FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-13995
CHICAGO TITLE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4217886
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
171 North Clark Street
Chicago, Illinois 60601
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(Address of Principal Executive Offices and Zip Code)
(888) 431-4288
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
21,880,681
---------------------
(As of October 31, 1999)
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CHICAGO TITLE CORPORATION
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(In thousands, except share data)
ASSETS
------
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
<S> <C> <C>
Cash on hand and in banks. . . . . . . . $ 32,692 $ 39,230
Cash pledged to secure trust and
escrow deposits. . . . . . . . . . . . 183,699 93,887
Marketable securities, available-for-sale:
Fixed maturities, at fair value
(amortized cost of $1,102,891 and
$1,136,432 in 1999 and 1998,
respectively). . . . . . . . . . . . 1,096,620 1,158,664
Equity securities, at fair value
(cost of $33,895 and $33,079
in 1999 and 1998, respectively) . . 31,593 35,464
---------- ----------
Total marketable securities. . 1,128,213 1,194,128
Receivables, including accrued investment
income, less allowance for doubtful
accounts of $13,628 and $14,072 in
1999 and 1998, respectively. . . . . . 69,383 75,840
Deferred federal income taxes. . . . . . 105,062 89,553
Fixed assets, net. . . . . . . . . . . . 112,755 104,322
Title plants . . . . . . . . . . . . . . 152,455 151,600
Goodwill . . . . . . . . . . . . . . . . 128,745 90,581
Other assets (Note 4). . . . . . . . . . 104,865 42,618
---------- ----------
Total assets . . . . . . . . . $2,017,869 $1,881,759
========== ==========
<PAGE>
CHICAGO TITLE CORPORATION
Consolidated Balance Sheets - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
Accounts payable . . . . . . . . . . . . $ 93,485 $ 112,136
Accrued expenses and other liabilities . 196,799 172,253
Bank and other long term debt. . . . . . 21,437 21,648
Reserve for title losses . . . . . . . . 656,220 618,831
Trust and escrow deposits secured
by pledged assets. . . . . . . . . . . 553,688 495,299
---------- ----------
Total liabilities. . . . . . . 1,521,629 1,420,167
Stockholders' Equity (Note 7):
Common stock-par value of $1 per share,
authorized 66,000,000 shares; issued and
outstanding 21,833,159 shares at
September 30, 1999 (net of 205,179
treasury shares) and 21,905,685 shares
at December 31, 1998 (net of 20,966
treasury shares) . . . . . . . . . . 21,833 21,906
Additional paid-in capital . . . . . . 123,236 127,270
Unearned compensation-restricted stock
and employee stock award plans . . . (9,500) (15,573)
Retained earnings (Note 6) . . . . . . 366,243 311,988
Accumulated other comprehensive income
(Note 5) . . . . . . . . . . . . . . (5,572) 16,001
---------- ----------
Total stockholders' equity . . 496,240 461,592
---------- ----------
Total liabilities and
stockholders' equity . . . . $2,017,869 $1,881,759
========== ==========
<FN>
See accompanying notes to consolidated quarterly financial statements.
</TABLE>
<TABLE>
CHICAGO TITLE CORPORATION
Consolidated Statements of Income
For the three and nine months ended September 30, 1999 and 1998 (Unaudited)
(In thousands, except per share data)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Title, escrow, trust and other revenue . . . . . . $ 504,632 $ 481,326 $ 1,489,468 $ 1,328,887
Investment income. . . . . . . . . . . . . . . . . 17,311 15,563 48,988 46,116
Net realized investment gains. . . . . . . . . . . 12 199 1,261 737
---------- ---------- ----------- -----------
Total revenues . . . . . . . . . . . . . . 521,955 497,088 1,539,717 1,375,740
---------- ---------- ----------- -----------
EXPENSES:
Salaries and other employee benefits (Note 2). . . 160,668 157,618 475,679 452,242
Commissions paid to agents . . . . . . . . . . . . 180,947 170,450 533,090 455,683
Provision for title losses . . . . . . . . . . . . 28,229 31,904 89,722 88,650
Interest expense . . . . . . . . . . . . . . . . . 1,118 1,147 3,147 3,552
Other operating and administrative
expenses (Note 2 & 3). . . . . . . . . . . . . . 110,976 89,670 317,591 276,053
---------- ---------- ----------- -----------
Total expenses . . . . . . . . . . . . . . 481,938 450,789 1,419,229 1,276,180
---------- ---------- ----------- -----------
Operating income from continuing operations
before income taxes. . . . . . . . . . . . . . . . 40,017 46,299 120,488 99,560
Income taxes . . . . . . . . . . . . . . . . . . . . 14,814 16,393 42,034 37,710
---------- ---------- ----------- -----------
Net income from continuing operations. . . . . . . . 25,203 29,906 78,454 61,850
Net income from discontinued operations (Note 2) . . - - - 9,013
---------- ---------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 25,203 $ 29,906 $ 78,454 $ 70,863
=========== ========== ========== ==========
CHICAGO TITLE CORPORATION
Consolidated Statements of Income - CONTINUED
For the three and nine months ended September 30, 1999 and 1998 (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
Basic and diluted earnings per share (Note 2 & 7):
Continuing operations . . . . . . . . . . . . . . $ 1.16 $ 1.37 $ 3.60 $ 2.83
Discontinued operations . . . . . . . . . . . . . - - - 0.41
---------- ---------- ---------- ----------
Net earnings per share . . . . . . . . . . . . . . . $ 1.16 $ 1.37 $ 3.60 $ 3.24
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated quarterly financial statements.
</TABLE>
<PAGE>
<TABLE>
CHICAGO TITLE CORPORATION
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 (Unaudited)
(In thousands)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from continuing operations activities:
Net income from continuing operations. . . . . . . . . . . . . . . . . . . . . $ 78,454 $ 61,850
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operations activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 40,665 28,545
Changes in assets and liabilities:
Cash pledged to secure trust and escrow deposits . . . . . . . . . . . . (89,812) (86,434)
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,664 (1,318)
Current and deferred federal income taxes. . . . . . . . . . . . . . . . (3,666) (9,440)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,574) 8,917
Accounts payable and accrued expenses and other liabilities. . . . . . . 4,386 (8,457)
Reserve for title losses . . . . . . . . . . . . . . . . . . . . . . . . 37,488 38,024
Trust and escrow deposits secured by pledged assets. . . . . . . . . . . 58,276 77,639
Gain on sale of investments. . . . . . . . . . . . . . . . . . . . . . . . (1,660) (737)
---------- ----------
Net adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,233) 46,739
---------- ----------
Net cash provided by continuing operations activities. . . . . . . . . . . . . . 69,221 108,589
---------- ----------
Dividends received from Alleghany Asset Management, Inc. (Note 2). . . . . . . . - 7,472
---------- ----------
Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . . . . 69,221 116,061
---------- ----------
Cash flows from investing activities:
Purchase of long-term marketable securities. . . . . . . . . . . . . . . . . . (395,185) (349,176)
Sales of long-term marketable securities . . . . . . . . . . . . . . . . . . . 232,110 164,662
Maturities and redemptions of long-term marketable securities. . . . . . . . . 153,617 83,899
Net sales of short-term investments. . . . . . . . . . . . . . . . . . . . . . 48,295 55,946
Purchases of other invested assets . . . . . . . . . . . . . . . . . . . . . . (4,986) (3,942)
Sales of other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 1,716 2,248
Purchases of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (28,312) (23,738)
Sales of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626 3,104
Purchases of title records and indexes . . . . . . . . . . . . . . . . . . . . (186) (225)
Sales of title records and indexes . . . . . . . . . . . . . . . . . . . . . . 100 -
Purchases of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . (53,872) (30,657)
Cash of acquired subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 4,386 4,443
---------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . (41,691) (93,436)
---------- ---------
CHICAGO TITLE CORPORATION
Consolidated Statements of Cash Flows - CONTINUED
For the nine months ended September 30, 1999 and 1998 (Unaudited)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1999 1998
------------ -----------
Cash flows from financing activities:
Principal payments on bank and other long term debt. . . . . . . . . . . . . . (19,665) (1,612)
Principal receipts on bank and other long term debt. . . . . . . . . . . . . . 19,300 -
Payment of cash dividends (Note 6) . . . . . . . . . . . . . . . . . . . . . . (23,224) (7,448)
Original issuance and reissuance of treasury stock . . . . . . . . . . . . . . 4,863 -
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . (15,342) (1,663)
Cash remaining with discontinued operations (Note 2) . . . . . . . . . . . . . - (3,043)
---------- ----------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . (34,068) (13,766)
---------- ----------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . (6,538) 8,859
Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,230 21,219
---------- ----------
Cash as of balance sheet date. . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,692 $ 30,078
========== ==========
<FN>
See accompanying notes to consolidated quarterly financial statements.
</TABLE>
<PAGE>
CHICAGO TITLE CORPORATION
NOTES TO CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF PRESENTATION
This report should be read in conjunction with the Annual Report on Form
10-K of Chicago Title Corporation (the "Company") for the year ended
December 31, 1998 and the Quarterly Reports on Form 10-Q of the Company for
the quarters ended March 31, 1999 and June 30, 1999. The unaudited
consolidated financial information included in this report has been
prepared in conformity with the accounting principles and practices
reflected in the consolidated financial statements included in the
aforementioned Form 10-K filed with the Securities and Exchange Commission.
All adjustments are of a normal recurring nature and are, in the opinion of
management, necessary for a fair presentation of the consolidated results
for the interim periods. The results of operations for the interim periods
are not necessarily indicative of results for a full year.
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
(2) THE SPIN-OFF
In June 1998, the Company was spun off from Alleghany Corporation and
became an independent, publicly traded company (the "Spin-Off"). Prior to
the Spin-Off, the Company performed trust and asset management services
through a subsidiary, Alleghany Asset Management, Inc. This subsidiary
remained with Alleghany Corporation after the Spin-Off. Accordingly, the
results of operations of this subsidiary in 1998 are reported in the
Company's statements of income as discontinued operations. As a result of
the Spin-Off, Alleghany Asset Management, Inc. made no contribution to 1999
or third quarter 1998 results. For the nine months ended September 30,
1998, net income from discontinued operations was $9.0 million, or $0.41
per basic and diluted share.
On a pre-tax basis, for the nine months ended September 30, 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 the Company'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 nine months ended September 30, 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.
(3) MERGER WITH FIDELITY NATIONAL FINANCIAL, INC.
The Company entered into a definitive agreement with Fidelity National
Financial, Inc., a Delaware corporation ("Fidelity"), dated as of August 1,
1999, and amended as of October 13, 1999, providing for the merger of the
Company into Fidelity for approximately $1.2 billion, or $52.00 per share
of the Company's common stock (subject to certain adjustments as set forth
in the definitive agreement) for consideration consisting of approximately
equal amounts of cash and Fidelity common stock. The pre-tax costs
associated with the merger for the three and nine months ended September
30, 1999 included $1.7 million of investment advisory and management
consulting fees, $0.9 million of legal fees, and $0.6 million of other
various direct expenses.
<PAGE>
(4) ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted 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. For the three and
nine months ended September 30, 1999, costs in progress of $4,320 and
$8,137, respectively, were incurred for internal system development. These
costs are primarily attributable to the Company's previously announced
electronic spine project.
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("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, as subsequently amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133",
is effective for financial statements for fiscal years beginning after June
15, 2000. 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.
(5) COMPREHENSIVE INCOME
SFAS No. 130,"Reporting Comprehensive Income" requires total comprehensive
income be reported in condensed financial statements of interim periods.
Total comprehensive income consists of net income and other comprehensive
income.
The Company's total comprehensive income for the three months ended
September 30, 1999 and 1998 was $22,072 and $39,155, respectively. The
Company's total comprehensive income was $56,881 and $79,939 for the nine
months ended September 30, 1999 and 1998, respectively. Other comprehensive
income relates to the Company's change in unrealized appreciation
(depreciation) of marketable securities, net of deferred taxes, and was
$(3,131) and $9,249 for the three months ended September 30, 1999 and 1998,
respectively, and $(21,573) and $9,076 for the nine months ended September
30, 1999 and 1998, respectively.
(6) DIVIDENDS
On each of April 27, July 27, and October 26, 1999, the Company's Board of
Directors declared cash dividends of $0.36 per share, payable on June 15,
September 15, and December 15, 1999, respectively, to stockholders of
record on June 1, September 1, and December 1, 1999, respectively. On each
of July 28 and October 27, 1998, the Company's Board of Directors declared
a cash dividend of $0.34 per share, payable on September 15 and December
15, 1998, respectively, to stockholders of record on September 1 and
December 1, 1998, respectively.
(7) WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of shares outstanding for the three and nine
months ended September 30, 1999 was 21,815,863 and 21,827,664,
respectively. The weighted average number of shares outstanding for the
comparable periods in 1998 was 21,894,726 and 21,902,632, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations--Comparison of Three and Nine Months Ended September
30, 1999 and 1998
Net Income
For the third quarter of 1999, net income was $28.3 million, or $1.30
per basic and diluted share excluding $3.1 million of net-of-tax expenses
associated with the Company's pending merger with Fidelity. Including
merger-related costs, net income was $25.2 million, or $1.16 per basic and
diluted share. Net income for the third quarter of 1998 was $29.9 million
or $1.37 per basic and diluted share. As a result of the Spin-Off in June
1998, Alleghany Asset Management, Inc. made no contribution to third
quarter 1998 or 1999 results. For the nine months ended September 30,
1999, net income, excluding merger-related costs, was $81.5 million or
$3.74 per basic and diluted share. During the same period in 1998, net
income, excluding $9.0 million from discontinued operations, reached $83.4
million or $3.81 per basic and diluted share excluding $21.6 million of
net-of-tax expenses associated with the Company's Spin-Off.
Operating Revenues
The Company's gross revenue for the three months ended September 30,
1999 was $522.0 million, an increase of 5.0 percent from the same period in
1998. Direct title premiums for residential refinancing activity decreased
by 51.3 percent due to the increase in mortgage interest rates which have
climbed from 6.7 percent in September of 1998 to 7.8 percent in September
of 1999. Total revenues grew despite the decrease in residential refinance
levels due to continued strength in residential home sales and commercial
real estate markets. The residential refinance sector represented
approximately 10.5 percent of total direct title premiums for the third
quarter of 1999, compared to 20.5 percent for the third quarter of 1998.
Title, escrow, trust and other revenue was $504.6 million in the
third quarter of 1999, an increase of $23.3 million or 4.8 percent from the
year earlier period. The Company's continued focus on expanding its array
of available services resulted in a 27.0 percent increase in real estate
related services revenue which rose to $24.9 million for the third quarter
of 1999 compared to $19.7 million for the third quarter of 1998. For the
three months ended September 30, 1999, gross title premiums from agents and
approved attorneys increased by $17.1 million and direct title premiums
decreased by $7.4 million from the year earlier period. Escrow fees and
property information sales were relatively flat when comparing the third
quarter of 1999 to the third quarter of 1998. The remainder of the
increase was seen in other categories.
Residential purchase revenue realized quarter-over-quarter
improvements of 9.7 percent. During the third quarter of 1999, this sector
represented 53.9 percent of total direct title premiums compared to 46.8
percent during the third quarter of 1998. Commercial and industrial
("C&I") activity remained quite strong, accounting for 35.6 percent of
direct title premiums for the third quarter of 1999, compared to 32.7
percent during the third quarter of 1998.
For the first nine months of 1999, title, escrow, trust and other
revenue was $1,489.5 million, an increase of 12.1 percent from the first
nine months of 1998. Real estate related services revenue rose 27.7
percent to $72.5 million for the first nine months of 1999 compared to
$56.8 million for the first nine months of 1998. The increase was
primarily attributable to acquisitions made in the latter part of 1998 and
1999. For the nine months ended September 30, 1999, direct title premiums
increased by $9.0 million and gross title premiums from agents and approved
attorneys increased by $107.1 million. Property information sales and
escrow fees increased by $13.4 million from the year earlier period. The
remainder of the increase was seen in other categories.
<PAGE>
During the third quarter of 1999, 64.4 percent of the Company's
direct title premiums were attributable to residential transactions, of
which 53.9 percent were purchase transactions and 10.5 percent were
refinancings. During the third quarter of 1998, 67.3 percent of the
Company's direct title premiums were attributable to residential
transactions, of which 46.8 percent were purchase transactions and 20.5
percent were refinancings. The remaining direct title premiums for each
period were attributable to C&I transactions.
During the first nine months of 1999, 67.3 percent of the Company's
direct title premiums were attributable to residential transactions, of
which 49.3 percent were purchase transactions and 18.0 percent were
refinancings. During the first nine months of 1998, 65.7 percent of the
Company's direct title premiums were attributable to residential
transactions, of which 42.7 percent were purchase transactions and 23.0
percent were refinancings. The remaining direct title premiums for each
period were attributable to C&I transactions.
Investment Income
Investment income totaled $17.3 million for the third quarter and
$49.0 million for the first nine months of 1999 as compared with $15.6
million and $46.1 million, respectively, for the same periods last year. On
a pre-tax basis, realized gains from sales of marketable securities were
$0.0 million and $1.3 million for the three and nine months ended September
30, 1999, respectively. For the three and nine months ended September 30,
1998, realized pre-tax gains from sales of marketable securities were $0.2
million and $0.7 million, respectively. The average duration of the
portfolio at September 30, 1999 was 2.7 years as compared with 2.4 years at
December 31, 1998.
Expenses
COMMISSIONS PAID TO AGENTS. Payment of commissions to title insurance
agents constitutes the largest single expense incurred by the Company
(excluding non-recurring labor costs associated with the Spin-Off in 1998).
The commission rate varies by geographic area in which the commission is
earned, primarily due to competitive factors and the level of services
performed. The percentage of premiums retained by agents amounted to 75.2
and 75.6 percent for the three and nine months ended September 30, 1999,
respectively. For the three and nine months ended September 30, 1998 the
percentage of premiums retained by agents amounted to 76.3 and 76.2
percent, respectively. The Company reports amounts retained by agents,
along with amounts paid to approved attorneys, as commissions paid to
agents in its consolidated statements of income.
<PAGE>
SALARIES AND OTHER EMPLOYEE BENEFITS. This category of expense
represents the cost of salaries, incentive compensation and benefits paid
to employees. One key ratio monitored by management is the amount of these
expenses as a percentage of operating revenue, net of commissions paid to
agents. The following table summarizes this ratio:
(dollars in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Title, escrow, trust
and other revenue. . $ 504,632 $ 481,326 $1,489,468 $1,328,887
Commissions paid
to agents. . . . . . (180,947) (170,450) (533,090) (455,683)
--------- --------- --------- ---------
Net operating revenue. 323,685 310,876 956,378 873,204
--------- --------- --------- ---------
Total salaries and
other employee
benefits . . . . . . 160,668 157,618 475,679 452,242
Less Spin-Off and
related management
restructuring costs-
labor related. . . . - - - (23,196)
--------- --------- --------- ---------
Total salaries and
other employee
benefits, net. . . . 160,668 157,618 475,679 429,046
--------- --------- --------- ---------
Percentage . . . . . . 49.6% 50.7% 49.7% 49.1%
========= ========= ========= =========
During the third quarter of 1999, the level of total salaries and
other employee benefits as a percentage of net revenue decreased to 49.6
percent from 50.7 percent for the same period in 1998. Due to the decline
in refinance volume, the Company reduced its direct staff count by 6.0
percent during the third quarter of 1999. The Company continues to actively
manage labor costs and staffing levels in an effort to ensure that
appropriate productivity levels are maintained.
<PAGE>
PROVISION FOR TITLE LOSSES. The following table summarizes key
information pertaining to the Company's provision for title losses:
(dollars in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Provision for
title losses . . . . $ 28,229 $ 31,904 $ 89,722 $ 88,650
Title, escrow,
trust and other
revenue. . . . . . . 504,632 481,326 1,489,468 1,328,887
Ratio. . . . . . . . . 5.6% 6.6% 6.0% 6.7%
As of As of
September 30, December 31,
1999 1998
---------- -----------
Reserve for title losses at
period-end . . . . . . . . . . . . . $ 656,220 $ 618,831
Paid losses, net of recoveries-
trailing 12 months . . . . . . . . . 71,775 70,233
Reserve coverage of paid losses-
trailing 12 months . . . . . . . . . 9.1x 8.8x
For the third quarter of 1999, the provision for title losses was 5.6
percent of total operating revenue, representing a 1.0 percent drop when
compared with the provision rate for the third quarter of 1998. For the
nine months ended September 30, 1999, the provision rate was reduced to 6.0
percent from 6.7 percent for the comparable period in 1998. This lower rate
is in recognition of a continued favorable trend in the Company's claims
experience.
OTHER OPERATING AND ADMINISTRATIVE EXPENSES. During the third quarter
of 1999, other operating and administrative expenses increased $21.3
million over such expenses for the same period in 1998. This increase was
primarily attributable to abnormally low expense levels in the third
quarter of 1998, as well as additional operating costs of entities acquired
in the latter part of 1998 and the first half of 1999. Variable costs
associated with the higher levels of revenue earned in the current year and
merger-related expenses also contributed to the increase.
During the first nine months of 1999, other operating and
administrative expenses increased $41.5 million to $317.6 million, an
increase of 15.0 percent over the first nine months of 1998. Excluding
pre-tax merger costs of $3.2 million in the first nine months of 1999 and
pre-tax Spin-Off and related management restructuring costs of $5.4 million
in the first nine months of 1998, other operating and administrative
expenses increased $43.7 million over the same period last year. These
cost increases were spread across various categories including, but not
limited to, occupancy, goodwill amortization, and depreciation.
Merger Update
On August 1, 1999, the Company and Fidelity entered into an
Agreement and Plan of Merger, which was amended on October 13, 1999 (as
amended, the "Merger Agreement"). Pursuant to the Merger Agreement and
subject to the terms and conditions set forth therein, the Company will be
merged with and into Fidelity, with Fidelity being the surviving
corporation of such merger (the "Merger"). At the Effective Time (as
defined in the Merger Agreement) of the Merger, each issued and outstanding
share of common stock, par value $1.00 per share, of the Company ("Company
Common Shares") will be converted into the right to receive merger
consideration having a value of $52.00 (subject to certain adjustments) and
consisting of cash and shares of common stock, par value $.0001 per share,
of Fidelity ("Fidelity Common Shares"). Holders of Company Common Shares
will be provided an opportunity to elect to receive the merger
consideration in the form of cash or in the form of Fidelity Common Shares
or a combination, in each case subject to proration. The transaction is
expected to be completed in the first quarter of 2000, subject to approval
by the stockholders of the Company and Fidelity and to certain regulatory
approvals.
Liquidity and Capital Resources
At September 30, 1999, the Company and its wholly owned subsidiary,
Chicago Title and Trust Company ("CT&T") - on a stand-alone basis excluding
all other subsidiaries - had total cash, cash equivalents and marketable
securities of $587.1 million, $554.2 million of which were pledged to
secure escrow deposits and other liabilities. At December 31, 1998, the
Company and CT&T - on a stand-alone basis excluding all other subsidiaries
- - had total cash, cash equivalents and marketable securities of $548.4
million, $502.3 million of which was pledged to secure escrow deposits and
other liabilities.
For the nine months ended September 30, 1999, the Company's
continuing operations provided cash of $69.2 million. For the comparable
period last year, continuing operations activities provided a total of
$108.6 million in cash. Approximately $19.3 million of the decrease in cash
flow between the two periods was due to the timing of activities related to
trust and escrow activities. In addition, approximately $14.7 million of
the decrease in cash flow was related to increased capital spending,
approximately $7.8 million of which related to the Company's electronic
spine project. The remainder of the decrease occurred in various
categories.
The Company continues to expand its direct title operations in high
growth areas and to extend its array of real estate related product
offerings. During 1999, the Company used a total of $53.9 million in cash
for acquisitions. The Company used internally generated funds to finance
these acquisitions. The aggregate gross annualized revenue of these
companies is $60.0 million, and the Company expects each of these
acquisitions to be immediately accretive to earnings.
On January 1, 1999, the Company entered into a revolving line of
credit agreement that provides for borrowings of up to $20.0 million. This
agreement is scheduled to terminate on December 31, 1999. Borrowings
thereunder, which bear interest at a floating rate, are available for
general corporate purposes. No amounts were outstanding under this line of
credit as of September 30, 1999.
On May 26, 1999, the Company entered into two separate agreements
with banking institutions for lines of credit of $20 million and $25
million, replacing similar lines that CT&T had with the same lenders. The
new lines of credit will expire on May 24, 2000. Borrowings thereunder,
which bear interest at a floating rate, are available for general corporate
purposes. On May 28, 1999, the Company borrowed $19.3 million under the
$25 million line to repay the outstanding balance of $19.3 million 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
Insurance Company and Ticor Title Insurance Company. Such $19.3 million
remained outstanding under the $25 million line, and no amounts were
outstanding under the $20 million line, as of September 30, 1999.
On June 2, 1999, the Company entered into a bank credit agreement
providing for maximum borrowings of $50 million on a revolving basis,
replacing a similar agreement that CT&T had with the same lenders. The new
credit agreement will expire in May 29, 2004. Borrowings thereunder, which
bear interest at a floating rate, are available for general corporate
purposes. No amounts were outstanding under this credit agreement as of
September 30, 1999.
In addition to the credit relationships described above, in
connection with the escrow and closing services that the Company offers to
its customers, the Company deposits substantial funds into demand deposit
accounts with various financial institutions. The Company 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 vendors (including one or more of the Company's subsidiaries)
that provide escrow accounting and other services, and credit
accommodations including short-term low rate loans to the Company secured
by its assets, primarily commercial paper purchased by the Company with the
proceeds of such loans.
On April 27, July 27, and October 26, 1999, the Company's Board of
Directors declared cash dividends of $0.36 per share, respectively, payable
on June 15, September 15, and December 15, 1999, respectively, to
stockholders of record as of June 1, September 1, and December 1, 1999,
respectively. On July 28 and October 27, 1998, the Company's Board of
Directors declared a cash dividend of $0.34 per share payable on September
15 and December 15, 1998, to stockholders of record as of September 1 and
December 1, 1998.
The Company's common stockholders' equity per share as of September
30, 1999 was $22.73.
In June 1999, the Company filed a registration statement under the
Securities Act of 1933 to issue $75.0 million of debt, net proceeds of
which were expected to be used for general corporate purposes including the
repayment of existing debt and the funding of potential acquisitions. In
light of the execution of the Merger Agreement by the Company and Fidelity
discussed elsewhere in this report, the Company has indefinitely postponed
this debt offering.
Management believes cash generated from operations, investments, and
cash available from financing activities will provide sufficient liquidity
to meet the Company's currently foreseeable needs.
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 the Company 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 the Company.
In response to "Year 2000" concerns, the Company 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.
The Year 2000 Committee, composed of representatives from the
Internal Audit, Information Services and General Counsel's Departments of
the Company, directs and monitors the Company's Year 2000 compliance
activities.
<PAGE>
Information Technology
Inventory And Assessment. The Company 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 regular basis. These responses are sent to the
Internal Audit Department for review and for use in ongoing oversight
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). The Company has
received certification from all major PC manufacturers of the Year 2000
compliance of their specific models. Information regarding the Year 2000
readiness of such models has been posted on the Intranet (which is the
Company's computerized internal communications system). In addition, the
field offices have used software packages to test the Year 2000
preparedness of all local hardware used in regular business operations. In
order to assure Year 2000 compliance of the software installed on these
PCs, the Company has collected vendor certifications and conducted proxy
testing of each such program.
Business critical operations which interface with computer hardware,
software or databases of third-party service providers, customers and
agents have been identified. The Company has requested and received written
certification of Year 2000 compliance from most 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 one hundred percent complete. As previously mentioned, field
offices are being asked to provide regular updates on the Year 2000
readiness of those systems developed or acquired locally. Use of the PC
evaluation software on field office PCs resulted in the identification of
more equipment that required replacement. As a result, additional funding
for renovation or replacement of local systems was required.
The Company has been receiving information from its key service
providers, customers and agents concerning their efforts to become Year
2000 compliant. Although such information generally indicates that the
systems of the Company'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 one
hundred percent complete. Off-site end-to-end application tests of the data
transfer between integrated business critical systems occurred in May 1999
and was successfully repeated in August 1999, with all systems producing
expected results. Additional testing necessary to conform to Federal
Financial Institutions Examination Council ("FFIEC") guidelines took place
during the first half of 1999 while follow-up testing was completed in
August. FFIEC guidelines have been adopted by various regulatory and
licensing authorities and are considered by them when performing on-site
audits of the Company. Central documentation libraries have been created to
make test plans and test results more readily available to auditors for
these authorities.
Testing methodologies used for locally developed or acquired systems
have been at the discretion of field office management, subject to the
approval of the Year 2000 Committee. The Field Office Survey continuously
requests additional information on testing of business critical local
systems and equipment.
Implementation. One hundred percent of all centrally supported
systems modified to be Year 2000 compliant have been installed and are
currently in use. Significant hardware purchases for Year 2000 compliance
of central systems have been completed. Additional expenditures for field
office hardware may also be required as final remediation efforts are
completed.
Audit. The final phase of the Year 2000 Plan consists of continuous
monitoring of the Company's remediation efforts. The completion of
milestones and the satisfaction of objectives defined in the Year 2000 Plan
provided checkpoints to assess the status of the Company's Year 2000
readiness. Audits of central systems and local and regional systems have
been conducted by the Internal Audit and Information Services Departments.
Follow-up audits have taken place where necessary.
Non-Information Technology
The Company 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. The Company 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 the Company is
dependent. However, the Company is not more dependent on these technologies
than other businesses in the United States. The Company has received
certifications from the owner of its headquarters building that the
building's systems are Year 2000 compliant.
The Company 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 the Company's direct
business operations.
Costs for Year 2000 Remediation
In respect of remediation of central systems, the Company spent
approximately $2.8 million through the end of 1998, and nearly $1.2 million
in 1999 to date out of a budget of just over $1.2 million for this year. To
remediate local systems, the Company spent approximately $2.1 million
through the end of 1998, and approximately $3.1 million in 1999 to date out
of a revised budget of $3.9 million for this year. These expenses are
funded by cash generated from corporate operating activities. The Company
does not separately track the cost of and time spent by its own internal
employees 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
The Company's operations are heavily dependent upon its information
technology business systems. Although not reasonably likely to occur, the
Company 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. The Company 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, the Company 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 the Company's
operations in that they could lead to a decline in the Company's volume of
business or an increase in its costs, the extent of which is not estimable.
However, any such failure would be likely to impact others in the industry
as well, and the Company has no reason to believe that it would be any more
adversely affected than other real estate services companies.
Contingency Planning
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 business critical components
of the Company's information technology business systems. In response to
the possibility that Year 2000 failures might occur, business resumption
contingency plans (other than for catastrophic events, which are outside
the control of the Company) have been completed for major events and
business critical processes at each of the corporate, regional, and local
levels.
For instance, business resumption contingency plans have been
developed to provide for the transfer of business operations from a non-
compliant Year 2000 facility to the nearest fully operational facility.
Contingency plans were also developed to allow fully operational systems to
provide alternative data processing capabilities for select systems that
experience failures. Examples of specific systems for which contingency
plans have been developed include branch processing and accounting,
financial accounting, general ledger, and payroll/human resources. In
accordance with FFIEC guidelines, methods of testing business resumption
contingency plans have been developed.
Although it is impossible to plan for every contingency, the Company
has taken steps to identify certain problems which might occur and
prioritize 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 the Company has focused on those
in its contingency planning.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market demand for the Company'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, the Company's revenue tends to expand in
periods of lower interest rates and contract in periods of higher interest
rates.
The Company's Annual Report on Form 10-K for the year ended
December 31, 1998 provides a detailed discussion of the market risks
affecting the Company's operations. Based on the Company's assessments as
of September 30, 1999, no material change has occurred in its market risk
from amounts disclosed in its 1998 Form 10-K.
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" set forth in this report contain disclosures which are
forward-looking statements. Forward-looking statements include all
statements that do not relate solely to historical or current facts, and
can be identified by the use of words such as "may," "will," "expect,"
"project," "estimate," "anticipate," "plan" or "continue." These
forward-looking statements are based upon the Company'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 the
Company'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 the Company'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 the Company 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 the
Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NUMBER DESCRIPTION
10.1 Agreement and Plan of Merger dated as of August 1, 1999
by and between Fidelity and the Company and amended as of
October 13, 1999, filed as Exhibit 2.1 to Fidelity's
Registration Statement on Form S-4 (Registration No. 333-
89163), is incorporated herein by reference.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 4, 1999 to report
that the Company entered into the Merger Agreement with Fidelity.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHICAGO TITLE CORPORATION
Registrant
Date: November 12, 1999 /s/ Peter G. Leemputte
----------------------------------------------
Peter G. Leemputte
Executive Vice President, Chief Administrative
Officer and Chief Financial Officer
(principal financial officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
10.1 Agreement and Plan of Merger dated as of August 1, 1999
by and between Fidelity and the Company and amended as of
October 13, 1999, filed as Exhibit 2.1 to Fidelity's
Registration Statement on Form S-4 (Registration No. 333-
89163), is incorporated herein by reference.
27 Financial Data Schedule.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHICAGO
TITLE CORPORATION'S CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND
THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFED IN ITS ENTIRETY BY REFERANCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 0
[DEBT-HELD-FOR-SALE] 1,096,620
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 31,593
[MORTGAGE] 0
[REAL-ESTATE] 0
[TOTAL-INVEST] 1,128,213
<CASH> 216,391
[RECOVER-REINSURE] 0
[DEFERRED-ACQUISITION] 0
<TOTAL-ASSETS> 2,017,869
[POLICY-LOSSES] 656,220
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 21,437
0
0
<COMMON> 21,833
<OTHER-SE> 474,407
<TOTAL-LIABILITY-AND-EQUITY> 2,017,869
[PREMIUMS] 1,489,468
[INVESTMENT-INCOME] 48,988
[INVESTMENT-GAINS] 1,261
[OTHER-INCOME] 0
[BENEFITS] 89,722
[UNDERWRITING-AMORTIZATION] 0
[UNDERWRITING-OTHER] 1,329,507
<INCOME-PRETAX> 120,488
<INCOME-TAX> 42,034
<INCOME-CONTINUING> 78,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,454
<EPS-BASIC> 3.60
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[RESERVE-OPEN] 0
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