such as telephone or facilities failures; and internal events,
such as failures of specific components of Chicago Title's information
technology business systems.
Contingency plans addressing the foregoing events (other than catastrophic
events, which are outside the control of Chicago Title) are currently in
development. Although it is impossible to plan for every contingency, Chicago
Title is taking steps to identify certain problems which might occur and
prioritizing them in accordance with their relative risk. More complex systems
(e.g., business critical information technology systems and major facilities)
tend to be more high risk, and Chicago Title is focusing on those in its
contingency planning. Systems which have already been tested and found to be
Year 2000 compliant have lower priority in Chicago Title's contingency planning.
For both central and field offices, contingency plans are in development
to provide for the transfer of business operations from a non-compliant Year
2000 facility to the nearest fully operational facility. Contingency plans are
also in development to allow fully operational systems to provide alternative
data processing capabilities for select systems that experience failures.
Chicago Title is emphasizing compliance of all systems, but expects contingency
planning to be an ongoing function during 1999.
Results of Operations
Net Income
Chicago Title's net income from continuing operations totaled $88.2
million, or $4.03 per basic and diluted share for the year ended December 31,
1998. These results included $21.6 million, or $0.98 per basic and diluted
share, of after-tax spin-off and related management restructuring costs.
Exclusive of after-tax spin-off and related management restructuring costs, 1998
net income from continuing operations was $109.7 million, or $5.01 per basic and
diluted share. This represented an increase of 97.0 percent from the $55.7
million in net income from continuing operations, or $2.54 per basic and diluted
share, earned in 1997. In 1996, net income from continuing operations was $46.6
million, or $2.13 per basic and diluted share. Total revenue rose 31.3 percent
to $1.93 billion in 1998 from $1.47 billion in 1997. In 1997, total revenue rose
10.5 percent from $1.33 billion in 1996.
For both 1998 and 1997, the improved operating results were primarily
attributable to higher revenue levels resulting from improved real estate
markets. All business sectors 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 1998 and 1997. Excluding spin-off and related management
restructuring costs, pre-tax income from continuing operations, as a percentage
of revenue, amounted to 8.8 percent in 1998, 5.7 percent in 1997 and 5.2 percent
in 1996.
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. Operating results for 1996 were
favorably impacted by an increase in pre-tax income of $8.0 million resulting
from a reduction in the reserve for title losses for prior years. The reduction
in the reserve for title losses was due to a downward trend in claims paid and
an assessment that the mix of business written between 1993 and 1995 presented a
lower level of risk than previously anticipated.
Prior to the spin-off, Chicago Title performed trust and asset management
services through a subsidiary, Alleghany Asset Management, Inc. (AAM). This
subsidiary remained with Alleghany after the spin-off. Results for AAM during
the periods it was owned by Chicago Title have been classified as "discontinued
operations" in the financial statements included elsewhere in this report. Net
income from discontinued operations was $9.0 million, or $0.41 per basic and
diluted share, in 1998 compared with $12.2 million, or $0.56 per basic and
diluted share, in 1997. In 1996, net income from discontinued operations was
$5.5 million, or $0.25 per basic and diluted share.
26
<PAGE> 8
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Operating Revenues
The real estate market had its best year ever in 1998, benefiting from the
nation's longest peacetime economic expansion, the lowest inflation rate in four
decades, the lowest unemployment rate in three decades, low interest rates and a
rallying stock market reaching record highs. Moreover, against a backdrop of
economic turmoil abroad and political uncertainty at home, the U.S. economy grew
3.9 percent in 1998, nearing the eighth consecutive year of expansion.
Fueled by low mortgage rates, strong job growth, rising wages, high
consumer confidence levels and greater purchasing power, sales of existing
single-family homes soared 13.5 percent to an all-time high of 4.79 million in
1998, beating the previous record of 4.22 million in 1997. This was the third
straight record year for sales of existing homes. With sales of new homes also
proceeding at a record pace, construction of new single-family homes reached
1.27 million in 1998, a 12 percent increase from 1997.
Chicago Title's operating revenue reflects the growing economy and real
estate market. Title, escrow, trust and other revenue increased to $1.86 billion
in 1998 from $1.41 billion in 1997 and from $1.28 billion in 1996. Approximately
35 percent of the $450.0 million increase in 1998 was attributable to gross
agent revenues, 28 percent was related to direct residential title premiums, 13
percent was due to direct escrow and closing fees, 8 percent was attributable to
direct real estate-related service fees, 7 percent was attributable to direct
commercial title premiums and the remainder was due to various other items.
Approximately 38 percent of the $132.9 million increase in 1997 was attributable
to gross agent revenues, 26 percent was due to direct commercial title premiums,
11 percent was related to direct residential title premiums, 10 percent was
attributable to direct real estate-related service fees, 9 percent was due to
direct escrow and closing fees, and the remainder was due to various other
items.
In 1998, direct title premiums related to residential purchase
transactions, residential refinance transactions and commercial and industrial
transactions increased by 23.7 percent, 131.1 percent and 18.0 percent,
respectively, from 1997, compared with increases of 4.9 percent, 10.1 percent
and 26.0 percent, respectively, in 1997 from 1996. In 1998, 1997 and 1996,
approximately 66 percent, 61 percent and 65 percent, respectively, of Chicago
Title's direct title premiums were attributable to residential transactions; the
remainder in each year was attributable to commercial and industrial
transactions.
Investment Income
Pre-tax investment income totaled $63.8 million in 1998, compared with
$52.3 million in 1997 and $47.7 million in 1996. These increases were due
principally to higher levels of investment assets. Chicago Title also recorded a
pre-tax gain of $1.4 million on investment transactions in 1998, compared with
pre-tax gains of $3.7 million in 1997 and $1.4 million in 1996. Of the $3.7
million pre-tax gain that was recognized in 1997, $2.2 million was related to
sales of securities to Chicago Title's former parent, Alleghany.
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 areas in which the commissions are earned,
primarily due to competitive factors. The percentage of premiums retained by
agents amounted to 76.4 percent in 1998, 76.2 percent in 1997 and 75.7 percent
in 1996. Chicago Title reports amounts retained by agents, along with amounts
paid to approved attorneys, as commissions paid to agents in the consolidated
statements of income included elsewhere in this report.
Salaries and Other Employee Benefits. This category of expense represents
the cost of salaries, incentive compensation and benefits paid to employees. One
key ratio monitored by management is the level of these expenses as a percentage
of revenue, net of commissions paid to agents. The following table summarizes
this ratio for the past three years:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
==================================================================================================================
<S> <C> <C> <C>
Title, escrow, trust and other revenue $ 1,861,463 $ 1,411,496 $ 1,278,590
Less: Commissions paid to agents (648,023) (526,324) (484,351)
- ------------------------------------------------------------------------------------------------------------------
Net operating revenue 1,213,440 885,172 794,239
- ------------------------------------------------------------------------------------------------------------------
Total salaries and other employee benefits 619,814 454,648 411,815
Less: Spin-off and related management restructuring costs (23,196) -- --
- ------------------------------------------------------------------------------------------------------------------
Total salaries and other employees benefits, net 596,618 454,648 411,815
- ------------------------------------------------------------------------------------------------------------------
Percentage 49.2% 51.4% 51.9%
</TABLE>
27
<PAGE> 9
Chicago Title Corporation and Subsidiaries 1998 Annual Report
The level of total salaries and other employee benefits as a percentage of
net operating revenue has declined in each of the last two years due to
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 operating
revenue through the transfer of best practices throughout Chicago Title as well
as through increased automation and continued consolidation of title plants,
production centers and staff functions.
Other Operating and Administrative Expenses. Other operating and
administrative expenses included spin-off related expenses of $5.4 million in
1998. Exclusive of these costs, other operating and administrative expenses
increased $87.2 million from 1997 to 1998, and increased $22.7 million from 1996
to 1997. Approximately 28 percent of the increase in 1998 was due to an increase
in the expense of property information purchased from outside sources, about 20
percent was attributable to contract labor, 12 percent was due to state premium
taxes and the remainder was due to various other items. The expense of property
information purchased from outside sources accounted for slightly over half of
the increase in expense in 1997 from 1996 and the remainder was due to various
other items. In each year, the higher expense levels were primarily due to the
increased volume of business.
Provision for Title Losses. The following table summarizes key information
pertaining to Chicago Title's provision for title losses:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for title losses -- current year $ 123,920 $ 102,324 $ 91,023
Title, escrow, trust and other revenue 1,861,463 1,411,496 1,278,590
Ratio 6.7% 7.2% 7.1%
Reserve for title losses at year-end $ 618,831 $ 564,334 532,923
Paid losses, net of recoveries 70,233 70,913 80,015
Reserve coverage of paid losses 8.8x 8.0x 6.7x
</TABLE>
The provision for title losses as a percentage of operating revenue was
reduced in 1998 from the prior year level in recognition of a continued downward
trend in claims paid. Because of the favorable trend in claims paid, management
currently anticipates that the provision for title losses as a percentage of
operating revenue will be further reduced in 1999 from the 1998 level of 6.7
percent to approximately 6.2 percent. However, the actual level of the provision
for title losses in 1999 may differ based upon management's future evaluation of
all pertinent factors, including analyses of actuarial studies, economic
conditions and loss patterns.
As previously discussed, Chicago Title's 1996 results included an $8.0
million reduction in the provision for title losses for prior years. This
reduction in title loss provision rates 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.
Financial Condition
Cash provided by continuing operations amounted to $232.5 million in 1998,
compared with $260.9 million in 1997 and $87.7 million in 1996. Substantially
all of the $21.6 million in spin-off and related management restructuring costs
that were incurred in 1998 reduced cash provided by continuing operations.
Chicago Title (on a stand-alone basis excluding subsidiaries) had total
cash and cash equivalents of $7.0 million at December 31, 1998, none of which
was pledged. The primary source of cash inflow to Chicago Title is the payment
of dividends by its subsidiary Chicago Title and Trust Company (CT&T). Chicago
Title's primary use of cash is the payment of dividends to its stockholders. In
each of the third and fourth quarters of 1998, Chicago Title paid its
stockholders a quarterly cash dividend of $0.34 per share of Chicago Title
common stock. While it is currently the intention of management to recommend the
payment of a quarterly dividend at this level in the future, the actual timing
and amount of future dividends, if any, will depend on various factors and are
subject to change at the discretion of the board of directors from time to time.
28
<PAGE> 10
Chicago Title Corporation and Subsidiaries 1998 Annual Report
At December 31, 1998, CT&T (on a stand-alone basis excluding its
subsidiaries) had total cash, cash equivalents and marketable securities of
$541.4 million, $502.3 million of which was pledged to secure trust and escrow
deposits and other liabilities. On the same basis, as of December 31, 1997, CT&T
had total cash, cash equivalents and marketable securities of $511.9 million,
$476.2 million of which was pledged to secure trust and escrow deposits and
other liabilities.
The primary sources of cash inflow to CT&T are dividends paid by its
subsidiaries, investment earnings and fees paid by various subsidiaries for
services furnished by CT&T. The primary uses of cash by CT&T are dividends paid
to Chicago Title's debt service, funding for acquisitions, capital expenditures
and corporate operating expenses. As described in Note 5 to the consolidated
financial statements included elsewhere in this report, CT&T's title insurance
subsidiaries are restricted as to the amount of dividends that may be paid
without prior approval of insurance regulatory authorities in the states in
which such subsidiaries are incorporated. The maximum amount of dividends that
these subsidiaries may pay to CT&T in 1999 without prior regulatory approval is
approximately $80.2 million. These limitations have not affected Chicago Title's
ability to meet its obligations.
Chicago Title had consolidated outstanding long-term debt of $21.6 million
at December 31, 1998. Of this amount, $19.3 million was the balance borrowed
under a bank credit agreement entered into by CT&T 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 1999 and 2000. Interest is payable quarterly at variable
rates. The credit agreement requires CT&T to meet certain financial tests and
includes customary restrictive covenants, including a limitation on the amount
of additional indebtedness that may be incurred. At December 31, 1998, CT&T
satisfied all applicable financial tests imposed by the credit agreement.
CT&T currently has two arrangements in place with banking institutions for
lines of credit of $20.0 million and $25.0 million. The two lines of credit are
scheduled to expire on June 9, 1999, and October 31, 1999, 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 1998 and no amounts were
outstanding under such lines as of December 31, 1998. CT&T has a third
arrangement with a banking institution that became effective January 1, 1999,
for a line of credit of $20.0 million, which is scheduled to expire December 31,
1999. CT&T expects to negotiate an extension for this line of credit. Amounts
may be drawn under this line of credit for general corporate purposes. This
arrangement requires CT&T to meet certain financial tests and includes customary
restrictive covenants.
In 1998, CT&T entered into a bank credit agreement which provides 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
requires CT&T to meet certain financial tests and includes customary restrictive
covenants. Borrowings under the revolving credit agreement are available for
general corporate purposes. The revolving credit agreement expires May 29, 2003.
At December 31, 1998, CT&T satisfied all applicable financial tests imposed by
the credit agreement. No amounts were drawn under this agreement during 1998 and
no amounts were outstanding as of December 31, 1998.
In addition to the credit relationships described above, in connection
with its business operations Chicago Title also deposits substantial funds into
demand deposit accounts with various financial institutions. Chicago Title
negotiates for and receives a range of banking services from these institutions
as permitted by banking laws and regulations, such as direct services, payments
to third-party vendors, including one or more Chicago Title subsidiaries, that
provide escrow accounting and other services, and credit accommodations
including short-term low rate loans to Chicago Title secured by its assets,
primarily commercial paper.
One element of Chicago Title's strategy to increase its market share and
earnings growth is the pursuit of selected acquisition opportunities intended
either to broaden Chicago Title's array of product offerings or to bolster
Chicago Title's presence in certain higher growth title insurance markets. The
scope of this acquisition program, which involves primarily smaller companies,
is limited and will be funded from internally generated cash flow and financing
activities. In the first two months of 1999, Chicago Title and its subsidiaries
acquired a total of three companies at a total cost of approximately $36.6
million. These acquisitions were funded from internally generated cash flow.
Another aspect of Chicago Title's strategy is to improve work flow and
productivity through the development of an "electronic spine" that will fully
integrate Chicago Title's services and offices. Through December 31, 1998,
Chicago Title had spent approximately $3.8 million and management currently
estimates that costs aggregating approximately an additional $17 million will be
incurred in connection with construction of the electronic spine. These costs
are expected to be incurred over a three-year period and will be funded from
internally generated cash flow. Chicago Title and its subsidiaries have no other
material commitments for capital expenditures.
29
<PAGE> 11
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Chicago Title has announced that it may purchase up to two million shares
of its common stock in open market transactions during the next five years to
provide for various employee and director benefit plans. In 1998, Chicago Title
purchased an aggregate of 63,000 shares for about $2.6 million, for an average
cost of about $40.86 per share.
Management believes cash generated from operations, investments and cash
available from financing activities will provide sufficient liquidity to meet
Chicago Title's currently foreseeable needs.
Market Risk
Market demand for Chicago Title's primary products, like that of other
companies within the title insurance industry, is highly dependent upon the
volume of lending activity that is secured by real estate. While the volume of
real estate lending is strongly influenced by general economic conditions, the
level of interest rates (as well as the direction and magnitude of changes in
interest rates) is a particularly important factor. Lower interest rates tend to
improve the affordability of housing and commercial space and therefore promote
higher levels of construction and real estate sales. Lower interest rates also
make the refinancing of existing loans secured by real estate more economically
feasible. Conversely, the increased financing costs associated with higher
interest rates tend to lower the demand for real estate and reduce the amount of
real estate lending. Consequently, Chicago Title's revenue tends to expand in
periods of lower interest rates and contract in periods of higher interest
rates.
To mitigate the risks associated with fluctuations in demand, Chicago
Title strives to maintain a cost structure that is highly variable. The most
visible aspect of this is its network of over 4,100 policy-issuing agents. These
agents are independent companies that maintain the staff and facilities
necessary to generate and produce title insurance business. Chicago Title pays
the agents a commission based upon a percentage of title premiums, resulting in
a distribution channel with a highly variable cost structure.
Within its direct operations, Chicago Title's most significant expense is
labor. Chicago Title's employee compensation strategy is to emphasize variable
expense programs such as commissions, incentive compensation plans tied to
financial results and profit sharing programs. One of the benefits of the
spin-off is that it provides Chicago Title with the ability to utilize
equity-based compensation plans that enhance the variable nature of staffing
expense. In addition, Chicago Title strives to meet its peak staffing needs
through the use of temporary and part-time personnel. Chicago Title maintains
contingency plans that identify specific cost reduction actions to be taken to
ensure swift action in the event that demand subsides.
An element of diversification within Chicago Title's revenue sources is
its maintenance of a substantial portfolio of liquid, relatively short-duration
investment securities. Chicago Title does not specifically match particular
assets to related liabilities (primarily claims obligations), 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.
At December 31, 1998, the duration of the fixed-income securities in
Chicago Title's portfolio was approximately 2.4 years and is managed within a
duration range of 1.9 to 3.1 years. Duration measures a portfolio's sensitivity
to changes 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 2.4 percent in the value of Chicago Title's portfolio.
Chicago Title's total capitalization amounted to $483 million at December
31, 1998. Of this amount, only 4.5 percent or $22 million was attributable to
long-term debt and the remainder was provided by equity capital. The low level
of reliance on interest sensitive capital also serves to mitigate risks that
would emanate from a rising interest rate environment.
30
<PAGE> 12
Chicago Title Corporation and subsidiaries 1998 Annual Report
The table below provides information about Chicago Title's financial
instruments that are sensitive to changes in interest rates, including
investment securities and debt obligations. At December 31, 1998, Chicago Title
had no interest rate swaps or other material derivative financial instruments
outstanding. The entire portfolio of investment securities is classified as
available for sale. Chicago Title does not maintain a trading portfolio. For
both investment securities and debt obligations, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. The expected maturity dates for the callable securities, which are
primarily mortgage-backed securities, are based upon contractual amounts.
Chicago Title had no variable rate investment securities at December 31, 1998.
The variable rate debt instrument is tied to the London Inter-Bank Offered Rate
(LIBOR) and rates shown are based on those in effect at December 31, 1998.
<TABLE>
<CAPTION>
There- Fair
(In millions) 1999 2000 2001 2002 2003 after Total Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
Fixed rate, non-callable $ 337.3 $ 114.2 $ 94.7 $ 85.1 $ 84.6 $ 182.9 $ 898.8 $ 922.5
Average interest rates 5.40% 5.60% 5.65% 5.85% 5.47% 6.29% 5.68% 4.86%
Fixed rate, callable $ 7.4 $ 6.0 $ 10.8 $ 11.2 $ 16.7 $ 178.3 $ 230.4 $ 236.1
Average interest rates 7.17% 6.97% 6.74% 6.33% 5.51% 6.48% 6.45% 6.31%
Notes payable
Fixed rate $ 0.4 $ 0.7 $ 0.7 $ 0.2 $ 0.1 $ 0.2 $ 2.3 $ 2.3
Average interest rates 8.44% 7.85% 7.88% 8.87% 9.00% 9.00% 8.15% 8.15%
Variable rate $ 9.7 $ 9.6 -- -- -- -- $ 19.3 $ 19.3
Average interest rates 5.72% 5.72% -- -- -- -- 5.72% 5.72%
</TABLE>
In addition to the fixed rate securities shown in the table above, at
December 31, 1998 Chicago Title held equity securities with a total cost of
$33.1 million and a total market value of $35.5 million.
Forward-Looking Statements
This "Management's Discussion and Analysis" 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 real estate transactions; acquisition activities; 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 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; the success of Chicago Title in
achieving Year 2000 compliance; 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.
31
<PAGE> 13
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
Assets
Cash on hand and in banks $ 39,230 $ 21,219
Cash pledged to secure trust and escrow deposits 93,887 100,207
Marketable securities, available-for-sale:
Fixed maturities, at fair value (amortized cost of $1,136,432 and
$1,016,446 in 1998 and 1997, respectively) 1,158,664 1,032,089
Equity securities, at fair value (cost of $33,079 and $33,232 in
1998 and 1997, respectively) 35,464 34,489
---------------------------------------------------------------------------------------------------------------
Total marketable securities 1,194,128 1,066,578
Receivables, including accrued investment income, less allowance for doubtful
accounts of $14,072 and $7,574 in 1998 and 1997, respectively 75,840 62,558
Deferred federal income taxes 89,553 75,997
Fixed assets, net 104,322 97,222
Title plants 151,600 150,546
Net assets of Alleghany Asset Management, Inc. to be distributed
to Alleghany Corporation -- 18,097
Other assets 133,199 109,783
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,881,759 $ 1,702,207
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accounts payable $ 112,136 $ 105,692
Accrued expenses and other liabilities 172,253 128,638
Notes payable and other obligations 21,648 32,443
Reserve for title losses 618,831 564,334
Trust and escrow deposits secured by pledged assets 495,299 467,553
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,420,167 1,298,660
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 6):
Common stock - par value of $1 and $4,000 per share, authorized 66,000,000 and
3,722 shares; issued 21,926,651 and 3,419 shares at December 31, 1998 and
December 31, 1997, respectively 21,927 13,676
Additional paid-in capital 128,137 117,381
Unearned compensation-restricted stock (15,573) --
Retained earnings 311,988 261,425
Accumulated other comprehensive income (Note 6) 16,001 11,065
Cost of treasury stock 20,966 shares) (888) --
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 461,592 403,547
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,881,759 $ 1,702,207
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 14
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
====================================================================================================================================
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Title, escrow, trust and other revenue $1,861,463 $1,411,496 $1,278,590
Investment income 63,837 52,266 47,658
Net realized investment gain on sales to Alleghany Corporation -- 2,214 --
Net realized investment gains - other 1,409 1,470 1,436
----------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,926,709 1,467,446 1,327,684
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other employee benefits 619,814 454,648 411,815
Commissions paid to agents 648,023 526,324 484,351
Provisions for title losses 123,920 102,324 83,023
Interest expense 4,707 4,644 5,566
Other operating and administrative expenses 388,540 295,903 273,236
----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,785,004 1,383,843 1,257,991
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations before income taxes 141,705 83,603 69,693
Income taxes 53,536 27,894 23,115
- ------------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 88,169 55,709 46,578
Net income from discontinued operations 9,013 12,162 5,462
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 97,182 $ 67,871 $ 52,040
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share (Note 8):
Continuing operations $ 4.03 $ 2.54 $ 2.13
Discontinued operations 0.41 0.56 0.25
----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 4.44 $ 3.10 $ 2.38
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 15
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Consolidated Statements of
Changes in Stockholders' Equity
and Comprehensive Income
<TABLE>
<CAPTION>
Unearned Accumulated
compen- other
Additional sation-- compre- Cost of Total
Common paid-in restricted Retained hensive treasury stockholders'
Years ended December 31, 1998, 1997 and 1996 stock capital stock earnings income stock equity
===================================================================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 14,876 $ 126,100 $ -- $ 192,347 $ 13,115 $ -- $ 346,438
Net income -- -- -- 52,040 -- -- 52,040
Other comprehensive income (Note 6) -- -- -- -- (9,236) -- (9,236)
---------
Total comprehensive income 42,804
---------
Purchase and retirement of common stock (1,200) (10,072) -- (18,728) -- -- (30,000)
Capital contributions from former parent -- 1,353 -- -- -- -- 1,353
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,676 117,381 -- 225,659 3,879 -- 360,595
Net income -- -- -- 67,871 -- -- 67,871
Other comprehensive income (Note 6) -- -- -- -- 7,186 -- 7,186
---------
Total comprehensive income 75,057
---------
Dividends paid to former parent -- -- -- (32,105) -- -- (32,105)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 13,676 117,381 -- 261,425 11,065 -- 403,547
Net income -- -- -- 97,182 -- -- 97,182
Other comprehensive income (Note 6) -- -- -- -- 5,040 -- 5,040
---------
Total comprehensive income 102,222
---------
Recapitalization for spin-off 7,848 (7,848) -- -- -- -- --
Issuance of stock 403 18,599 (18,877) -- -- -- 125
Amortization of restricted stock -- -- 3,304 -- -- -- 3,304
Dividends to former parent -- -- -- (31,599) (104) -- (31,703)
Treasury shares acquired and reissued
for employee benefit plans -- 5 -- (119) -- (888) (1,002)
Cash dividends paid to stockholders
($0.68 per share) -- -- -- (14,901) -- -- (14,901)
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 21,927 $ 128,137 $ (15,573) $ 311,988 $ 16,001 $ (888) $ 461,592
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36 & 37
<PAGE> 16
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
===================================================================================================================================
(In thousands)
<S> <C> <C> <C>
Cash flows from continuing operations activities:
Net income from continuing operations $ 88,169 $ 55,709 $ 46,578
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operations activities:
Depreciation and amortization 40,907 31,032 27,567
Changes in assets and liabilities:
Cash pledged to secure trust and escrow deposits 6,320 (815) 7,868
Receivables (7,097) (10,979) (2,677)
Current and deferred Federal income taxes (18,190) (4,792) 488
Other assets (830) 12,058 (5,978)
Accounts payable and accrued expenses and other liabilities 43,258 39,091 25,940
Reserve for title losses 53,687 31,411 3,090
Trust and escrow deposits secured by pledged assets 27,660 111,842 (13,740)
Gain on sale of investments (1,409) (3,684) (1,436)
------------------------------------------------------------------------------------------------------------------------------
Net adjustments 144,306 205,164 41,122
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations activities 232,475 260,873 87,700
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends received from Alleghany Asset Management, Inc. 7,472 13,300 3,401
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 239,947 274,173 91,101
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of long-term marketable securities (426,759) (384,693) (266,808)
Sales of long-term marketable securities 167,772 148,968 119,799
Maturities and redemptions of long-term marketable securities 107,441 132,664 131,505
Net sales (purchases) of short-term investments 32,027 (99,509) (16,318)
Purchases of other invested assets (6,986) (4,955) (22,430)
Sales of other invested assets 4,336 7,163 27,169
Purchases of fixed assets (35,094) (28,506) (33,048)
Sales of fixed assets 4,400 3,134 4,546
Purchases of title plants (305) (584) (118)
Sales of title plants -- 1,385 --
Purchases of subsidiaries (32,427) (4,106) (2,264)
Cash received from sale of subsidiary -- -- 4,073
Cash of acquired subsidiaries 4,443 33 1,700
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (181,152) (229,006) (52,194)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to former parent (9,000) (32,105) --
Repurchase of common stock from former parent -- -- (30,000)
Principal payments on notes payable and other obligations (12,840) (11,554) (13,505)
Payment of cash dividends (Note 6) (14,894) -- --
Purchases of treasury stock, net of reissuances (Note 6) (1,007) -- --
Proceeds of long-term debt -- -- 1,550
Cash remaining with discontinued operations (3,043) (3,361) (512)
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (40,784) (47,020) (42,467)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 18,011 (1,853) (3,560)
Cash at beginning of year 21,219 23,072 26,632
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 39,230 $ 21,219 $ 23,072
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 17
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Notes to Consolidated
Financial Statements
(1) Nature of Operations and Basis of Presentation
Nature of Operations
Chicago Title Corporation (Chicago Title) and its subsidiaries
(collectively, the Company) issue title insurance policies and manage escrow
funds principally through three subsidiaries: Chicago Title Insurance Company
(CTIC), Ticor Title Insurance Company (Ticor Title) 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 340 full service offices and 4,100
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,
real estate valuations and default management. These services are offered
through various subsidiaries.
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 the
Company. All significant intercompany transactions have been eliminated in
consolidation. All dollar amounts shown, except per share data, are in thousands
unless otherwise noted.
Spin-off
On June 17, 1998, Alleghany Corporation (Alleghany) completed a spin-off
of the Company through the pro-rata distribution to its stockholders of
21,523,863 shares of common stock of Chicago Title. Immediately prior to the
spin-off, 364,184 shares of common stock were issued as restricted stock to
members of the Company's senior management. Immediately after the spin-off, an
additional 16,000 shares were issued as restricted stock to non-employee
directors of Chicago Title. These shares of restricted stock will be expensed
over their respective vesting periods based upon the value of such shares as of
the first trading day after the spin-off, which was $18.0 million. On the day
after the spin-off, the non-employee directors of Chicago Title received a total
of 2,604 shares in lieu of cash as payment of a portion of their annual
retainer.
On a pre-tax basis, for the year ended December 31, 1998, salaries and
other employee benefits included $19.5 million in executive compensation
associated with the spin-off (including $7.2 million attributable to the
repurchase of an option that had been granted to John Rau in connection with the
commencement of his employment as President and Chief Executive Officer of
Chicago Title's subsidiary Chicago Title and Trust Company (CT&T) in January
1997), and $3.7 million in related managerial restructuring expenses.
On a pre-tax basis, for the year ended December 31, 1998, other operating
and administrative expenses included $5.4 million for professional fees,
printing costs, listing fees and other expenses directly associated with the
spin-off.
In connection with the spin-off, effective June 9, 1998, all of the
outstanding stock of Alleghany Asset Management, Inc. (AAM) was distributed by
CT&T to Alleghany, which resulted in a $22.7 million reduction in the Company's
stockholders' equity. In light of such distribution, AAM is classified as a
discontinued operation for all periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Discontinued Operations
AAM participates in the financial services and investment management
business principally through two subsidiaries: The Chicago Trust Company and
Montag & Caldwell, Inc. These companies provide investment management,
counseling and administrative services to institutional clients, pension and
profit sharing plans and high net worth individuals. The Chicago Trust Company
acts as trustee and fiduciary under various types 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.
39
<PAGE> 18
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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
Notes 13 and 15 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 investments in fixed maturities and
equity securities. 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, 1998 and 1997, all marketable securities are classified as
available-for-sale and carried at fair value. Unrealized gains and losses, net
of deferred taxes, are excluded from net income and are reported as a separate
component of stockholders' 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 three to 40 years. At December 31,
1998, gross fixed assets consisted of land, buildings and improvements, and
furniture and equipment of $8,043, $56,924 and $107,316, respectively. 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. Accumulated depreciation and amortization was $67,961 and $57,928
at December 31, 1998 and 1997, respectively.
Title Plants
Title plants are carried at cost. The cost is not being amortized, as
properly maintained title plants have indefinite lives. Title plants are
reviewed for impairment whenever events or circumstances provide evidence
suggesting the carrying amount of the asset may not be recoverable. Current
costs of maintaining title plants are expensed in the year incurred.
Goodwill
Goodwill is amortized over its estimated useful life on a straight-line
basis over periods ranging from five 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 $90,581 and $69,407 at December 31, 1998
and 1997, respectively.
Federal Income Taxes
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 current reserve for title losses is adequate.
40
<PAGE> 19
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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 14. 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 an agency
capacity and, accordingly, amounts aggregating approximately $1,450,390 and
$1,626,403 are excluded from the accompanying consolidated balance sheets at
December 31, 1998 and 1997, respectively.
Regulatory Accounting Practices
The title insurance subsidiaries are required to file annual statements
with insurance regulatory authorities which are prepared on an accounting basis
prescribed or permitted by such authorities. Prescribed statutory accounting
principles include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, may differ from company to company within a state, and may change in
the future.
Revenue Recognition
Title insurance premiums and escrow fees are typically recognized as
revenues at the time of the real estate closing. Revenues from title policies
issued by independent agents are generally recorded when notice of issuance is
received from the agent.
Stock-based Compensation
The Company accounts for its employee stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees." The Company has not issued stock options where the exercise price is
less than the market value of Chicago Title common stock on the date of grant
and, accordingly, no compensation expense has been recognized.
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, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Interest paid $ 4,746 $ 5,077 $ 5,602
Income taxes paid 69,442 41,331 28,216
================================================================================
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the 1998 presentation.
Accounting Changes
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 applies only to public companies. Under SFAS No. 128, the
dual presentation of basic and diluted earnings per share (EPS) is required on
the face of the income statement for all entities with complex capital
structures. The Company adopted SFAS No. 128 in 1998.
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 adopted SFAS No. 130 in 1998.
41
<PAGE> 20
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes an
employer's disclosures about pension and other postretirement benefit plans,
requires additional information on the benefit obligations and fair values of
plan assets and eliminates certain disclosures. SFAS No. 132 is effective for
financial statements for fiscal years beginning after December 15, 1997. The
provisions of SFAS No. 132 are of a reporting nature and do not have an impact
on the financial position or results of operations of the Company. The Company
adopted SFAS No. 132 in 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 is effective for financial statements for fiscal years beginning after June
15, 1999. The Company intends to adopt SFAS No. 133 in 1999. While the Company
is still evaluating this standard, adoption of SFAS No. 133 is not expected to
have a material impact on the financial position or results of operations of the
Company.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software intended for internal use. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company intends to adopt SOP 98-1 in 1999 and is still
evaluating its impact on the financial position and results of operations of the
Company.
(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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1998 cost gains losses value
=====================================================================================================
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government obligations $ 420,079 $ 12,426 $ (257) $ 432,248
State and municipal bonds 333,814 6,832 (81) 340,565
Other bonds 173,973 3,699 (779) 176,893
Certificates of deposit 5,455 -- -- 5,455
Commercial paper 189,498 -- -- 189,498
Redeemable preferred stocks 13,613 482 (90) 14,005
----------------------------------------------------------------------------------------------------
Total fixed maturities 1,136,432 23,439 (1,207) 1,158,664
Equity securities 33,079 2,570 (185) 35,464
- -----------------------------------------------------------------------------------------------------
Total $1,169,511 $ 26,009 $ (1,392) $1,194,128
=====================================================================================================
</TABLE>
42
<PAGE> 21
Chicago Title Corporation and Subsidiaries 1998 Annual Report
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1997 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
- -----------------------------------------------------------------------------------------------------
Total $1,049,678 $ 18,120 $ (1,220) $1,066,578
=====================================================================================================
</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.
Marketable securities with restrictions at December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
================================================================================================
<S> <C> <C>
Pledged to secure statutory premium reserves $430,898 $400,164
On deposit with regulatory authorities 19,201 17,701
Pledged to secure trust and escrow deposits 408,434 374,888
================================================================================================
</TABLE>
The amortized cost and fair value of fixed maturities at December 31,
1998, by contractual maturity, are shown below. Contractual maturities will
differ from expected 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 $ 353,058 $ 354,153
Due after one year through five years 416,972 425,975
Due after five years through 10 years 139,068 141,599
Due after 10 years 32,284 38,582
- -------------------------------------------------------------------------
941,382 960,309
Mortgage-backed securities 195,050 198,355
- -------------------------------------------------------------------------
Total $1,136,432 $1,158,664
=========================================================================
</TABLE>
The change in accumulated other comprehensive income included in
stockholders' equity for each of the years in the three-year period ended
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
=========================================================================================================================
<S> <C> <C> <C>
Change in accumulated other comprehensive income--continuing operations $ 7,717 $ 10,903 $(14,081)
Income tax benefit (expense)--continuing operations (2,701) (3,816) 4,928
Change in accumulated other comprehensive income--discontinued
operations, net of income tax benefit (expense) 24 99 (83)
------------------------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income, net of taxes $ 5,040 $ 7,186 $ (9,236)
=========================================================================================================================
</TABLE>
43
<PAGE> 22
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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,
1998 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Interest on fixed maturities $61,117 $50,481 $46,679
Dividends on equity securities 2,720 1,785 979
- --------------------------------------------------------------------------------
Investment income $63,837 $52,266 $47,658
================================================================================
</TABLE>
Investment expenses are included in other operating and administrative
expenses and are immaterial. Proceeds from sales of marketable securities were
$167,772, $148,968 and $119,799 during 1998, 1997 and 1996, 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, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Fixed maturities:
Gains $ 1,412 $ 1,514 $ 1,446
Losses (36) (45) (10)
Equity securities:
Gains 33 8,097 --
Losses -- (5,882) --
------------------------------------------------------------------------------
Net gains on sales of marketable securities $ 1,409 $ 3,684 $ 1,436
===============================================================================
</TABLE>
(4) Notes Payable and Other Obligations
Notes payable and other obligations included in the consolidated balance
sheets at December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1998 1997
==========================================================================================
<S> <C> <C>
Bank borrowing at 5.72 percent to 6.31 percent during 1998 and
6.00 percent to 8.60 percent during 1997 $19,333 $29,000
Unsecured promissory notes at 6.00 percent to 9.00 percent during 1998
and 6.00 percent to 10.75 percent during 1997 2,315 3,443
- ------------------------------------------------------------------------------------------
Total notes payable and other obligations $21,648 $32,443
==========================================================================================
</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 1999 and 2000 and bears interest
at a floating rate payable quarterly. 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. At
December 31, 1998, CT&T satisfied all applicable financial tests imposed by the
credit agreement.
In 1998, CT&T entered into a new bank credit agreement, which provides 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
requires CT&T to meet certain financial tests and includes customary restrictive
covenants. Borrowings under the revolving credit agreement will be available for
general corporate purposes. The revolving credit agreement expires May 29, 2003.
At December 31, 1998, CT&T satisfied all applicable financial tests imposed by
the credit agreement. As of December 31, 1998, no amounts were outstanding under
this line of credit.
As of December 31, 1998, CT&T had two arrangements in place with banking
institutions for lines of credit for $20.0 million and $25.0 million. The two
lines of credit are scheduled to expire on June 9, 1999 and October 31, 1999,
respectively. Amounts may be drawn under these lines of credit for general
corporate purposes. No amounts were drawn under these lines of credit during
1998 and no amounts were outstanding under such lines as of December 31, 1998.
CT&T has a third line of credit for $20.0 million that became effective January
1, 1999 and it is scheduled to expire
44
<PAGE> 23
Chicago Title Corporation and Subsidiaries 1998 Annual Report
December 31, 1999. Amounts may be drawn under this line of credit for general
corporate purposes. This arrangement requires CT&T to meet certain financial
tests and includes some customary restrictive covenants.
In addition to the credit relationships described above, in connection
with its business operations Chicago Title also deposits substantial funds into
demand deposit accounts with various financial institutions. Chicago Title
negotiates for and receives a range of banking services from these institutions
as permitted by banking laws and regulations, such as direct services, payments
to third-party vendors, including one or more Chicago Title subsidiaries, that
provide escrow accounting and other services, and credit accommodations
including short-term low rate loans to Chicago Title secured by its assets,
primarily commercial paper.
(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 in 1999 without prior
regulatory approval is $80,218. The statutory surplus of CTIC, Ticor Title and
Security Union as reported to regulatory authorities was $291,110, $251,996 and
$243,093 as of December 31, 1998, 1997 and 1996, respectively. The statutory net
income of CTIC, Ticor Title and Security Union as reported to regulatory
authorities was $86,517, $72,683 and $56,038 for the years ended December 31,
1998, 1997 and 1996, respectively.
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 the
respective insurance departments of their 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.
(6) Stockholders' Equity
Dividends declared and paid to the Company by title insurance
subsidiaries, other subsidiaries and AAM for each of the years in the three-year
period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
==============================================================================================
<S> <C> <C> <C>
Title insurance subsidiaries $54,300 $46,700 $32,200
Other subsidiaries 5,300 5,000 700
- ----------------------------------------------------------------------------------------------
Continuing operations 59,600 51,700 32,900
AAM 7,995 13,300 3,401
- ----------------------------------------------------------------------------------------------
Total dividends declared and paid to the Company by subsidiaries $67,595 $65,000 $36,301
==============================================================================================
</TABLE>
The Company paid cash dividends of $9,000, $32,105 and $0 to Alleghany in
1998, 1997 and 1996, respectively. The Company also paid dividends of $14,894 to
its stockholders during 1998 following the spin-off.
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. An
additional capital contribution of $359 was recorded in 1996 upon resolution of
a contingent liability relating to Chicago Title Credit Services Inc., which was
transferred to the Company in the form of a capital contribution in 1995.
In July 1998, Chicago Title's board of directors authorized the purchase
of up to two million shares of Chicago Title common stock over the next five
years to provide shares for various employee and director benefit plans. As of
December 31, 1998, 63,000 shares of common stock had been repurchased at a cost
of $2,574. Subsequently, 42,034 of these shares were reissued under Chicago
Title's Employee Stock Purchase Plan. The remaining 20,966 shares are expected
to be reissued in the first quarter of 1999.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" which requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that requires disclosure of certain financial information
that historically has not been recognized in
45
<PAGE> 24
Chicago Title Corporation and Subsidiaries 1998 Annual Report
the calculation of net income. At December 31, 1998, 1997 and 1996, the Company
held securities classified as available for sale, which had pre-tax unrealized
gains (losses) of $7,754, $11,055 and ($14,209), respectively. These amounts
reflect pre-tax reclassification adjustments of $1,409, $3,684 and $1,436 for
gains realized in income from the sale of marketable securities in 1998, 1997
and 1996, respectively. The statement of changes in stockholders' equity has
been restated for prior years to reflect the adoption of SFAS No. 130.
(7) Employee 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 percent 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 percent 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 $20,262, $12,727 and $10,421 in 1998, 1997 and
1996, 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 the Company as directed by the
employee. The Company's cost for this plan was $2,780, $2,151 and $1,681 in
1998, 1997 and 1996, 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 accrued to date, but also for those expected to be earned
in the future. The Company contributed $6,800 in 1998 and made no contribution
in 1997.
As of December 31, 1998, a total of 58,742 shares of Chicago Title common
stock were held by the Company's benefit plans.
The following table sets forth the funded status of the Plan and amounts
recognized in the Company's consolidated balance sheets at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
===============================================================================
<S> <C> <C>
Change in Benefit Obligation:
Net benefit obligation at beginning of year $ 101,924 $ 111,595
Service cost 5,060 5,046
Interest cost 7,342 8,631
Actuarial (gain) loss 12,548 (7,699)
Gross benefits paid (7,213) (15,649)
- -------------------------------------------------------------------------------
Net benefit obligation at end of year 119,661 101,924
Change in Plan Assets:
Fair value of plan assets at beginning of year 97,593 90,015
Actual return on plan assets 5,650 13,816
Employer contributions -- 9,411
Gross benefits paid (5,686) (15,649)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 97,557 97,593
Funded status at end of year (22,104) (4,331)
Employer contributions 6,800 --
Unrecognized net actuarial (gain) loss 31,177 19,499
- -------------------------------------------------------------------------------
Unrecognized prior service cost (324) (446)
- -------------------------------------------------------------------------------
Net prepaid pension asset included in other assets $ 15,549 $ 14,722
===============================================================================
</TABLE>
46
<PAGE> 25
Chicago Title Corporation and Subsidiaries 1998 Annual Report
The principal assumptions used in the actuarial calculations of projected
benefit obligations and net periodic pension expense for 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Weighted-average assumptions:
Discount rate 6.85% 7.50% 8.00%
Expected return on Plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50%
================================================================================
</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,
1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Service cost $ 5,060 $ 5,046 $ 4,765
Interest cost 7,342 8,631 8,606
Expected return on assets (7,357) (7,806) (8,300)
Amortization of:
Transition obligation (asset) -- (718) (2,873)
Prior service cost (120) (122) (122)
Actuarial (gain) loss 2,396 4,294 4,131
- -------------------------------------------------------------------------------
Total net periodic benefit cost $ 7,321 $ 9,325 $ 6,207
===============================================================================
</TABLE>
The Chicago Trust Company, a subsidiary of AAM, is a qualified trust
company and as such, serves as trustee for the assets of the pension and other
retirement plans.
Postretirement Plans
In addition to retirement benefits, the Company provides certain health
care and life insurance benefits for retired employees. The costs of these
benefit plans are accrued during the periods 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, 1998 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Service cost $ 771 $ 531 $ 419
Interest cost 1,974 1,456 1,284
Amortization of:
Prior service cost (890) (700) (610)
Actuarial (gain) loss (26) -- 115
- -------------------------------------------------------------------------------
Total net periodic benefit cost $ 1,829 $ 1,287 $ 1,208
===============================================================================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.50 percent in 1998 and 7.00 percent in
1997, declining to 5.00 percent in the year 2002. The discount rate used was
6.85 percent in 1998 and 7.25 percent for 1997. If the health care cost trend
rate assumptions were increased 1.00 percent, the accumulated postretirement
benefit obligation as of December 31, 1998 would increase by 2.34 percent. The
effect of this change on the sum of the service and interest cost would be an
increase of 2.34 percent. If the health care costs trend
47
<PAGE> 26
Chicago Title Corporation and Subsidiaries 1998 Annual Report
rate assumptions were decreased 1.0O percent, the accumulated post retirement
benefit obligation as of December 31, 1998 would decrease by 2.08 percent. The
effect of this change on the sum of the service and interest cost would be a
decrease of 2.08 percent
The accrued cost of the accumulated postretirement benefit obligation
included in the consolidated balance sheets at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
========================================================================================
<S> <C> <C>
Change in Benefit Obligation:
Net benefit obligation at beginning of year $ 24,325 $ 24,753
Service cost 771 531
Interest cost 1,974 1,456
Plan participants' contributions 1,699 1,646
Actuarial (gain) loss 4,271 112
Gross benefits paid (2,859) (4,173)
- ----------------------------------------------------------------------------------------
Net benefit obligation at end of year 30,181 24,325
Change in Plan Assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 1,160 2,527
Plan participants' contributions 1,699 1,646
Gross benefits paid (2,859) (4,173)
- ----------------------------------------------------------------------------------------
Fair value of plan assets at end of year -- --
Funded status at end of year (30,181) (24,325)
Unrecognized net actuarial (gain) loss 5,166 868
Unrecognized prior service cost (6,526) (7,417)
- ----------------------------------------------------------------------------------------
Net accrued cost of accumulated postretirement benefit obligation
included in accrued expenses and other liabilities (31,541) (30,874)
========================================================================================
</TABLE>
(8) Stock Compensation and Earnings Per Share
Chicago Title has adopted the 1998 Long-term Incentive Plan (the 1998
Plan) to provide incentives to officers and employees of Chicago Title and its
subsidiaries and to directors of Chicago Title. The 1998 Plan permits the
Company to provide incentive compensation such 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 2003.
The 1998 Plan has 2,230,000 shares authorized, of which 1,580,000 may be
used for stock options and stock appreciation rights and the remaining 650,000
may be used for restricted stock awards. Currently outstanding options become
exercisable one to three years after issuance and expire five to 10 years from
the grant date. During 1998, a total of 400,184 shares of restricted stock
awards were granted. The amount of unearned compensation related to the
restricted stock is reflected as a reduction to stockholders' equity. A summary
of all stock option activity during the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
Weighted
Number of average
Options outstanding shares exercise price
================================================================================
<S> <C> <C>
Beginning of year -- --
Add (deduct):
Granted 881,940 $46.91
Exercised -- --
Cancelled (7,000) 47.06
------------------------------------------------------------------------------
End of year 874,940 $46.91
Exercisable, end of year -- --
================================================================================
</TABLE>
48
<PAGE> 27
Chicago Title Corporation and Subsidiaries 1998 Annual Report
The following options were outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted
average
Number of remaining
Exercise price shares contractual life
================================================================================
<S> <C> <C>
$41.94 26,000 9.83 years
$47.06 848,940 9.38 years
================================================================================
</TABLE>
During 1998, the Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires a
fair-value based method of accounting for stock-based compensation. To calculate
the fair value of the options awarded, the Company elected to use the
Black-Scholes pricing model which produced a value of 39.6 percent of the
exercise price for 1998 awards. The following assumptions were used to derive
the ratio: a seven-year option term, an annualized volatility rate of 39.9
percent, a risk-free rate of return of 5.6 percent and a dividend yield of 2.4
percent. The Company elected to account for terminations when they occur rather
than include an attrition factor in its model.
If the compensation cost had been measured using the fair-value based
accounting method under SFAS No. 123, pro-forma net income for the year ended
December 31, 1998 would have been $95,318, and basic and diluted earnings per
share would have been $4.35.
Only a small portion of the stock options issued in 1998 was dilutive, and
as a result, basic and diluted earnings per share are the same in 1998. Earnings
per share information has been presented as if the 21,906,651 shares referenced
in these footnotes had been outstanding for all periods presented prior to the
spin-off. The weighted average number of shares outstanding for the year ended
December 31, 1998 was 21,902,304.
(9) Income Taxes
Income tax expense (benefit) included in the statements of income and
stockholders' equity for each of the years in the three-year period ended
December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
1998 Federal State Total
===================================================================================================================================
<S> <C> <C> <C>
Continuing operations:
Current $ 66,578 $ 1,644 $ 68,222
Deferred ` (14,686) -- (14,686)
----------------------------------------------------------------------------------------------------------------------------------
Total from continuing operations 51,892 1,644 53,536
Total from discontinued operations 5,748 880 6,628
Accumulated other comprehensive income--deferred 2,701 -- 2,701
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 60,341 $ 2,524 $ 62,865
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 Federal State Total
===================================================================================================================================
<S> <C> <C> <C>
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
Accumulated other comprehensive income--deferred 3,816 -- 3,816
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense 37,533 $ 1,847 39,380
===================================================================================================================================
</TABLE>
49
<PAGE> 28
Chicago Title Corporation and Subsidiaries 1998 Annual Report
<TABLE>
<CAPTION>
1996 Federal State Total
===================================================================================================================================
<S> <C> <C> <C>
Operations:
Current $ 19,568 $ 281 $ 19,849
Deferred 3,266 -- 3,266
----------------------------------------------------------------------------------------------------------------------------------
Total from continuing operations 22,834 281 23,115
Total from discontinued operations 3,681 586 4,267
Accumulated other comprehensive income--deferred (4,928) -- (4,928)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 21,587 $ 867 $ 22,454
===================================================================================================================================
</TABLE>
In 1998, the Company recorded an additional deferred tax asset of $1,044
for additional net operating loss and credit carryforwards as a result of an
Internal Revenue Service audit. Also during 1998, the Company utilized net
operating loss carryforwards which resulted in a $1,402 current tax benefit and
a $1,402 deferred tax expense.
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, 1998 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount Rate Amount Rate Amount Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Expected expense $ 49,597 35.0% $ 29,261 35.0% $ 24,392 35.0%
Nondeductible expenses 1,964 1.4 1,467 1.8 1,215 1.7
Tax-exempt interest income (4,759) (3.4) (3,698) (4.4) (3,162) (4.5)
Goodwill amortization 1,135 0.8 800 0.8 1,014 1.5
Dividends received deduction (238) (0.2) (489) (0.6) (324) (0.5)
State taxes, net of federal tax
benefit (575) (0.4) (294) (0.4) (98) (0.1)
Other net 4,768 3.4 7 0.2 (203) (0.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 51,892 36.6% $ 27,054 32.4% $ 22,834 32.8%
===================================================================================================================================
</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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
===============================================================================================
<S> <C> <C>
Deferred tax assets:
Reserve for title losses $104,554 $ 89,737
Reserves for invested assets 2,057 2,102
Expenses deducted for tax purposes when paid 21,641 18,435
Net operating loss and credit carryforwards 4,634 5,021
Other assets 5,415 5,159
----------------------------------------------------------------------------------------------
Total gross deferred tax assets 138,301 120,454
- -----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized appreciation of marketable securities 8,616 5,915
Book to tax basis differences of marketable securities 2,291 2,186
Receivable reserves and other liabilities 2,404 1,505
Tax over book depreciation 1,758 1,813
Title plants 29,085 29,085
Prepaid pension cost 4,594 3,953
----------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 48,748 44,457
- -----------------------------------------------------------------------------------------------
Net deferred tax asset $ 89,553 $ 75,997
===============================================================================================
</TABLE>
50
<PAGE> 29
Chicago Title Corporation and Subsidiaries 1998 Annual Report
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 utilized 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, 1998 is $13,239 and expires in 2006.
(10) 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 $61,848,
$57,119 and $59,904 for the years ended December 31, 1998, 1997 and 1996,
respectively. Of the total lease expense, contingent rental costs associated
with lease, tax and expense escalation clauses approximated $1.1 million, $1.0
million and $0.9 million for 1998, 1997 and 1996, respectively. Sublease rentals
are insignificant. The aggregate minimum payments under non-cancelable operating
leases with initial terms of more than one year are: $38,720 in 1999, $31,830 in
2000, $28,125 in 2001, $23,685 in 2002 and $103,212 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.
(11) Litigation and Contingent Liabilities
The Company is a party to pending litigation involving losses under title
insurance policies and various other types of litigation. The Company has
established reserves for these items and is of the opinion that any losses
actually sustained in connection with this litigation will not have a material
effect on the Company's consolidated financial position or results of
operations.
(12) Acquisitions
During 1998, the Company acquired the assets of, or stock in, seven
separate companies for a total cost of $32,427. These acquisitions were
accounted for using the purchase method of accounting. In January and February
of 1999, the Company acquired three additional companies for a total cost of
approximately $36,600.
(13) Related Party Transactions
In August 1997, Alleghany effected a transfer of equity security holdings
with the Company. The fair value of the shares sold by the Company to Alleghany
and the shares acquired by the Company from Alleghany was approximately equal.
The transaction resulted in a net gain in the results of operations for 1997 of
$2.21 million. The securities transferred were investments in marketable equity
securities of unrelated third parties.
Agreements in Anticipation of the Spin-off
Prior to the spin-off, certain agreements were entered into between
Alleghany and its subsidiaries and Chicago Title and its subsidiaries to define
their ongoing relationship after the dividend of AAM to Alleghany (the AAM
Distribution) and the spin-off. The following summarizes material terms of these
agreements.
Distribution Agreement
Chicago Title and Alleghany entered into a Distribution Agreement (the
Distribution Agreement) which generally provides 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. The Distribution Agreement also provides that
Chicago Title will bear the expenses incurred in connection with the spin-off,
except that Alleghany will bear certain identified legal fees and expenses.
51
<PAGE> 30
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Tax Sharing Agreement
Chicago Title and Alleghany entered 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 AAM 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 also will be
responsible for any tax liability resulting from any action necessary to
implement the spin-off and its associated events, including the AAM Distribution
and the transfer of a business previously conducted by a subsidiary of AAM 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 Internal Revenue Code (the Code) as a tax-free
distribution, then Chicago Title will be obligated to indemnify and to hold
Alleghany harmless from any such tax unless such tax arises solely by reason of
certain actions taken, or certain misrepresentations made, by Alleghany. The Tax
Sharing Agreement obligates Chicago Title to indemnify and hold Alleghany
harmless from any tax attributable to the AAM Distribution if the AAM
Distribution does not qualify as a tax-free distribution under Section 355 of
the Code because of any misrepresentation made by Chicago Title upon which the
tax ruling received from the Internal Revenue Service was based or because of
any action taken by Chicago Title which is inconsistent with the treatment of
the AAM Distribution as a tax-free distribution. In the Tax Sharing Agreement,
Chicago Title also agrees not to take certain specified actions which might
adversely affect the tax status of the spin-off or the AAM Distribution.
Although Chicago Title and its subsidiaries remain jointly and severally
liable with Alleghany and its subsidiaries for all unpaid tax liabilities of the
Alleghany consolidated group for any year for which Chicago Title's subsidiaries
were members of the Alleghany consolidated group (except for AAM and its
subsidiaries), the Tax Sharing Agreement provides that Alleghany shall indemnify
Chicago Title for all such liabilities (including interest and penalties),
provided that Chicago Title and its subsidiaries have performed all of their
obligations under the Tax Sharing Agreement. Moreover, although Chicago Title
and its subsidiaries remain jointly and severally liable with Alleghany and its
subsidiaries for failures to fund current pension plan obligations as well as
for the penalty taxes imposed to enforce such current funding, Alleghany has
agreed to indemnify Chicago Title for all such liabilities.
Investment Management Agreements
The Chicago Trust Company entered into Investment Management Agreements
with Chicago Title and certain of its subsidiaries 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 Chicago Title and its
subsidiaries. The term of the agreements is five years, with automatic one-year
renewals unless either party terminates by giving notice of such termination at
least three months prior to the end of any such term. The agreements also may be
terminated by Chicago Title or its subsidiaries party thereto in the event that
investment performance is unsatisfactory. The investment management fees charged
under the Investment Management Agreements generally are based on market rates,
and are not material.
Transitional Services Agreement
CT&T and AAM entered into an agreement pursuant to which CT&T continued to
furnish various administrative services to AAM. The initial term of the
agreement ended on December 31, 1998. CT&T continues to provide certain
administrative services to AAM under recently negotiated terms.
Sublease
The Chicago Trust Company subleases space from CT&T at the principal
headquarters building of Chicago Title until 2012 at a rent and on such terms as
are currently applicable to CT&T for such space.
52
<PAGE> 31
Chicago Title Corporation and Subsidiaries 1998 Annual Report
(14) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments included
in the consolidated balance sheets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
amount value amount value
====================================================================================================================================
<S> <C> <C> <C> <C>
Assets:
Cash on hand and in banks $ 39,230 $ 39,230 $ 21,219 $ 21,219
Cash pledged to secure trust and escrow deposits 93,887 93,887 100,207 100,207
Marketable securities, available-for-sale:
Fixed maturities 1,158,664 1,158,664 1,032,089 1,032,089
Equity securities 35,464 35,464 34,489 34,489
--------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Notes payable and other obligations 21,648 21,648 32,443 32,443
Trust and escrow deposits secured by pledged assets $ 495,299 $ 495,299 $ 467,553 $ 467,553
====================================================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practical to estimate fair
value:
Cash on hand and in banks, cash pledged to secure trust and escrow
deposits, and trust and escrow deposits secured by pledged assets: The carrying
amounts approximate fair value because of the short maturity of the instruments.
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, 1998, 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. In addition, the Company has
not determined the fair value of various loan guarantees made principally on
behalf of policy-issuing title insurance agents for third-party financing. The
total amount of loan guarantees at December 31, 1998 and 1997 was $8,295 and
$9,749, respectively. This amount represents the accounting loss the Company
would incur if any party to the loan guarantees failed to perform according to
the terms of the contract. Amounts that may become payable, if any, under such
loan guarantees are not reasonably estimable.
53
<PAGE> 32
Chicago Title Corporation and Subsidiaries 1998 Annual Report
(15) Distribution of AAM to Alleghany
The net assets of AAM distributed to Alleghany included in the
consolidated balance sheets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Assets:
Cash on hand and in banks $ 7,667
Cash pledged to secure trust and escrow deposits 1,336
Marketable securities 18,329
Receivables, net 11,509
Deferred federal income taxes 2,915
Fixed assets, net 2,312
Other assets 1,363
-------------------------------------------------------------------------------
Total assets 45,431
================================================================================
Liabilities:
Accounts payable 2,480
Accrued expenses and other liabilities 20,625
Trust deposits secured by pledged assets 4,229
-------------------------------------------------------------------------------
Total liabilities 27,334
- --------------------------------------------------------------------------------
Net assets of AAM distributed to Alleghany $18,097
================================================================================
</TABLE>
54
<PAGE> 33
Chicago Title Corporation and Subsidiaries 1998 Annual Report
(16) 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, 1998 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, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Balance as of January 1 $ 564,334 $ 532,923 $ 529,915
Provision for title losses related to:
Current year 123,920 102,324 91,023
Prior year -- -- (8,000)
-----------------------------------------------------------------------------
Total provision 123,920 102,324 83,023
- -------------------------------------------------------------------------------
Paid related to:
Current year 3,363 3,509 3,071
Prior years 66,870 67,404 76,944
-----------------------------------------------------------------------------
Total paid 70,233 70,913 80,015
- -------------------------------------------------------------------------------
Balance from acquired subsidiary 810 -- --
- -------------------------------------------------------------------------------
Balance as of December 31 $ 618,831 $ 564,334 $ 532,923
===============================================================================
</TABLE>
The Company had no reinsurance recoverable at December 31, 1998, 1997,
1996 or 1995. The title insurance subsidiaries assume and cede title risks and
the related premiums with other title insurance companies. In addition, the
Company has purchased reinsurance coverage for losses in excess of $12,500. For
these losses, the reinsurers will pay 90 percent of the next $50,000 in losses.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders.
The following table presents the effects of reinsurance on earned
premiums:
<TABLE>
<CAPTION>
Percentage
of assumed
Earned Premiums Gross Ceded Assumed Net to net
=============================================================================================
<S> <C> <C> <C> <C> <C>
1998 1,541,668 4,603 2,470 1,539,535 0.16%
1997 1,204,968 5,115 1,959 1,201,812 0.16%
1996 1,098,875 4,579 2,160 1,098,456 0.20%
=============================================================================================
</TABLE>
55
<PAGE> 34
Chicago Title Corporation and Subsidiaries 1998 Annual Report
(17) Quarterly Financial Information (Unaudited)
Quarterly revenues, net income and earnings per share for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------------------
1998 March 31 June 30 September 30 December 31 Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenue:
Title, escrow, trust and other revenue $ 385,804 $ 461,757 $ 481,326 $ 532,576 $1,861,463
Investment income 14,805 15,748 15,563 17,721 63,837
Net realized investment gains 371 167 199 672 1,409
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 400,980 $ 477,672 $ 497,088 $ 550,969 $1,926,709
- ------------------------------------------------------------------------------------------------------------------------------------
Net income:
From continuing operations $ 21,000 $ 10,594 $ 29,777 $ 25,882 $ 87,253
From sales of marketable securities 241 109 129 437 916
From discontinued operations 4,979 4,034 -- -- 9,013
-----------------------------------------------------------------------------------------------------------------------------------
Total net income $ 26,220 $ 14,737 $ 29,906 $ 26,319 $ 97,182
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share:
Continuing operations $ 0.97 $ 0.49 $ 1.37 $ 1.20 $ 4.03
Discontinued operations 0.23 0.18 -- -- 0.41
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 1.20 $ 0.67 $ 1.37 $ 1.20 $ 4.44
====================================================================================================================================
<CAPTION>
Three months ended
--------------------------------------------------------------------------
1997 March 31 June 30 September 30 December 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
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share:
Continuing operations $ 0.27 $ 0.77 $ 0.80 $ 0.70 $ 2.54
Discontinued operations 0.10 0.14 0.17 0.15 0.56
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.37 $ 0.91 $ 0.97 $ 0.85 $ 3.10
====================================================================================================================================
</TABLE>
56
<PAGE> 35
Chicago Title Corporation and Subsidiaries 1998 Annual Report
Independent Auditors' Report
The Board of Directors
Chicago Title Corporation:
We have audited the accompanying consolidated balance sheets of Chicago
Title Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
February 5, 1999
57
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF CHICAGO TITLE
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 - 80%)
Chicago Title Insurance Company of Puerto Rico
(Puerto Rico - 99.2%)
Chicago Title of Colorado, Inc. (Chicago)
Creative Land Services, Inc. (Minnesota)
Johnson County Title Company (Kansas)
Liberty Title Company (Minnesota)
McHenry County Title Company (Illinois)
Meade Title Agency, Inc. (Ohio)
Service Title of Virginia, Inc. (Virginia - 30%)
Johnson County Title Company (Kansas)
Joint Title Plants and Associations
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)
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%)
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)
Security Title Agency, Inc. (Arizona)
Washington Title Company (Washington)
Heritage American Insurance Services (California)
Decator Title Company (Illinois - 60%)
Chicago Title Flood Services, Inc. (Delaware)
(1) A charitable foundation in which Chicago Title possesses no ownership
interest.
<PAGE> 2
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)
Ticor Title Guarantee Company (New York)
United Title of Nevada, Inc. (Nevada)
United Financial Management Company (Nevada)
McNamara, Inc. (Nevada)
CT/Nevada Holding Company (Nevada)
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Chicago Title Corporation:
We consent to incorporation by reference in the Registration Statements Nos.
333-56843, 333-56841, 333-56839, 333-72831, and 333-74133 on Forms S-8 of our
reports relating to the financial statements and related schedules of Chicago
Title Corporation and subsidiaries, which appear in, or are incorporated by
reference in, Chicago Title Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998. We also consent to the reference to our
Firm as "experts" in Registration Statement Nos. 333-56843, 333-56841,
333-56839, 333-72831, and 333-74133.
/s/ KPMG LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chicago
Title Corporation's consolidated balance sheet at 12/31/98 and the consolidated
statement of income for the 12 months then ended.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,158,664
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 35,464
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,194,128
<CASH> 133,117
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,881,759
<POLICY-LOSSES> 618,831
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 21,648
0
0
<COMMON> 21,927
<OTHER-SE> 439,665
<TOTAL-LIABILITY-AND-EQUITY> 1,881,759
1,861,463
<INVESTMENT-INCOME> 63,837
<INVESTMENT-GAINS> 1,409
<OTHER-INCOME> 0
<BENEFITS> 123,920
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,661,084
<INCOME-PRETAX> 141,705
<INCOME-TAX> 53,536
<INCOME-CONTINUING> 88,169
<DISCONTINUED> 9,013
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,182
<EPS-PRIMARY> 4.44
<EPS-DILUTED> 4.44
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
