<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHICAGO TITLE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
171 NORTH CLARK STREET
DELAWARE CHICAGO, ILLINOIS 60601 36-4217886
(STATE OR OTHER (ADDRESS, INCLUDING ZIP (I.R.S. EMPLOYER
JURISDICTION CODE AND TELEPHONE NUMBER, IDENTIFICATION NO.)
OF INCORPORATION OR INCLUDING AREA CODE, OF
ORGANIZATION) REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
</TABLE>
------------------------
PAUL T. SANDS, JR., ESQ.
CHICAGO TITLE CORPORATION
171 NORTH CLARK STREET
CHICAGO, ILLINOIS 60601-3294
(888) 431-4288
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LINDA E. RANSOM, ESQ. RICHARD G. CLEMENS, ESQ.
Dewey Ballantine LLP Sidley & Austin
1301 Avenue of the Americas One First National Plaza
New York, NY 10019-6092 Chicago, IL 60603
(212) 259-8000 (312) 853-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________________
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) PRICE (1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
Senior Notes due 2009..................... $75,000,000 100% $75,000,000 $20,850
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 1, 1999
PROSPECTUS
$75,000,000
[CHICAGO TITLE LOGO]
CHICAGO TITLE CORPORATION
% SENIOR NOTES DUE 2009
------------------------
Chicago Title is offering and selling an aggregate of $75,000,000 of its
% Senior Notes due 2009. Chicago Title will receive all of the net proceeds
from the sale of the notes.
The notes bear interest at a rate of % per year. Interest on the
notes is payable semi-annually on and of each
year, beginning , 1999. The notes will mature on , 2009.
The notes do not have the benefit of any sinking fund. Chicago Title may redeem
some or all of the notes at any time in the manner described in the "Description
of the Notes" section of this prospectus. Chicago Title will also pay accrued
interest to (but not including) the date of any redemption.
The notes are unsecured and rank equally with all other unsecured senior
indebtedness of Chicago Title. The notes will be issued only in registered form
in denominations of $1,000 and integral multiples of $1,000.
AN INVESTMENT IN THE NOTES INVOLVES RISK. SEE THE "RISK FACTORS" SECTION
OF THIS PROSPECTUS BEGINNING ON PAGE 9.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price(1).............................. % $
Underwriting discount................................. % $
Proceeds, before expenses, to Chicago Title........... % $
</TABLE>
(1) Plus accrued interest from , 1999, if settlement occurs
after that date
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The notes will be ready for delivery in book-entry form only through The
Depository Trust Company, on or about , 1999.
------------------------
MERRILL LYNCH & CO. ABN AMRO INCORPORATED
------------------------
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information......................... 2
Forward-Looking Statements.................................. 3
Prospectus Summary.......................................... 4
Risk Factors................................................ 9
Use of Proceeds............................................. 11
Capitalization.............................................. 11
Ratio of Earnings to Fixed Charges.......................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Business.................................................... 26
Management of Chicago Title................................. 35
Description of the Notes.................................... 38
Underwriting................................................ 48
Validity of the Notes....................................... 49
Experts..................................................... 49
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy the reports, statements or other
information we file at the SEC's public reference room in Washington, D.C.
located at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also
maintains regional offices where you can read and copy the reports. These are
located at 500 West Madison Street, Room 1400, Chicago, Illinois 60601 and at 7
World Trade Center, Suite 1300, New York, New York 10048. You can request copies
of these documents, upon payment of photocopying fees, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings are also available to the public
on the SEC's internet site (http://www.sec.gov).
This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC. This prospectus does not contain all the information in that
registration statement. For further information with respect to us and the
securities offered by this prospectus, you should review the registration
statement. You can obtain the registration statement from the SEC at the public
reference facilities we referred to above.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in this prospectus.
This prospectus incorporates by reference the documents set forth below that we
have previously filed with the SEC. These documents contain important
information about us and our financial condition.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this prospectus shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus, or in any other subsequently filed document that
is also incorporated or deemed to be incorporated by reference in this
prospectus, modifies or supersedes the earlier statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus. The following documents are
incorporated by reference into this prospectus:
(a) Our Annual Report on Form 10-K for the year ended December 31, 1998;
and
2
<PAGE> 4
(b) Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
Statements contained in this prospectus, including statements in documents
incorporated by reference, as to the contents of any contract, agreement or any
other document referred to are not necessarily complete, and in each instance we
refer you to the copy of the relevant contract, agreement or other document
filed as an exhibit to the registration statement or the exhibit to the relevant
document incorporated by reference. Each of these statements is qualified in all
respects by reference to the relevant exhibit.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus and prior to the completion of the offering of the Notes will be
deemed to be incorporated by reference into this prospectus and to be a part
hereof from the date of filing of such documents.
Documents incorporated by reference are available from us without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this prospectus. Prospective investors may obtain documents
incorporated by reference in this prospectus by requesting them in writing or by
telephone from us at our executive offices at 171 North Clark Street, Chicago,
Illinois, 60601, Telephone: (888) 431-4288.
FORWARD-LOOKING STATEMENTS
This prospectus 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 our current plans or
expectations and are subject to a number of uncertainties and risks that could
significantly affect current plans and anticipated actions and our 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 our
investment portfolio; the effect of state regulations requiring maintenance of
minimum levels of capital and surplus and restricting the payment of dividends;
our success 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 us.
3
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that you should
consider before investing in the Notes. You should read the entire prospectus
carefully, including the "Risk Factors" section, the financial statements and
the notes to the financial statements. Unless the context otherwise indicates,
all references to "we," "us" or "our" in this prospectus refer to Chicago Title
Corporation and its consolidated subsidiaries and all references to "Chicago
Title" refer to Chicago Title Corporation and not its subsidiaries.
We are one of the nation's three 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, we currently have more than 340 full service offices and approximately
4,100 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands, Guam,
and Canada. Our revenues, totaling $1.927 billion in 1998, are generated from
all geographic regions of the country, with no one region predominating. We
believe that our brand name, national distribution network, financial position
and experienced management have enabled us to become one of the premier
companies participating in the title insurance and real estate-related services
industry.
Our strategy to improve our market share and earnings growth is threefold.
We are focusing our marketing efforts to serve three distinct customer sectors:
Institutional Partners consisting of large residential lenders and mortgage
servicers, Core Local Operations consisting of our locally based clients, and
National Commercial and Industrial consisting of participants in large
commercial transactions. In addition, we are pursuing growth opportunities,
including selective acquisitions. Acquisitions under this initiative are
directed toward companies intended either to broaden our array of product
offerings or to bolster our presence in certain higher growth title insurance
markets. We are also generating operating efficiencies and cost improvements
through the promotion of best practices throughout the organization and
investments in technology, such as the development of an "electronic spine,"
that will more fully integrate our services and offices.
Chicago Title was organized as a Delaware corporation in March 1998 and was
a wholly owned subsidiary of Alleghany Corporation. On June 17, 1998, Chicago
Title and its subsidiaries were spun off from Alleghany Corporation and Chicago
Title 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 and its subsidiaries. Chicago Title and Trust Company was organized as
an Illinois corporation in 1912 and was acquired, along with its wholly owned
subsidiary Chicago Title Insurance Company, by Alleghany Corporation in June
1985. Chicago Title Insurance Company, a Missouri corporation incorporated in
1961, succeeded to businesses conducted by predecessor corporations since 1847.
Chicago Title and Trust Company and Chicago Title Insurance Company are
headquartered in Chicago. Security Union Title Insurance Company, acquired in
1987, and Ticor Title Insurance Company, acquired in 1991, were incorporated in
California in 1962 and 1965, respectively. Both Security Union Title Insurance
Company and Ticor Title Insurance Company were parts of business organizations
that had succeeded to businesses conducted since around the turn of the century.
Security Union Title Insurance Company and Ticor Title Insurance Company are
headquartered in Pasadena, California.
Through our subsidiaries, primarily Chicago Title Insurance Company, Ticor
Title Insurance Company and Security Union Title Insurance Company, we conduct
title searches and issue title insurance policies in residential and commercial
real estate transactions. Policies are issued by us directly through branch
offices, as well as through independent agents and approved attorneys working as
independent contractors. We manage our exposure through an underwriting approval
system that entails higher levels of approval for larger commitments, as well as
by placing liability caps on loss occurrences and purchasing reinsurance
protection. In addition, we maintain a significant claims reserve against
losses.
4
<PAGE> 6
Our 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 ours 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 us. 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. 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, we offer 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.
We also provide the following 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 12,500 real estate agents and appraisers. Chicago
Title -- Market Intelligence, Inc. also offers property appraisal
services through a network of state-licensed contract appraisers.
In addition, we have made several acquisitions of companies offering real
estate-related services in 1998 and early 1999:
- Universal Mortgage Services, Inc., now known as Chicago Title Field
Services, Inc., which provides property inspection, preservation and
maintenance services nationwide;
- Consolidated Reconveyance Company, now operating as a division of Chicago
Title Insurance Company, which furnishes foreclosure and reconveyance
services to institutional lenders;
5
<PAGE> 7
- Westfall & Company, which provides mortgage services in the residential
mortgage business;
- Escondido Escrow and Ranch & Coast Escrow, which are two of the most
experienced escrow providers in California; Escondido Escrow is also one
of the leading timeshare escrow organizations in the nation; and
- Continental Home Warranty, Inc., a leading underwriter in California of
home warranty insurance policies, which protect home buyers against
significant repairs on major appliances and systems during the first year
of home ownership.
6
<PAGE> 8
THE OFFERING
ISSUER........................ Chicago Title Corporation.
SECURITIES OFFERED............ $75,000,000 principal amount of % Senior
Notes due 2009.
MATURITY DATE................. , 2009.
INTEREST PAYMENT DATES........ Semi-annually on and
of each year, beginning
.
RANKING....................... The Notes will rank equally with all unsecured
senior indebtedness of Chicago Title.
OPTIONAL REDEMPTION........... The Notes will be redeemable, in whole or in
part, at Chicago Title's option at any time, at
a redemption price equal to the greater of: (i)
100% of the principal amount of the Notes or
(ii) the sum of the present values of the
remaining scheduled payments of principal and
interest thereon from the redemption date to
the maturity date, computed by discounting such
payments, in each case, to the redemption date
on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the
treasury rate (as defined), plus basis
points, plus, in either case, accrued and
unpaid interest to (but not including) the date
of redemption.
COVENANTS..................... The Indenture governing the Notes contains
certain restrictive covenants. Among other
things, these covenants will: (i) limit Chicago
Title's ability to issue, sell or otherwise
dispose of shares of capital stock of certain
of its subsidiaries, (ii) limit the ability of
Chicago Title and certain of its subsidiaries
to incur liens and (iii) limit Chicago Title's
ability to consolidate with, merge with or
into, or transfer all or substantially all its
assets to any person.
RATINGS....................... The Notes are expected to be rated by Moody's
Investors Service, Inc. and Standard & Poor's
Ratings Services, a division of The McGraw-Hill
Companies, Inc.
BOOK-ENTRY FORM............... The Notes will be represented by a global Note
in book-entry form deposited with the Trustee
as custodian for, and registered in the name
of, The Depository Trust Company or its
nominee, except in the limited circumstances
described under "Description of the
Notes -- Payment, Registration, Transfer and
Exchange."
USE OF PROCEEDS............... We intend to use the net proceeds from this
offering for general corporate purposes,
including the repayment of existing debt and
the funding of potential acquisitions.
RISK FACTORS.................. See "Risk Factors" beginning on page 9 for a
discussion of risks that should be considered
prior to making an investment in the Notes.
7
<PAGE> 9
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following table sets forth, for the periods and at the dates indicated,
our summary consolidated historical financial information. The information as of
and for the five years ended December 31, 1998 is from our audited consolidated
historical financial statements and notes. Since the information in this table
is only a summary and does not provide all of the information contained in our
financial statements, including the related notes, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes. These data may not
necessarily be indicative of the results of operations or financial position
that would have been obtained if we had been a separate, independent company
during the periods shown or of our future performance as an independent company.
The information as of and for the three months ended March 31, 1999 and 1998 is
from our unaudited financial statements, which, in management's opinion, include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation. Our operating results for the three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Title, escrow, trust and other
revenue......................... $ 471,810 $ 385,804 $1,861,463 $1,411,496 $1,278,590 $1,082,008 $1,283,970
Investment income................. 16,607 14,805 63,837 52,266 47,658 46,661 44,913
Net realized investment gain on
sales to Alleghany
Corporation..................... -- -- -- 2,214 -- -- --
Net realized investment
gains -- other.................. 1,034 371 1,409 1,470 1,436 3,697 (5,447)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.............. 489,451 400,980 1,926,709 1,467,446 1,327,684 1,132,366 1,323,436
Expenses:
Salaries and other employee
benefits........................ 153,533 127,603 619,814 454,648 411,815 344,767 368,097
Commissions paid to agents........ 172,196 131,490 648,023 526,324 484,351 420,555 549,990
Provisions for title losses....... 29,817 26,279 123,920 102,324 83,023 81,385 94,845
Interest expense.................. 1,079 1,295 4,707 4,644 5,566 6,456 6,859
Other operating and administrative
expenses........................ 97,686 82,273 388,540 295,903 273,236 242,380 244,655
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses.............. 454,311 368,940 1,785,004 1,383,843 1,257,991 1,095,543 1,264,446
Operating income from continuing
operations before income taxes.... 35,140 32,040 141,705 83,603 69,693 36,823 58,990
Income taxes........................ 11,951 10,799 53,536 27,894 23,115 11,889 18,854
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income from continuing
operations........................ 23,189 21,241 88,169(1) 55,709 46,578 24,934 40,136
Net income from discontinued
operations........................ -- 4,979 9,013 12,162 5,462 5,478 4,337
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income...................... $ 23,189 $ 26,220 $ 97,182 $ 67,871 $ 52,040 $ 30,412 $ 44,473
========== ========== ========== ========== ========== ========== ==========
Basic and diluted earnings per
share:
Continuing operations............. $ 1.06 $ 0.97 $ 4.03(1) $ 2.54 $ 2.13 $ 1.14 $ 1.83
Discontinued operations........... -- .23 0.41 0.56 0.25 0.25 0.20
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings per share.......... $ 1.06 $ 1.20 $ 4.44 $ 3.10 $ 2.38 $ 1.39 $ 2.03
========== ========== ========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges
(2)............................... 6.4x 6.4x 6.6x 4.6x 3.8x 2.4x 3.2x
BALANCE SHEET DATA:
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets........................ $1,955,626 $1,812,464 $1,881,759 $1,702,207 $1,482,697 $1,447,351 $1,389,700
Bank and other long-term debt....... 21,467 32,851 21,648 32,443 43,282 55,043 64,441
Reserve for title losses............ 631,190 569,829 618,831 564,334 532,923 529,915 536,068
Total liabilities................... 1,487,901 1,382,657 1,420,167 1,298,660 1,122,102 1,100,913 1,073,237
Stockholders' equity................ 467,725 429,807 461,592 403,547 360,595 346,438 316,463
</TABLE>
- ---------------
(1) Net income and basic and diluted earnings per share from continuing
operations, excluding after-tax spin-off and related management
restructuring costs, were $109,732 and $5.01, respectively, in 1998.
(2) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
estimated interest component of rent expense.
8
<PAGE> 10
RISK FACTORS
Prospective investors should carefully consider the following risk factors
before deciding to purchase the Notes.
WE FACE SIGNIFICANT COMPETITION.
The title insurance industry is competitive throughout the United States,
with large title insurance firms such as the title insurance subsidiaries of
Chicago Title competing on a national basis, while smaller firms have
significant market shares on a regional basis. Chicago Title's title insurance
subsidiaries also compete with abstractors, attorneys issuing opinions and, in
some areas, state land registration systems. The removal of regulatory barriers
in the future might result in new competitors, including financial institutions,
entering the title insurance business. We believe 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.
OUR REVENUE MAY FLUCTUATE WITH INTEREST RATES AND FROM SEASON TO SEASON.
The title insurance industry is highly dependent upon the volume of real
estate transactions occurring within the market. In turn, the volume of real
estate transactions is highly sensitive to interest rate levels and general
economic conditions. Because these factors can be volatile, revenue levels for
the title industry also can be volatile. In addition, the title insurance
business is seasonal, since real estate activity is seasonal. The first calendar
quarter is typically the weakest quarter in terms of revenue due to the
generally low volume of home sales during the winter. The fourth calendar
quarter is typically the strongest in terms of revenue due to the desire of
commercial entities to complete transactions by year end. These traditional
seasonal patterns can be altered if there is a significant change in the level
of mortgage refinancing, since refinancing activity is correlated with movements
in the level of interest rates and is not tied to a seasonal pattern.
TITLE LOSSES IN EXCESS OF OUR RESERVES COULD HURT OUR EARNINGS.
Our largest single liability is the reserve for title losses, which also
covers losses arising from the escrow, closing and disbursement functions due to
fraud or operational error, and includes costs of external legal defense. The
establishment of appropriate loss reserves is an inherently uncertain process,
particularly due to the long-term nature of most title insurance business. Loss
reserves represent our estimates, at a given point in time, of the ultimate
settlement and legal costs of losses incurred (including incurred but not
reported losses). Our reserves are reviewed regularly by management and are
certified by an independent actuary on an annual basis. Whenever we determine
that any existing loss reserves are inadequate, we are required to increase our
loss reserves with a corresponding reduction, which could be material, in our
operating results in the period in which the deficiency is identified. The
establishment of new reserves, or the adjustment of reserves, could have a
material effect on our financial condition and results of operations in any
particular period. See "Business -- Reserve for Title Losses."
CHICAGO TITLE IS A HOLDING COMPANY; CHICAGO TITLE'S OBLIGATIONS WITH RESPECT TO
THE NOTES WILL BE STRUCTURALLY SUBORDINATED TO INDEBTEDNESS AND OTHER
OBLIGATIONS OF CHICAGO TITLE'S SUBSIDIARIES.
All of Chicago Title's operations are conducted through its subsidiaries.
As a result, Chicago Title depends entirely upon the earnings and cash flows of
its subsidiaries to service its indebtedness, including its ability to pay the
interest on and principal of the Notes. Chicago Title will be the sole obligor
with respect to the Notes and the Notes will not be obligations of, or
guaranteed by, any of its subsidiaries. If Chicago Title is unable to receive
funds from its subsidiaries in the form of dividends, distributions or other
payments (whether as a result of regulatory restrictions, contractual
limitations or otherwise), Chicago Title may not be able to satisfy its
obligations with respect to the Notes. The payment of
9
<PAGE> 11
dividends to Chicago Title by its title insurance subsidiaries is limited by
state insurance regulations in the states in which they do business. The maximum
amount of dividends and other payments that Chicago Title's regulated
subsidiaries will be permitted to pay to Chicago Title in 1999 without prior
regulatory approval is $80.2 million. An additional amount of dividends may be
paid by Chicago Title's limited number of unregulated subsidiaries.
The Notes will be structurally subordinated to all indebtedness and other
obligations of Chicago Title's subsidiaries. Claims of creditors of Chicago
Title's subsidiaries, including trade creditors, will generally have priority as
to the assets of Chicago Title's subsidiaries over Chicago Title and the claims
of Chicago Title's creditors (including holders of the Notes), except to the
extent that Chicago Title may be a creditor with recognized claims against its
subsidiaries. Even to the extent Chicago Title is a creditor of its subsidiaries
with recognized claims, these claims would be subordinated to the claims of
creditors of the subsidiaries having security interests and any indebtedness of
the subsidiaries that is senior to Chicago Title's claims.
The Indenture does not limit the amount of additional unsecured
indebtedness that may be incurred by Chicago Title and its subsidiaries in the
future.
STATE INSURANCE REGULATIONS COULD AFFECT OUR BUSINESS AND THE ABILITY OF CHICAGO
TITLE TO PAY INTEREST AND PRINCIPAL ON THE NOTES.
Chicago Title and its title insurance subsidiaries are subject to state
insurance regulations in the states in which they do business. Such regulations,
among other things, affect statutory reserves, limit the amount of dividends and
other payments that can be made by Chicago Title's title insurance subsidiaries
without prior regulatory approval, and impose restrictions on the amount and
type of investments they may hold. Certain states also regulate the rates
charged for various title insurance products. We cannot predict the effect that
any proposed or future regulations may have on our financial condition or
operations. Any regulatory changes that would further limit the ability of
Chicago Title's subsidiaries to pay dividends could impair Chicago Title's
ability to pay interest and principal on the Notes. See "Business --
Regulation."
10
<PAGE> 12
USE OF PROCEEDS
We expect to receive net proceeds of approximately $74.2 million from this
offering. Net proceeds is computed by deducting the underwriting discount and
our estimated offering expenses from the total public offering price.
We intend to use the net proceeds from this offering for general corporate
purposes, including the repayment of existing debt and the funding of potential
acquisitions. Proceeds of $19.3 million will be used to repay the outstanding
balance under a revolving credit facility with U.S. Bank National Association,
which bears interest at a floating rate equal to LIBOR plus 25 basis points and
matures on May 24, 2000. The borrowing from U.S. Bank National Association was
incurred by Chicago Title on May 28, 1999 for the purpose of repaying all
amounts outstanding under a Credit Agreement, dated as of March 29, 1996, among
Chicago Title and Trust Company, various commercial lending institutions and The
Chase Manhattan Bank, N.A., as Administrative Agent. We are not currently a
party to any material acquisition agreements.
CAPITALIZATION
The following table sets forth the capitalization of Chicago Title as of
March 31, 1999 (1) on a historical basis and (2) as adjusted to give effect to
the sale of the Notes and the application of a portion of the estimated net
proceeds from their sale to repay indebtedness as described under "Use of
Proceeds" and the restructuring of certain credit agreements of Chicago Title
and its subsidiaries subsequent to March 31, 1999. This table should be read in
conjunction with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
LIABILITIES:
Bank and other long-term debt............................... $ 21,467 $ 2,134
% Senior Notes due 2009................................ -- 75,000
-------- --------
Total bank and other long-term debt............... $ 21,467 $ 77,134
======== ========
STOCKHOLDERS' EQUITY:
Common stock, par value $1.00 per share, 66,000,000 shares
authorized, 21,829,702 issued and outstanding............. $ 21,830 $ 21,830
Additional paid in capital.................................. 124,713 124,713
Unearned compensation-restricted stock and employee stock
award plans............................................... (14,890) (14,890)
Retained earnings........................................... 327,336 327,336
Accumulated other comprehensive income...................... 8,736 8,736
Total stockholders' equity........................ 467,725 467,725
-------- --------
Total capitalization.............................. $489,192 $544,859
======== ========
</TABLE>
11
<PAGE> 13
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTH ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------
PRO PRO
FORMA FORMA
1999(2) 1999 1998 1998(2) 1998 1997 1996 1995 1994
------- ----- ----- ------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(1)... 5.6x 6.4x 6.4x 5.9x 6.6x 4.6x 3.8x 2.4x 3.2x
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
estimated interest component of rent expense.
(2) The pro forma ratio of earnings to fixed charges assumes the sale of the
Notes and the application of a portion of the net proceeds therefrom to the
repayment of bank debt as described in "Use of Proceeds" and the
restructuring of certain of our credit agreements subsequent to March 31,
1999 as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition" as if each had
occurred on the first day of the period presented.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In June 1998, Chicago Title was spun off from its parent Alleghany
Corporation and became an independent, publicly traded company. The title
industry is undergoing a period of consolidation and rapid change and, as an
independent company, we are 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. We are now able to provide equity-based compensation and incentives
that enable us to retain and recruit senior management and to motivate employees
throughout the organization.
Net Income
We 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 our results in 1996 on an increase in total revenue of 10.5 percent. Net
income from continuing operations in the first quarter of 1999 represented a 9.2
percent increase from the same period in 1998 on an increase in total revenue of
22.1 percent.
Operating Revenues
Our 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, our revenue levels 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 our 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 we
recognize 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, we
earn interest and dividend income from our portfolio of fixed maturity and
equity securities. Our 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
Our 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 we, like any other title insurance company, have a
significant level of fixed costs arising from personnel, occupancy and
maintenance of title plants.
13
<PAGE> 15
Our principal variable expense is commissions paid to agents. We regularly
review the performance of our agents, adjusting commission levels or canceling
agents that do not meet objectives.
Our next largest category of expense is salaries and other employee
benefits. Due to the volatility of real estate transaction volumes driving our
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, we strive
to emphasize variable forms of compensation such as commissions, bonuses and
incentive compensation programs for large segments of the employee population.
The most significant components of other operating and administrative
expenses are occupancy, purchased property information, computer-related
expenses, telecommunications and supplies.
Provision for Title Losses
Generally, title insurance claim rates are lower than for other types of
insurance because title insurance policies 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, we establish a "case" reserve, based upon the
best estimate of the total amount necessary to settle the claim and to provide
for allocated loss adjustment expenses, including legal defense costs. These
reserves are periodically adjusted by us based on our evaluation of subsequent
developments regarding the reported claim.
In addition to case reserves, we also maintain 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.
We establish IBNR reserves by using actuarial principles and procedures
commonly used in the title insurance industry to estimate the ultimate liability
for losses and loss adjustment expenses. 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 both our experience and
the experience of the title insurance industry.
Our reserves are reviewed regularly by management and are certified by an
independent actuary on an annual basis. We do not discount our 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 our financial statements, which could have a
material effect on our financial condition and results of operations. Based on
current information, management believes the reserve for title losses at March
31, 1999, is adequate.
14
<PAGE> 16
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Net Income
For the first quarter of 1999, net income was $23.2 million or $1.06 per
share on both a basic and diluted basis. This represents a 9.2 percent increase
over net income from continuing operations of $21.2 million, or $0.97 per share
on both a basic and diluted basis, for the same period in 1998. For the first
quarter of 1999, total revenue was $489.5 million, a 22.1 percent increase over
the prior year period.
This period marked the beginning of the first full fiscal year of
operations following the June 1998 spin-off from Alleghany Corporation.
Exclusive of $0.4 million in after-tax non-recurring spin-off and related
management restructuring costs, net income from continuing operations amounted
to $21.6 million, or $0.98 per basic and diluted share, for the three months
ended March 31, 1998.
Prior to the spin-off, we 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 are reported in our statements of income as
discontinued operations. As a result of the spin-off, Alleghany Asset
Management, Inc. made no contribution to first quarter 1999 results. Net income
from discontinued operations was $5.0 million, or $0.23 per basic and diluted
share, for the first quarter of 1998.
Operating Revenues
Real estate markets throughout the first three months of 1999 continued to
benefit from favorable economic conditions marked by low levels of unemployment
and the absence of inflationary pressures. These conditions, combined with
relatively stable long-term interest rates and strong consumer confidence, have
resulted in particularly strong residential resale activity in a period when it
normally reaches a seasonal low. New residential refinance orders have dropped
from the peak levels achieved in the latter part of 1998, but they remain well
above average historical levels and revenue from this sector was quite strong in
the quarter. Commercial and industrial transactions also continue at a healthy
level.
Title, escrow, trust and other revenue was $471.8 million in the first
quarter of 1999, an increase of $86.0 million or 22.3 percent from the year
earlier period. Real estate related services revenue rose 30.6 percent to $21.3
million for the first quarter of 1999 compared to $16.3 million for the first
quarter of 1998. For the first quarter of 1999, direct title premiums increased
by $13.5 million, gross title premiums from agents and approved attorneys
increased by $51.3 million, and property information sales and escrow fees
increased by $8.4 million from the year earlier period. The remainder of the
increase was incurred in other categories.
Of the 1999 first quarter increase in direct title premiums, $13.4 million
was attributable to residential purchases, while residential refinancings and
commercial and industrial activity remained relatively flat when compared to the
same period last year.
During the first quarter of 1999, 70.2 percent of our direct title premiums
were attributable to residential transactions, of which 43.5 percent were
purchase transactions and 26.7 percent were refinancings. During the first
quarter of 1998, 64.3 percent of our direct title premiums were attributable to
residential transactions, of which 37.2 percent were purchase transactions and
27.1 percent were refinancings. The remaining direct title premiums for each
period were attributable to commercial and industrial transactions.
Investment Income
Investment income totaled $16.6 million for the first three months of 1999
as compared with $14.8 million for the same period last year. The increased
level of investment income was attributable to higher levels of investment
assets. Realized gains from sales of marketable securities were $1.0 and $0.4
million on a pre-tax basis for the three months ended March 31, 1999 and 1998,
respectively. The average duration of the portfolio at March 31, 1999 was 2.8
years as compared with 2.4 years at December 31, 1998.
15
<PAGE> 17
Expenses
Commissions Paid to Agents. Payment of commissions to title insurance
agents constitutes the largest single expense incurred by us. 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 76.7 percent in the first quarter of
1999 as compared with 75.9 percent in the first quarter of 1998. We report
amounts retained by agents, along with amounts paid to approved attorneys, as
commissions paid to agents in our consolidated statements of income.
Salaries and Other Employee Benefits. This category of expense represents
the cost of salaries and benefits (including incentive compensation) 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Title, escrow, trust and other revenue...................... $471,810 $385,804
Less: Commissions paid to agents............................ (172,196) (131,490)
Net operating revenue....................................... 299,614 254,314
Total salaries and other employee benefits.................. 153,533 127,603
Total salaries and other employee benefits as a percentage
of net operating revenue.................................. 51.2% 50.2%
</TABLE>
During the first quarter of 1999 the level of total salaries and other
employee benefits as a percentage of net revenue was 51.2 percent as compared to
50.2 percent for the same period in 1998. Typically, this ratio is relatively
high in the first quarter due to the normal seasonal reduction in real estate
transactions during the winter months. However, reductions in mortgage rates
early in 1998 led to an increase in residential refinance activity and pushed
other real estate activity to higher than normal levels. Since staffing levels
typically lag changes in demand, the ratio of salaries and other employee
benefits as compared with operating revenue, net of commissions paid to agents,
was at an unusually low level in the first quarter of 1998. In the first quarter
of 1999, this ratio returned to more typical levels. During 1999, we will
continue to track labor costs and workforce to ensure the appropriate level of
productivity is maintained.
Provision for Title Losses. The following table summarizes key information
pertaining to our provision for title losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Provision for title losses.................................. $ 29,817 $ 26,279
Title, escrow, trust and other revenue...................... 471,810 385,804
Ratio of the provision for title losses to title, escrow,
trust and other revenue................................... 6.3% 6.8%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
Reserve for title losses at period end..................... $ 631,190 $ 618,831
Paid losses, net of recoveries- trailing 12 months......... 66,401 70,233
Reserve coverage of paid losses- trailing 12 months........ 9.5x 8.8x
</TABLE>
16
<PAGE> 18
For the first quarter of 1999 the provision for title losses was 6.3
percent of total operating revenue, representing a 0.5 percent drop when
compared with the provision rate for the first quarter of 1998. This lower rate
is in recognition of a continued favorable trend in our claims experience.
Other Operating and Administrative Expenses. During the first quarter of
1999, other operating and administrative expenses increased $15.4 million over
such expenses for the same period in 1998. This increase was split between
various categories including, but not limited to, telecommunications, property
information and contract labor. Excluding pre-tax spin-off and related
management restructuring costs of $0.6 million incurred in the first three
months of 1998, operating and administrative expenses increased $16.0 million
between March 31, 1998 and 1999, respectively. The increased level of expense
was primarily related to increases in variable costs associated with the higher
levels of revenue earned in the current year.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Net Income
Our 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.
Our 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.
Net income from discontinued operations (Alleghany Asset Management, Inc.)
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.
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
17
<PAGE> 19
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.
Our 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 our 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. We 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 our former parent, Alleghany Corporation.
Expenses
Commissions Paid to Agents. 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.
Salaries and Other Employee Benefits. The following table summarizes the
ratio of salaries and benefits (including incentive compensation) paid to
employees as a percentage of revenue, net of commissions paid to agents, for the
past three years:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<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 employee benefits,
net.......................................... 596,618 454,648 411,815
Total salaries and other employee benefits, net
as a percentage of net operating revenue..... 49.2% 51.4% 51.9%
</TABLE>
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
18
<PAGE> 20
of best practices throughout Chicago Title and its subsidiaries as well as
through increased automation and continued consolidation of title plants,
production centers and staff functions.
Provision for Title Losses. The following table summarizes key information
pertaining to our provision for title losses:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<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 of the provision for title losses to
title, escrow, trust and other revenue....... 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. Our 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.
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.
FINANCIAL CONDITION
At March 31, 1999, we had total assets of $1.956 billion representing an
increase of 4 percent from the $1.882 billion reported at December 31, 1998.
Total stockholders' equity at March 31, 1999 was $468 million representing an
increase of 1 percent from the $462 million reported at December 31, 1998. For
the three months ended March 31, 1999, our operations used cash of $62.1
million. For the comparable period in 1998, a total of $61.0 million in cash was
used by continuing operations activities. The negative cash flow for both
periods is primarily attributable to the timing of activities related to trust
and escrow operations, and cash payments of employee incentives earned in 1997
and 1998 and paid in the first quarter of 1998 and 1999, respectively. 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 $2.0 million and $7.0 million at March 31, 1999 and
December 31, 1998, respectively, 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. Chicago Title's primary use of cash is the
payment of dividends to its stockholders. In each of the first quarter of 1999
and the third and fourth quarters of 1998, Chicago Title paid its stockholders a
quarterly cash dividend of $0.34 per share. On April 28, 1999, Chicago Title's
Board of Directors declared a dividend of $0.36 per share payable in cash on
June 15, 1999 to stockholders of record as of June 1, 1999. 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
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<PAGE> 21
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.
At March 31, 1999 and December 31, 1998, Chicago Title and Trust Company
(on a stand-alone basis excluding its subsidiaries) had total cash, cash
equivalents and marketable securities of $601.1 million and $541.4 million,
respectively, $567.2 million and $502.3 million of which was pledged to secure
trust and escrow deposits and other liabilities, respectively. On the same
basis, as of December 31, 1997, Chicago Title and Trust Company 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 Chicago Title and Trust Company are
dividends paid by its subsidiaries, investment earnings and fees paid by various
subsidiaries for services furnished by Chicago Title and Trust Company. The
primary uses of cash by Chicago Title and Trust Company are dividends paid to
Chicago Title's debt service, funding for acquisitions, capital expenditures and
corporate operating expenses. As described in Note 5 to our consolidated
financial statements, Chicago Title and Trust Company'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 Chicago Title and Trust Company in 1999 without
prior regulatory approval is approximately $80.2 million. To date, these
limitations have not affected our ability to meet our obligations.
We had consolidated outstanding long-term debt of $21.5 million at March
31, 1999. Of this amount, $19.3 million was the balance borrowed under a bank
credit agreement entered into by Chicago Title and Trust Company in connection
with the acquisition of two of Chicago Title and Trust Company's title insurance
subsidiaries, Security Union Title Insurance Company and Ticor Title Insurance
Company. Subsequent to March 31, 1999, all amounts outstanding under this bank
credit agreement were repaid with the proceeds of a borrowing by Chicago Title,
as described below, and the bank credit agreement was terminated.
At March 31, 1999, Chicago Title and Trust Company had two arrangements in
place with banking institutions for lines of credit of $20 million and $25
million. No amounts were drawn under these lines of credit during 1998 or the
first quarter of 1999 and no amounts were outstanding under such lines as of
March 31, 1999. Subsequent to March 31, 1999, these agreements were terminated
and Chicago Title entered into two new lines of credit containing substantially
similar terms with the same lenders. The new lines of credit are scheduled to
expire on May 24, 2000. On May 28, 1999, Chicago Title borrowed $19.3 million
under the $25 million line to repay all amounts outstanding under Chicago Title
and Trust Company's bank credit agreement, as described above. Chicago Title's
borrowing will be repaid with the proceeds from the sale of the Notes.
In 1998, Chicago Title and Trust Company entered into a bank credit
agreement providing for maximum borrowings of $50 million on a revolving basis.
No amounts were drawn under this agreement during 1998 or the first quarter of
1999 and no amounts were outstanding as of March 31, 1999. At March 31, 1999,
Chicago Title and Trust Company satisfied all applicable financial tests imposed
by the credit agreement. We expect that, prior to the completion of this
offering, this agreement will be terminated and Chicago Title will enter into a
new revolving credit agreement containing substantially similar terms with the
same lenders. Indebtedness under the new credit agreement is expected to bear
interest at a floating rate. It is expected that the new credit agreement will
require Chicago Title to meet certain financial tests and will include customary
restrictive covenants. Borrowings under the new credit agreement are expected to
be available for general corporate purposes. The new credit agreement is
expected to expire in June 2004.
On January 1, 1999, Chicago Title entered into a revolving line of credit
agreement that provides for borrowings of up to $20 million. This agreement is
scheduled to terminate December 31, 1999. No amounts were drawn, and no amounts
were outstanding, under this line of credit as of March 31, 1999. This credit
agreement requires Chicago Title to meet certain financial tests and includes
customary
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<PAGE> 22
restrictive covenants. At March 31, 1999, Chicago Title satisfied all applicable
financial tests imposed by this credit agreement.
In addition to the credit relationships described above, in connection with
the escrow and closing services that we offer to our customers, we deposit
substantial funds into demand deposit accounts with various financial
institutions. We negotiate for and receive 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 our subsidiaries) that
provide escrow accounting and other services, and credit accommodations
including short-term low rate loans to us secured by our assets, primarily
commercial paper purchased by us with the proceeds of such loans.
One element of our strategy to increase our market share and earnings
growth is the pursuit of selected acquisition opportunities intended either to
broaden our array of product offerings or to bolster our presence in certain
higher growth title insurance markets. We intend to fund our acquisition program
from internally generated cash flow and financing activities. To date in 1999,
we have acquired a total of five companies at a total cost of approximately
$51.1 million. These acquisitions were funded from internally generated cash
flow.
Another aspect of our strategy is to improve work flow and productivity
through the development of an "electronic spine" that will fully integrate our
services and offices. Through March 31, 1999, we had spent approximately $6.0
million and management currently estimates that costs aggregating approximately
an additional $14 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. We have no other
material commitments for capital expenditures.
We have announced that we may purchase up to a total of five percent, or
1.1 million shares, of our currently outstanding common stock in open market
transactions over the next two years. This program is in addition to our
existing stock repurchase program, through which we may purchase up to two
million shares of our common stock in open market transactions during the next
four years to provide for various employee and director benefit plans. In the
first quarter of 1999, we purchased an aggregate of 236,900 shares for about
$9.2 million, for an average cost of about $38.71 per share. In 1998, we
purchased an aggregate of 63,000 shares for about $2.6 million, for an average
cost of about $40.86 per share.
Management believes that cash generated from operations and investments and
cash available from financing activities will provide sufficient liquidity to
meet our currently foreseeable needs. Our common stockholders' equity per share
as of March 31, 1999 was $21.43.
MARKET RISK
Market demand for our 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, our 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, we strive to
maintain a cost structure that is highly variable. The most visible aspect of
this is our 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. We pay the agents a commission
based upon a percentage of title premiums, resulting in a distribution channel
with a highly variable cost structure.
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<PAGE> 23
Within our direct operations, our most significant expense is labor. Our
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 us
with the ability to utilize equity-based compensation plans that enhance the
variable nature of staffing expense. In addition, we strive to meet our peak
staffing needs through the use of temporary and part-time personnel. We maintain
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 our revenue sources is our maintenance
of a substantial portfolio of liquid, relatively short-duration investment
securities. We do not specifically match particular assets to related
liabilities (primarily claims obligations), but instead hold 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, we regularly re-examine our
portfolio strategies and periodically modify 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 our
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 our portfolio.
Our 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.
The table below provides information about our financial instruments that
are sensitive to changes in interest rates, including investment securities and
debt obligations. At December 31, 1998, we had no interest rate swaps or other
material derivative financial instruments outstanding. The entire portfolio of
investment securities is classified as available for sale. We do 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 terms. We 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>
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------ ------ ----- ----- ----- ----------- ------ ------
(In millions)
<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 we held equity securities with a total cost of $33.1 million
and a total market value of $35.5 million.
Based on our assessments at March 31, 1999, no material change has occurred
in our market risk from that at December 31, 1998.
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<PAGE> 24
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 us
use only two digits to identify the year, and failure to remediate this
situation could lead to a disruption in our business operations.
In response to these concerns, we have adopted a six-phase corporate plan
entitled "Planning for Year 2000." The Year 2000 Plan was designed to help
determine the extent of Year 2000 issues within each of our 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 our Internal
Audit, Information Services and General Counsel Departments, directs and
monitors our Year 2000 compliance activities.
We have completed the inventory and assessment phases of our Year 2000
Plan. With respect to remediation and implementation, modifications to our
centrally developed and supported information technology systems were 98.0
percent complete as of March 31, 1999. Modifications to the remaining
information technology 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.
Our field offices are being asked to provide monthly updates on the Year
2000 readiness of those information technology systems developed or acquired
locally. Most of the noncompliant personal computers and related software used
by field offices have been replaced. It is expected that this process will be
completed by the end of the second quarter of 1999.
We have been receiving information from our key service providers,
customers and agents about their efforts relating to the Year 2000 readiness of
their information technology. Although such information generally indicates that
the systems of our key vendors, customers and agents will be ready for the Year
2000, there can be no assurance that such systems will be remediated on a timely
basis.
Testing of centrally supported information technology systems was 95
percent complete as of March 31, 1999. Testing methodologies used for locally
developed or acquired information technology systems have been at the discretion
of field office management.
The final phase of the Year 2000 Plan consists of continuous monitoring of
our information technology remediation efforts. The completion of milestones and
the satisfaction of objectives defined in the Year 2000 Plan provide checkpoints
to assess the status of our Year 2000 readiness. Audits of central systems and
local and regional systems are being conducted by our Internal Audit and
Information Services Departments.
We have not identified any Year 2000 problems associated with our
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 our direct business operations.
Costs for Year 2000 Remediation
In respect of remediation of central systems, we spent approximately $2.8
million through the end of 1998, and expect to spend approximately $0.9 million
in 1999. To remediate local systems, we spent
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<PAGE> 25
approximately $2.1 million through the end of 1998, and expenditures in 1999 are
expected to be about $4.1 million. The source of these sums is corporate
operating funds. We do not separately track the cost and time our internal
employees spend on the Year 2000 project because such costs are principally the
related payroll costs for our Information Services Department. There may be
other, non-material costs which have also not been separately tracked.
Risks Related to Year 2000 Issues
Our operations are heavily dependent upon our information technology
business systems. Although not reasonably likely to occur, we believe that a
possible worst case scenario could result from a combination of failures in our
business critical information technology systems coupled with failures in the
real estate transaction and banking businesses generally. We believe 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, we 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 our operations in that it could
lead to a decline in our volume of business or an increase in our costs, the
extent of which are not estimable. However, any such failure would be likely to
impact others in the industry as well, and we have no reason to believe that we
would be any more adversely affected than other title insurance companies.
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 our information technology business
systems.
Contingency plans addressing the foregoing events (other than catastrophic
events, which are outside our control) are currently in development. Although it
is impossible to plan for every contingency, we are 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 we are
focusing on those in our contingency planning. Systems which have already been
tested and found to be Year 2000 compliant have lower priority in our
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. We are
emphasizing compliance of all systems, but expect contingency planning is an
ongoing function during 1999.
Please refer to our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, which is incorporated herein by reference, for a more detailed
discussion of our Year 2000 activities.
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<PAGE> 26
QUARTERLY RESULTS (UNAUDITED)
The following table sets forth unaudited quarterly financial data for 1997,
1998 and the first quarter of 1999. Our operating results for any quarter are
not necessarily indicative of the results that may be expected for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998(1) 1998
--------- ------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues......... $489,451 $550,969 $497,088 $477,672 $400,980
Total expenses......... 454,311 508,824 450,789 456,451 368,940
Operating income from
continuing operations
before income taxes... 35,140 42,145 46,299 21,221 32,040
Income taxes........... 11,951 15,826 16,393 10,518 10,799
Net income:
From continuing
operations,
excluding sales of
marketable
securities.......... 22,517 25,882 29,777 10,594 21,000
From sales of
marketable
securities.......... 672 437 129 109 241
From discontinued
operations(2)....... -- -- -- 4,034 4,979
-------- -------- -------- -------- --------
Total............... $ 23,189 $ 26,319 $ 29,906 $ 14,737 $ 26,220
======== ======== ======== ======== ========
Basic and diluted
earnings per share:
Continuing
operations............ $ 1.06 $ 1.20 $ 1.37 $ .49 $ .97
Discontinued
operations............ -- -- -- .18 .23
-------- -------- -------- -------- --------
Net earnings per
share................. $ 1.06 $ 1.20 $ 1.37 $ .67 $ 1.20
======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues......... $431,695 $373,175 $352,251 $310,325
Total expenses......... 408,230 346,787 326,903 301,923
Operating income from
continuing operations
before income taxes... 23,465 26,388 25,348 8,402
Income taxes........... 8,005 8,905 8,510 2,474
Net income:
From continuing
operations,
excluding sales of
marketable
securities.......... 14,889 15,851 16,746 5,827
From sales of
marketable
securities.......... 571 1,632 92 101
From discontinued
operations(2)....... 3,091 3,752 3,123 2,196
-------- -------- -------- --------
Total............... $ 18,551 $ 21,235 $ 19,961 $ 8,124
======== ======== ======== ========
Basic and diluted
earnings per share:
Continuing
operations............ $ .70 $ .80 $ .77 $ .27
Discontinued
operations............ .15 .17 .14 .10
-------- -------- -------- --------
Net earnings per
share................. $ .85 $ .97 $ .91 $ .37
======== ======== ======== ========
</TABLE>
- ---------------
(1) On a pre-tax basis, total expenses in the three months ended June 30, 1998
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 in January 1997), $3.7 million in
related managerial restructuring expenses, and $4.8 million for professional
fees, printing costs, listing fees and other expenses directly associated
with the spin-off.
(2) The results of Alleghany Asset Management, Inc. are shown as a discontinued
operation for all periods presented.
25
<PAGE> 27
BUSINESS
We are one of the nation's three 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, we currently have more than 340 full service offices and approximately
4,100 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands, Guam,
and Canada. Our revenues, totaling $1.927 billion in 1998, are generated from
all geographic regions of the country, with no one region predominating. We
believe that our brand name, national distribution network, financial position
and experienced management have enabled us to become one of the premier
companies participating in the title insurance and real estate-related services
industry.
Chicago Title was organized as a Delaware corporation in March 1998 and was
a wholly owned subsidiary of Alleghany Corporation. On June 17, 1998, Chicago
Title and its subsidiaries were spun off from Alleghany Corporation and Chicago
Title 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 and its subsidiaries. Chicago Title and Trust Company was organized as
an Illinois corporation in 1912 and was acquired, along with its wholly owned
subsidiary Chicago Title Insurance Company, by Alleghany Corporation in June
1985. Chicago Title Insurance Company, a Missouri corporation incorporated in
1961, succeeded to businesses conducted by predecessor corporations since 1847.
Chicago Title and Trust Company and Chicago Title Insurance Company are
headquartered in Chicago. Security Union Title Insurance Company, acquired in
1987, and Ticor Title Insurance Company, acquired in 1991, were incorporated in
California in 1962 and 1965, respectively. Both Security Union Title Insurance
Company and Ticor Title Insurance Company were parts of business organizations
that had succeeded to businesses conducted since around the turn of the century.
Security Union Title Insurance Company and Ticor Title Insurance Company are
headquartered in Pasadena, California.
Through our subsidiaries, primarily Chicago Title Insurance Company, Ticor
Title Insurance Company and Security Union Title Insurance Company, we conduct
title searches and issue title insurance policies in residential and commercial
real estate transactions. Policies are issued by us directly through branch
offices, as well as through independent agents and approved attorneys working as
independent contractors. We manage our risk exposure through an underwriting
approval system that entails higher levels of approval for larger commitments,
as well as by placing liability caps on loss occurrences and purchasing
reinsurance protection. In addition, we maintain a significant claims reserve
against losses.
Our 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 ours 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 us. 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. 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
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<PAGE> 28
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, we offer 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.
We also provide the following 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 12,500 real estate agents and appraisers. Chicago
Title -- Market Intelligence, Inc. also offers property appraisal
services through a network of state-licensed contract appraisers.
In addition, we have made several acquisitions of companies offering real
estate-related services in 1998 and early 1999:
- Universal Mortgage Services, Inc., now known as Chicago Title Field
Services, Inc., which provides property inspection, preservation and
maintenance services nationwide;
- Consolidated Reconveyance Company, now operating as a division of Chicago
Title Insurance Company, which furnishes foreclosure and reconveyance
services to institutional lenders;
- Westfall & Company, which provides mortgage services in the residential
mortgage business;
- Escondido Escrow and Ranch & Coast Escrow, which are two of the most
experienced escrow providers in California; Escondido Escrow is also one
of the leading timeshare escrow organizations in the nation; and
- Continental Home Warranty, Inc., a leading underwriter in California of
home warranty insurance policies, which protect home buyers against
significant repairs on major appliances and systems during the first year
of home ownership.
STRATEGY
During 1997, we undertook an in-depth analysis that assessed changes within
the rapidly evolving title industry. As a result of this study, we have
developed a strategy to increase our market share and earnings growth by: (i)
focusing our marketing efforts to serve three distinct customer
sectors -- Institutional Partners, Core Local Operations and National Commercial
and Industrial; (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 our services and offices.
27
<PAGE> 29
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, we
are focusing our marketing efforts and distribution network to serve three
distinct customer sectors:
- Institutional Partners. This sector markets its services to large
residential lenders and mortgage servicers, 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.
We have broadened our array of product offerings for this customer
sector, adding flood certification, credit reporting, property valuation
and default management services to the traditional title, escrow and
closing services.
- Core Local Operations. We intend to continue our long history of
providing relationship-based high quality service to these customers.
- National Commercial and Industrial. 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. We believe 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. We also believe 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 us, 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 our array of product offerings or to bolster our presence in certain
higher growth title insurance markets. This acquisition program has been funded
from our internally generated cash flow.
Operating Efficiencies and Cost Improvements. Opportunities exist among
relatively decentralized local offices to enhance performance and reduce
operating expenses. We have thus started a best practices initiative to promote
the transfer of ideas and techniques used by our high performing units with the
goal of standardizing excellence throughout all its offices. To date this
initiative has identified a wide range of opportunities to reduce costs or
enhance product and service quality, including more efficient escrow and closing
procedures, improved title production workflow, better utilization of imaging
and other technology solutions, and centralization of production facilities.
Further operating efficiencies are expected to result from investments in
technology, including the development of an "electronic spine" that will enable
us to receive, track, produce, deliver and bill an order for any product in any
location. Integrating electronically will improve customer service while
enhancing our ability to consolidate facilities and allocate staffing more
efficiently. Through March 31, 1999, we had spent approximately $6.0 million and
management currently estimates that costs aggregating approximately an
additional $14.0 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.
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<PAGE> 30
FINANCIAL RATINGS
Our principal title insurance subsidiaries -- Chicago Title Insurance
Company, Security Union Title Insurance Company and Ticor Title Insurance
Company -- carry a claims-paying ability rating of "A" from Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., and from Duff &
Phelps Credit Rating Co. In addition, Moody's Investors Service, Inc. has
assigned an insurance financial strength rating of "A2" to Chicago Title
Insurance Company, "A3" to Ticor Title Insurance Company and "Baa1" to Security
Union Title Insurance Company.
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 the Notes. Such ratings should not be relied on when making an
investment decision regarding the Notes.
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 entity 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.
Our 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 our investments, excluding cash, as of
December 31, 1998, with all investments carried at fair value in our 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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<PAGE> 31
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 is $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. We have a conservative investment philosophy with respect to both
asset quality and maturity distribution. We maintain 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. Our
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
Moody's. We have no interest rate swaps or other material derivative financial
instruments outstanding in our investment portfolio. As of December 31, 1998,
the duration of the short-term and fixed income securities in our 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 our portfolio.
We do not specifically match particular assets to related liabilities, but
instead hold 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, we regularly re-examine our portfolio
30
<PAGE> 32
strategies and periodically modify 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, we establish a "case" reserve, based upon the
best estimate of the total amount necessary to settle the claim and to provide
for allocated loss adjustment expenses, including legal defense costs. These
reserves are periodically adjusted by us based on our evaluation of subsequent
developments regarding the reported claim.
In addition to case reserves, we also maintain reserves for title losses
that are incurred but not yet reported, referred to as 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.
We establish IBNR reserves by using actuarial principles and procedures
commonly used in the title insurance industry to estimate the ultimate liability
for losses and loss adjustment expenses. 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 both of our experience and
the experience of the title insurance industry.
Our reserves are reviewed regularly by management and are certified by an
independent actuary on an annual basis. We do not discount our 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 our financial statements, which could have a
material effect on our financial condition and results of operations. Based on
current information, management believes the reserve for title losses at March
31, 1999 is adequate.
Chicago Title Insurance Company, Ticor Title Insurance Company and Security
Union Title Insurance Company 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 Chicago Title and Trust
Company and Chicago Title Insurance Company in 1985, Lincoln National
Corporation, the former owner of Chicago Title and Trust Company and Chicago
Title Insurance Company, agreed to indemnify Alleghany, Chicago Title and Trust
Company and Chicago Title Insurance Company 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 National
Corporation
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<PAGE> 33
agreed to indemnify for 50 percent 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, Chicago Title and Trust Company and
Chicago Title Insurance Company and its subsidiaries in the defense of such
claims), and 75 percent 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
Our 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, our revenue levels can
also be volatile. As business volume for the real estate-related businesses is
correlated to mortgage loan 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.
Real estate markets throughout the first three months of 1999 continued to
benefit from favorable economic conditions marked by low levels of unemployment
and the absence of inflationary pressures. These conditions, combined with
relatively stable long-term interest rates and strong consumer confidence, have
resulted in particularly strong residential resale activity in a period when it
normally reaches a seasonal low. New residential refinance orders have dropped
from the peak levels achieved in the latter part of 1998, but they remain well
above average historical levels and revenue from this sector was quite strong in
the quarter. Commercial and industrial transactions also continue at a healthy
level.
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 we recognize 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 1998 revenues reported in
statutory filings, Chicago Title Insurance Company, Security Union Title
Insurance Company, Ticor Title Insurance Company, LandAmerica Financial Group,
First American Title Insurance Company, Stewart Title Insurance Co., Fidelity
National Title Insurance Co., and Old Republic Title Insurance Group, Inc.
32
<PAGE> 34
together accounted for about 91 percent of all title insurance revenues. Chicago
Title's title insurance subsidiaries, LandAmerica Financial Group and First
American Title Insurance Company are the three largest, each accounting for
approximately 20 percent. 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.
We believe 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.
Our 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. Chicago Title Insurance Company is
incorporated in Missouri, Security Union Title Insurance Company is incorporated
in California and has a title insurance subsidiary incorporated in Oregon, and
Ticor Title Insurance Company 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 Chicago Title and Trust Company are also subject to the
insurance holding company regulations of Missouri, California and Oregon. The
acquisition of Chicago Title Insurance Company, Security Union Title Insurance
Company and Ticor Title Insurance Company and their respective title insurance
subsidiaries by Alleghany and/or Chicago Title and Trust Company 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, Chicago Title and Trust Company 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.
Chicago Title and Trust Company, 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.
Chicago Title and Trust Company and its subsidiaries are subject to a
consent agreement with the Federal Trade Commission 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
Insurance Company by Chicago Title and Trust Company. The consent agreement
provided for the divestiture by Chicago Title and Trust Company after its
acquisition of Ticor Title Insurance Company of certain title plants serving
overlapping geographical areas. Until July 2001, Chicago Title and Trust Company
and its subsidiaries are required to give prior notification to the FTC of any
acquisitions of an ownership interest
33
<PAGE> 35
in a title plant serving the same geographic area as a plant in which Chicago
Title and Trust Company or any of its subsidiaries already has an ownership
interest. Chicago Title and Trust Company is not, however, required to provide
notice with respect to any acquisition of a copy of title records or other
information from an entity which retains the ownership and control of the
original and where competition in the ordinary course between the parties is not
otherwise restrained. Chicago Title and Trust Company 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 March 31, 1999, Chicago Title had approximately 10,800 employees,
including full-time and part-time employees.
PROPERTIES
Chicago Title and Trust Company leases about 282,000 square feet for the
headquarters and operations of Chicago Title, Chicago Title and Trust Company
and Chicago Title Insurance Company 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 Chicago Title and Trust
Company's former subsidiary, The Chicago Trust Company.
Ticor Title Insurance Company's and Security Union Title Insurance
Company'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 Chicago Title Insurance Company, Security Union Title Insurance
Company and Ticor Title Insurance Company full-service and satellite branch
office operations.
LEGAL PROCEEDINGS
We are a party to pending litigation and claims in connection with the
ordinary course of our business. Provision is made on our 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 March 31, 1999.
On May 19, 1999, the California Attorney General, on behalf of the People
of the State of California, the Controller of the State of California and the
Insurance Commissioner of the State of California filed a complaint against an
alleged class of defendants consisting of title insurers and escrow companies
doing business in California. The complaint alleges that defendants failed to
escheat certain escrow funds to the State of California, charged home buyers and
other customers improper fees, and failed to pay over to customers interest
payments, or payments in lieu of interest, made by various banks on escrow funds
deposited by defendants on behalf of such customers, in violation of various
California laws. The plaintiffs seek damages according to proof, return of
allegedly improper fees, disgorgement of the alleged interest payments or
payments in lieu of interest, payment to the State of California of the funds
that allegedly should have been escheated, interest, costs of suit including
attorneys' fees and investigative fees, civil penalties and injunctive relief.
Neither Chicago Title nor any of its subsidiaries has been identified by name as
a defendant in this lawsuit.
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<PAGE> 36
MANAGEMENT OF CHICAGO TITLE
The name, age, position and five-year business experience of each director
and executive officer of Chicago Title are as follows:
<TABLE>
<CAPTION>
POSITION AT BUSINESS EXPERIENCE
NAME AGE CHICAGO TITLE DURING THE LAST FIVE YEARS
- ---- --- ------------------- ----------------------------------------
<S> <C> <C> <C>
Richard P. Toft................ 62 Chairman of the Chairman of the Board of Directors of
Board of Directors, Chicago Title since June 1998 and
Title since June Chairman and Chief Executive Officer of
1998 and Chairman Alleghany Asset Management, Inc.
and Chief Member of (financial services) since October 1995;
the Executive and he also served as Chairman of Chicago
Nominating Title and Trust Company from January
Committees. 1994 to July 1998, as President and
Chief Executive Officer of Chicago Title
and Trust Company from January 1994 to
July 1996, as President and Chief
Executive Officer of Chicago Title
Insurance Company prior thereto, and as
Senior Vice President of Alleghany until
October 1995; director, Peoples Energy
Corporation.
Norman R Bobins................ 56 Director, Member of Chairman, President and Chief Executive
the Audit and Officer, LaSalle Bank National
Compensation Association (commercial banking);
Committees. director, Center Point Properties.
John J. Burns, Jr.............. 67 Director, Chairman President, Chief Executive Officer and
of the Executive Chief Operating Officer, Alleghany
and Nominating Corporation (reinsurance and insurance,
Committees. financial services and mining);
director, Alleghany Corporation and
Burlington Northern Santa Fe
Corporation.
Peter H. Dailey................ 69... Director, Member of Chairman, Enniskerry Financial
the Compensation (investments); director, Jacobs
Committee. Engineering Group Inc., Krause Furniture
Co., Pinkerton's, Inc., Sizzler, Inc.
and Wirthlin Worldwide.
John F. Farrell, Jr............ 61 Director, Member of Chairman, Automatic Service Company
the Audit (food and vending service company);
Committee. trustee, Boston College and John F.
Kennedy Library; Chairman and Chief
Executive Officer of North American
Mortgage Company (mortgage company)
until October 1997.
Robert M. Hart................. 54 Director, Chairman Senior Vice President and General
of the Compensation Counsel of Alleghany Corporation
Committee. (reinsurance and insurance, financial
services and mining) since September
1994 and Secretary since 1995; Partner,
Donovan Leisure Newton & Irvine (law
firm) prior thereto.
Philip G. Heasley.............. 49 Director, Member of Vice Chairman, U.S. Bancorp (banking);
the Audit and director, SunAmerica Inc.
Compensation
Committees.
Allan P. Kirby, Jr............. 67 Director, Member of President, Liberty Square, Inc.
the Audit and (investments); management of family and
Compensation personal affairs; director, Alleghany
Committees. Corporation.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
POSITION AT BUSINESS EXPERIENCE
NAME AGE CHICAGO TITLE DURING THE LAST FIVE YEARS
- ---- --- ------------------- ----------------------------------------
<S> <C> <C> <C>
M. Leanne Lachman.............. 56 Director, Chairman Managing Director, Boston Financial
of the Real Estate (investment management-equity real
Committee and estate) since January 1999; Managing
member of the Audit Director, Schroder Real Estate
Committee. Associates (investment management-equity
real estate) prior thereto and Managing
Director, Schroder Mortgage Associates
(investment management-commercial
mortgages) until August 1998; director,
Lincoln National Corporation and Liberty
Property Trust.
William K. Lavin............... 54 Director, Chairman Financial Consultant; director,
of the Audit Alleghany Corporation and Stratford
Committee and Acquisition Corporation; Vice-Chairman
member of the of the Board and Chief Executive Officer
Executive and of Woolworth Corporation (retailing)
Nominating from May 1994 to September 1994 and
Committees. Chairman of the Board and Chief
Executive Officer prior thereto.
Lawrence F. Levy............... 55 Director, Member of Chairman of the Board and Chief
the Executive and Executive Officer, The Levy Organization
Real Estate (real estate, restaurants, and food
Committees. service).
Margaret P. MacKimm............ 65 Director, Member of Senior Vice President -- Communications,
the Compensation Kraft Foods, Inc. and its predecessor
Committee. Kraft, Inc. (multinational marketer and
processor of food products) prior to her
retirement in June 1989; director,
Venator Group, Inc.
Langdon D. Neal................ 41 Director, Member of Attorney, Earl L. Neal and Associates
the Real Estate (law firm).
Committee.
Alan N. Prince................. 60 Director, Member of Senior Executive Vice President, Chicago
the Real Estate Title Insurance Company from January
Committee. 1995 to retirement in December 1998,
Executive Vice President prior thereto.
John Rau....................... 50 President, Chief President and Chief Executive Officer,
Executive Officer, Chicago Title since June 1998; President
Director, Member of and Chief Executive Officer, Chicago
the Executive Title and Trust Company and Chicago
Committee. Title Insurance Company since January
1997; Dean, School of Business at
Indiana University (education ) prior
thereto; director, Borg-Warner
Automotive, Inc., First Industrial
Realty Trust, Inc., LaSalle Bank
National Association and Nicor, Inc.
Thomas H. Hodges............... 53 Executive Vice Executive Vice President, Chicago Title,
President since June 1998; Executive Vice
President, Chicago Title and Trust
Company, 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.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
POSITION AT BUSINESS EXPERIENCE
NAME AGE CHICAGO TITLE DURING THE LAST FIVE YEARS
- ---- --- ------------------- ----------------------------------------
<S> <C> <C> <C>
Louis A. Iannaccone............ 50 Executive Vice Executive Vice President and Chief
Executive and Chief Technology and Information Officer,
Technology and Chicago Title, since October 1998;
Information Senior Vice President and Chief
Officer. Information Officer, Long Island
Bancorp, from May 1994 until October
1997; Vice President and Division
Information Officer, Chase Manhattan
Bank, prior thereto.
Peter G. Leemputte............. 42 Executive Vice Executive Vice President, Chief
President, Chief Administrative Officer and Chief
Administrative Financial Officer, Chicago Title, since
Officer and Chief June 1998; Executive Vice President and
Financial Officer. Chief Administrative Officer, Chicago
Title and Trust Company, since January
1998, and Chief Financial Officer,
Chicago Title and Trust Company, 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.............. 56 Executive Vice Executive Vice President, General
President, General Counsel and Secretary, Chicago Title,
Counsel and since June 1998; Executive Vice
Secretary. President, General Counsel and
Secretary, Chicago Title and Trust
Company, and Executive Vice President
and General Counsel, Chicago Title
Insurance Company, since January 1997;
Senior Vice President, Chicago Title
Insurance Company and Chicago Title and
Trust Company, prior thereto.
Jeffrey A. Wilson.............. 52 Executive Vice Executive Vice President, Chicago Title,
President. since 1999; President and Chief
Executive Officer, T.D. Service
Financial Corp. (mortgage lending
services), from September 1996 to March
1998; President, The Wilson Group
(technology consulting), from April 1994
to September 1996; President and Chief
Executive Officer, Terminal Data Corp.
(manufacturer of electronic imaging
systems), prior thereto.
William T. Halvorsen, Jr....... 53 Senior Vice Senior Vice President and Manager,
President and Western Division, Chicago Title, since
Manager, Western June 1998; Senior Vice President and
Division. Manager, Western Division, Chicago Title
Insurance Company, prior thereto.
Christopher Abbinante.......... 48 Senior Vice Senior Vice President and Manager,
President and Eastern Division, Chicago Title, since
Manager, Eastern June 1998; Senior Vice President and
Division. Manager, Eastern Division, Chicago Title
Insurance Company, prior thereto.
</TABLE>
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DESCRIPTION OF THE NOTES
The Notes will be issued as a separate series under an indenture, dated as
of , 1999 (we refer to the indenture, as supplemented
from time to time, as the "Indenture"), between Chicago Title and LaSalle Bank
National Association, as trustee (the "Trustee"). The summary of the terms of
the Notes and certain provisions of the Indenture which follow is not complete
and is subject to the detailed provisions of the Indenture. We have filed a copy
of the Indenture as an exhibit to the registration statement to which this
prospectus relates. All article and section references appearing in this
prospectus are to articles and sections of the Indenture and whenever particular
sections or defined terms of the Indenture are referred to in this prospectus,
such sections or defined terms are incorporated by reference in this prospectus.
For purposes of this "Description of the Notes," all references to "we," "us,"
and "our" refer solely to Chicago Title and not its subsidiaries.
The Notes are limited to $75,000,000 in aggregate principal amount and will
mature on , 2009. We may elect to redeem the Notes
prior to maturity as described below under " -- Redemption." The Notes are
unsecured and will rank on a parity with all of our other unsecured and
unsubordinated obligations. At March 31, 1999, after giving effect to the
offering of the Notes and application of a portion of the net proceeds therefrom
to the repayment of indebtedness as described under "Use of Proceeds," and the
restructuring of certain credit facilities of Chicago Title and its subsidiaries
subsequent to March 31, 1999 as described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition," we had $75 million of such unsecured and unsubordinated indebtedness
outstanding, and our subsidiaries had $2.1 million of indebtedness outstanding
at March 31, 1999; such $2.1 million of indebtedness would be structurally
senior to the Notes. The Indenture does not limit the aggregate amount of debt
securities that we may issue under the Indenture, nor does it limit our
incurrence or issuance of unsecured debt.
The Notes will bear interest at the rate per annum shown on the cover page
of this prospectus from , 1999 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually in arrears on and of each
year, commencing , (each an "Interest
Payment Date"), to the persons in whose names such Notes were registered at the
close of business on the next preceding and
, whether or not a Business Day (as defined below) (each a
"Regular Record Date"), respectively. Interest on the Notes will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
Interest payable on a Note on any Interest Payment Date or at maturity
shall be the amount of interest accrued from and including the next preceding
Interest Payment Date in respect of which interest has been paid or provided for
(or from and including , 1999, if no interest has been paid or
provided for with respect to such Note) to, but excluding, the Interest Payment
Date or the date of maturity, as the case may be. If any Interest Payment Date
or the maturity date of a Note falls on a day that is not a Business Day, the
payment shall be made on the next Business Day as if it were made on the date
such payment was due and no interest shall accrue on the amount so payable for
the period from and after such Interest Payment Date or the maturity date, as
the case may be. "Business Day" means any day, other than a Saturday, Sunday,
legal holiday, or other day on which banks in The City of New York are required
or authorized by law, regulation or executive order to close.
The Notes will be issued only in fully-registered book-entry form, without
coupons, in denominations of $1,000 and integral multiples thereof, through the
facilities of The Depository Trust Company, New York, New York (the
"Depository"). Transfers or exchanges may be effected only through a
participating member of the Depository. See "-- Book-Entry Note" below. Payments
on the Notes will be made to the Depository or its nominee in accordance with
the arrangements then in effect between the Trustee and the Depository. See
"-- Book-Entry Note" below.
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OPTIONAL REDEMPTION
The Notes will be redeemable as a whole or in part at our option at any
time, at a redemption price equal to the sum of:
- the greater of
-- 100 percent of the principal amount of such Notes or
-- the sum of the present values of the remaining scheduled payments of
principal and interest thereon from the redemption date to the maturity
date, computed by discounting such payments, in each case, to the
redemption date on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Treasury Rate, plus
basis points, plus
- accrued and unpaid interest on the principal amount thereof to the date
of redemption.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial practice, in
pricing new issues of corporate Notes of comparable maturity to the remaining
terms of the Notes. "Independent Investment Banker" means one of the Reference
Treasury Dealers appointed by the Trustee after consultation with us.
"Comparable Treasury Price" means, with respect to any redemption date,
- the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the
third Business Day preceding such redemption date, as set forth in the
daily statistical release (or any successor release) published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities" or
- if such release (or any successor release) is not published or does not
contain such prices on such Business Day, the average of the Reference
Treasury Dealer Quotations actually obtained by the Trustee for such
redemption date. "Reference Treasury Dealer Quotations" means, with
respect to each Reference Treasury Dealer and any redemption date, the
average, as determined by the Trustee, of the bid and asked prices for
the Comparable Treasury Issue (expressed in each case as a percentage of
its principal amount) quoted in writing to the Trustee by such Reference
Treasury Dealer at 5:00 p.m. (New York City time) on the third Business
Day preceding such redemption date.
"Reference Treasury Dealer" means each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, ABN AMRO Incorporated and their respective successors;
provided, however, that if any of the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), we
may substitute therefor another Primary Treasury Dealer.
Notice of any redemption will be mailed at least 30 days but no more than
60 days before the redemption date to each holder of Notes to be redeemed. Upon
payment of the redemption price, on and after the redemption date interest will
cease to accrue on the Notes or portions thereof called for redemption.
BOOK-ENTRY NOTE
We have established a depositary arrangement with the Depository with
respect to the Notes, the terms of which are summarized below. The Notes will be
represented by a global Note registered in the name of the nominee of the
Depository. Beneficial interests in the global Note will be shown on, and
transfers thereof will be effected only through, records maintained by the
Depository (with respect to
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<PAGE> 41
beneficial interests of Participants (as defined below)) or by Participants or
persons that hold interests through Participants (with respect to beneficial
interests of owners).
So long as the Depository or its nominee is the registered owner of the
global Note, the Depository or its nominee, as the case may be, will be the sole
holder of the Notes represented thereby for all purposes under the Indenture.
Except as otherwise provided below, the Beneficial Owners (as defined below) of
the Notes will not be entitled to receive physical delivery of certificated
Notes and will not be considered the holders for any purpose under the
Indenture. Accordingly, each Beneficial Owner must rely on the procedures of the
Depository and, if such Beneficial Owner is not a Participant, on the procedures
of the Participant through which such Beneficial Owner owns its interest in
order to exercise any rights of a holder under such Note or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in the Notes.
The following is based on information furnished by the Depository:
The Depository will act as securities depository for the Notes. The
Notes will be issued as fully registered securities registered in the name
of Cede & Co. (the Depository's partnership nominee). One global Note will
be issued with respect to all of the principal amount of the Notes.
The Depository is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. The Depository
holds securities that its participants ("Participants") deposit with the
Depository. The Depository also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. Direct Participants of the Depository ("Direct
Participants") include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The
Depository is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the Depository's
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depository and its
Participants are on file with the Securities and Exchange Commission.
Purchases of Notes under the Depository's system must be made by or
through Direct Participants, which will receive a credit for such Notes on
the Depository's records. The ownership interest of each actual purchaser
of each Note represented by a global Note ("Beneficial Owner") is in turn
to be recorded on the records of Direct Participants and Indirect
Participants. Beneficial Owners will not receive written confirmation from
the Depository of their purchase, but Beneficial Owners are expected to
receive written confirmations providing details of the transaction, as well
as periodic statements of their holdings, from the Direct Participants or
Indirect Participants through which such Beneficial Owner entered into the
transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners of Notes will not receive
certificated Notes representing their ownership interests therein, except
in the event that use of the book-entry system for the Notes is
discontinued.
To facilitate subsequent transfers, all Notes which are deposited
with, or on behalf of, the Depository are registered in the name of the
Depository's nominee, Cede & Co. The deposit of Notes with, or on behalf
of, the Depository and their registration in the name of Cede & Co. effect
no change in beneficial ownership. The Depository has no knowledge of the
actual Beneficial Owners of the Notes; the Depository's records reflect
only the identity of the Direct Participants to whose
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<PAGE> 42
accounts such Notes are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of
their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depository to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Neither the Depository nor Cede & Co. will consent or vote with
respect to the Notes. Under its usual procedures, the Depository mails an
Omnibus Proxy to Chicago Title as soon as possible after the applicable
record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those Direct Participants to whose accounts the Notes are
credited on the applicable record date (identified in a listing attached to
the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Notes will be made in immediately available funds to the Depository. The
Depository's practice is to credit Direct Participants' accounts on the
applicable payment date in accordance with their respective holdings shown
on the Depository's records unless the Depository has reason to believe
that it will not receive payment on such date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of the Underwriters, the
Depository, the Trustee or Chicago Title, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to the Depository is
the responsibility of Chicago Title and the Trustee, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depository, and disbursement of such payments to the Beneficial Owners
shall be the responsibility of Direct Participants and Indirect
Participants.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depository's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
The Depository may discontinue providing its services as securities
depository with respect to the Notes at any time by giving reasonable
notice to Chicago Title or the Trustee. Under such circumstances, in the
event that a successor securities depository is not obtained, certificated
Notes are required to be printed and delivered.
Chicago Title may decide to discontinue use of the system of
book-entry transfers through the Depository (or a successor securities
depository). In that event, certificated Notes will be printed and
delivered.
The information in this section concerning the Depository and the
Depository's system has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy thereof.
CERTAIN COVENANTS
The Notes contain the following covenants:
Limitations on Issuance or Disposition of Stock of Significant
Subsidiaries. We will not, nor will we permit any Significant Subsidiary (as
defined below) to, issue, sell or otherwise dispose of any shares of Capital
Stock (other than non-voting Preferred Stock) of any Significant Subsidiary,
except for:
- directors' qualifying shares;
- sales or other dispositions to Chicago Title or to one or more wholly
owned Significant Subsidiaries;
- the sale or other disposition of all or any part of the Capital Stock of
any Significant Subsidiary for consideration which is at least equal to
the fair value of such Capital Stock as determined by our board of
directors (acting in good faith); or
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<PAGE> 43
- any issuance, sale, assignment, transfer or other disposition made in
compliance with an order of a court or regulatory authority of competent
jurisdiction, other than an order issued at our request or at the request
of any Significant Subsidiary.
Limitation on Liens. Except as provided below, we will not nor will we
permit any Significant Subsidiary to incur, issue, assume or guarantee any
indebtedness for borrowed money ("indebtedness") secured by a Lien on any
property or assets of ours or any Significant Subsidiary, or any shares of
Capital Stock of any Significant Subsidiary, without effectively providing that
the Notes (together with, if we shall so determine, any other indebtedness which
is not subordinated to the Notes) shall be secured equally and ratably with (or
prior to) such indebtedness, so long as such indebtedness shall be so secured;
provided, however, that this covenant shall not apply to indebtedness secured
by:
- Liens existing on the date of this prospectus;
- Liens on property of, or on any shares of stock of, any corporation
existing at the time such corporation becomes a Significant Subsidiary or
merges into or consolidates with us or a Significant Subsidiary;
- Liens on property or on shares of stock existing at the time of
acquisition thereof by us or any Significant Subsidiary;
- Liens to secure the financing of the acquisition, construction or
improvement of real or personal property, or the acquisition of shares of
stock, by Chicago Title or any Significant Subsidiary, provided that such
Liens (i) are created within one year after the acquisition of such
property or shares or, in the case of property, within one year after the
later of the completion of construction or commencement of operation of
such property, (ii) are limited to the property acquired, constructed or
improved or the shares of stock acquired and (iii) do not secure
indebtedness in excess of the cost of such acquisition, construction or
improvement;
- Liens in our favor or in favor of any Subsidiary;
- Liens in favor of, or required by, governmental authorities, including,
without limitation, those required by the Illinois Corporate Fiduciary
Act;
- Liens on the property or assets (including shares of stock or other
equity interests) of us or a Significant Subsidiary in favor of the
United States, any State or any department, agency or instrumentality or
political subdivision of the United States or any State, or in favor of
any other country, or any political subdivision of another country, to
secure any indebtedness incurred or guaranteed for the purpose of
financing all or any part of the purchase price or the cost of
construction of the property or assets (including shares of stock or
other equity interests) subject to such Liens within 180 days after the
latest of the acquisition, completion of construction or commencement of
operation of such property or assets (including shares of stock or other
equity interests), provided that (i) the principal amount of any
indebtedness secured by such Lien does not exceed 100% of the purchase
price or cost, and (ii) such Lien does not extend to or cover any
property or assets (including shares of stock or other equity interests)
other than the specific item of property or assets (including shares of
stock or other equity interests) (or portion thereof) acquired,
constructed or constituting the improvements made with the proceeds of
such indebtedness;
- Liens imposed by or in favor of any governmental authority for taxes,
assessments or other charges which are not yet due or which are being
contested in good faith and by appropriate proceedings and for which
adequate reserves shall have been established on our books as required in
accordance with generally accepted accounting principles;
- pledges or deposits to secure our or any Significant Subsidiary's
obligations under worker's compensation laws, unemployment insurance laws
or similar legislation and materialmen's, mechanics', carriers',
repairmen's or other like Liens, or deposits to obtain the release of
such Liens to the extent arising and continuing in the ordinary course of
business;
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- easements, rights-of-way, restrictions and other similar encumbrances
affecting real property incurred in the ordinary course of business
which, in the aggregate, are not substantial in amount and which do not
in any case materially detract from the value of the property subject to
such encumbrance or interfere with the ordinary conduct of our business;
- landlord's Liens for rent not yet due and payable;
- Liens granted to the Trustee pursuant to Section 6.09(d) of the
Indenture;
- Liens on property or assets (including shares of stock or other equity
interests) used to defease indebtedness not in violation of Article IV of
the Indenture;
- Liens on proceeds of any property or assets (including shares of stock or
other equity interests) subject to a Lien as permitted by any of the
foregoing exceptions; and
- any extension, renewal or replacement as a whole or in part, of any Lien
referred to in the foregoing exceptions, provided that (i) such
extension, renewal or replacement Lien shall be limited to all or a part
of the same property or shares of stock that secured the Lien extended,
renewed or replaced, and (ii) the indebtedness secured by such Lien at
such time is not increased except for increases to allow for the payment
of any fees, expenses and premiums associated with such extension,
renewal or replacement and, if otherwise increased, the following
exception is available to the extent of such increase;
In addition, we and any one or more of our Significant Subsidiaries may, without
securing any of the Notes, issue, assume or guarantee indebtedness secured by
any Lien which would otherwise be subject to the foregoing restrictions in an
aggregate amount which, together with all of our indebtedness and indebtedness
of our Significant Subsidiaries issued, assumed or guaranteed pursuant to this
sentence, does not at the time exceed 15% of Consolidated Net Tangible Assets.
Neither the Notes nor the Indenture contain any provisions other than the
foregoing which will restrict us from incurring, assuming or becoming liable
with respect to any indebtedness or other obligations, whether secured or
unsecured, or from paying dividends or making other distributions on our capital
stock or purchasing or redeeming our capital stock. Neither the Notes nor the
Indenture contain any financial ratios, or specified levels of net worth or
liquidity to which we must adhere. In addition, neither the Notes nor the
Indenture contain any provision which would require us to repurchase or redeem
or otherwise modify the terms of any of the Notes upon a change in control or
other events involving us which may adversely affect the creditworthiness of the
Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Notes.
"Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interest in
(however designated) corporate stock, including any Preferred Stock.
"Consolidated Net Tangible Assets" means the total amount of assets (less
applicable reserves and other properly deductible items) after deducting (i) all
current liabilities (excluding any thereof which are by their terms extendible
or renewable at the option of the obligor thereon to a time more than 12 months
after the time as of which the amount thereof is being computed), and (ii) all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, all as set forth on our most recent
consolidated balance sheet prepared in accordance with generally accepted
accounting principles. For purposes of this definition, "current liabilities"
shall mean total liabilities, less bank and other long-term debt (excluding any
portion of such debt maturing within one year of the date of determination),
reserve for title losses and trust and escrow deposits secured by pledged
assets, in each case as reflected on our consolidated balance sheet prepared in
accordance with generally accepted accounting principles.
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind (including any conditional sale or other title retention
agreement and any lease in the nature thereof).
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock or limited liability company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Significant Subsidiary" means each of Chicago Title and Trust Company,
Chicago Title Insurance Company, Ticor Title Insurance Company and Security
Union Title Insurance Company so long as it remains a Subsidiary, as well as any
successor to all or substantially all of the business of any such subsidiary.
"Subsidiary" means a corporation of which a majority of the Capital Stock
having voting power under ordinary circumstances to elect a majority of the
board of directors is owned directly or indirectly by us or by one or more of
our Subsidiaries.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Payments of principal and interest in respect of the Notes will be made in
U.S. Dollars at our office or agency maintained for that purpose as we may
designate from time to time in immediately available funds. The Notes will trade
in the Same-Day Funds Settlement System of the Depository until maturity, and
secondary market trading activity in the Notes will therefore be required by the
Depository to settle in immediately available funds.
Notes in registered form will be transferable or exchangeable at our agency
maintained for such purpose as we designate from time to time. (Sections 3.05
and 9.02.) Notes may be transferred or exchanged without service charge, other
than any tax or other governmental charge imposed in connection therewith.
(Section 3.05.)
The global Note may not be registered for transfer or exchange except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor Depository or a nominee of such
successor Depository. (Section 3.05.)
Owners of beneficial interests in the global Note will not be entitled to
have Notes represented by the global Note registered in their names, will not
receive or be entitled to receive physical delivery of Notes in certificated
form and will not be considered the holders thereof for any purposes under the
Indenture. (Section 3.08.) Accordingly, each person owning a beneficial interest
in the global Note must rely on the procedures of the Depository and, if such
person is not a Participant, on the procedures of the Participant through which
such person owns its interest, to exercise any rights of a holder under the
Indenture. The Depository may grant proxies and otherwise authorize Participants
to give or take any request, demand, authorization, direction, notice, consent,
waiver or other action which a holder is entitled to give or take under the
Indenture. Chicago Title understands that, under existing industry practices, if
Chicago Title requests any action of holders or if any owner of a beneficial
interest in the global Note desires to give any notice or take any action which
a holder is entitled to give or take under the Indenture, the Depository would
authorize the Participants to give such notice or take such action, and such
Participants would authorize beneficial owners owning through such Participants
to give such notice or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
If the Depository is at any time unwilling or unable to continue as
Depository or ceases to be a clearing agency registered under the Exchange Act
and a duly registered successor Depository is not appointed by Chicago Title
within 90 days, Chicago Title will issue such Notes in definitive certificated
form in exchange for the global Note. In addition, Chicago Title may at any time
and in its sole discretion determine not to have any of the Notes represented by
the global Note and, in such event, will issue Notes in definitive certificated
form in exchange for the global Note. (Section 3.05.)
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CONSOLIDATION, MERGER OR SALE OF ASSETS BY CHICAGO TITLE
We shall not consolidate with or merge with or into any other corporation
or sell our assets substantially as an entirety, unless:
- the corporation formed by such consolidation or into which we merge or
the corporation which acquires our assets is organized and existing under
the laws of the United States or any state thereof;
- the corporation formed by such consolidation or into which we merge or
which acquires our assets substantially as an entirety expressly assumes
all of our obligations under the Indenture;
- immediately after giving effect to such transaction, no Default or Event
of Default shall have happened and be continuing; and
- if, as a result of such transaction, our properties or assets would
become subject to an encumbrance which would not be permitted by the
terms of the Notes, we or the successor corporation, as the case may be,
shall take such steps as are necessary to secure such Notes equally and
ratably with all indebtedness secured thereunder. Upon any such
consolidation, merger or sale, the successor corporation formed by such
consolidation, or into which we are merged or to which such sale is made,
shall succeed to, and be substituted for us under the Indenture. (Section
7.01.)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
Pursuant to the Indenture, if an Event of Default occurs with respect to
the Notes and is continuing, the Trustee or the holders of 25 percent in
aggregate principal amount of all of the outstanding Notes, by written notice to
us (and to the Trustee, if notice is given by such holders of Notes), may
declare the principal of and accrued interest on all the Notes of that series to
be due and payable. (Section 5.02.)
Events of Default with respect to the Notes are defined as being:
- default in payment of any interest on any Note when the same becomes due
and payable and the same continues for 30 days;
- default in payment of principal, or premium, if any, at maturity or on
redemption or otherwise of any Notes when due;
- failure to comply in any material respect with any agreement or covenant
(other than an agreement or covenant for which non-compliance is
specifically dealt with in another bullet point) in the Notes, the
Indenture or in any supplemental indenture or board resolution referred
to therein under which the Notes have been issued and which is applicable
to the Notes, and such non-compliance continues for a period of 90 days
after notice to us by the Trustee or the holders of at least 25% in
aggregate principal amount of the Notes then outstanding;
- a default under any mortgage, agreement, indenture or instrument under
which there may be issued, or by which there may be evidenced any of our
indebtedness, whether existing now or in the future, in an aggregate
principal amount then outstanding of $20 million or more, which default:
-- shall constitute a failure to pay any portion of the principal of such
indebtedness when due and payable after the expiration of an applicable
grace period with respect thereto or
-- shall result in such indebtedness becoming or being declared due and
payable, and such acceleration shall not be rescinded or annulled, or
such debt shall not be paid in full within a period of 30 days after
there has been given written notice to us by the Trustee or to us and
the Trustee by the holders of at least 25 percent in aggregate
principal amount of the Notes,
provided that such Event of Default will be remedied, cured or waived if
the default that resulted in the acceleration of such other indebtedness
is remedied, cured or waived; and
- certain events of our bankruptcy, insolvency or reorganization. (Section
5.01.)
The Trustee will, within 90 days after the occurrence of a Default with
respect to the Notes, give to the holders of the Notes notice of all Defaults
known to it unless such Default shall have been cured or
45
<PAGE> 47
waived; provided that except, the Trustee may withhold the notice if and so long
as a committee of its Responsible Officers in good faith determines that
withholding such notice is in the interests of the holders of the Notes.
(Section 6.06.) "Default" means any event which is, or after notice or passage
of time or both, would be, an Event of Default. (Section 1.01.)
The holders of a majority in aggregate principal amount of the Notes may,
subject to certain limited conditions, direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on such Trustee. (Section 5.08.)
We will file annually with the Trustee a certificate as to our compliance
with all conditions and covenants of the Indenture. (Section 9.05.)
The holders of a majority in aggregate principal amount of the Notes by
notice to the Trustee may waive, on behalf of the holders of all Notes, any past
Default or Event of Default and its consequences except a Default or Event of
Default in the payment of the principal of, premium, if any, or interest, if
any, on the Notes (Section 5.07.) and certain other matters set forth in the
Indenture.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture shall generally cease to be of any further effect with
respect to the Notes if:
- we shall have delivered to the Trustee for cancellation all Notes, or all
Notes not previously delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable
within one year or are to be called for redemption within one year, and
we shall have irrevocably deposited with the Trustee as trust funds the
entire amount sufficient to pay at maturity or upon redemption all the
Notes;
- we shall have also paid or caused to be paid all other sums payable by us
with respect to the Notes under the Indenture; and
- we shall have delivered to the Trustee an officer's certificate and
opinion of counsel relating to the satisfaction and discharge of the
Notes.
DEFEASANCE AND COVENANT DEFEASANCE
We may elect either:
- to defease and be discharged from any and all obligations with respect to
the Notes (except as otherwise provided in the Indenture) ("defeasance")
or
- to be released from our obligations with respect to certain covenants
applicable to the Notes ("covenant defeasance"), upon the deposit with
the Trustee (or other qualifying trustee), in trust for such purpose, of
money and/or Government Obligations which through the payment of
principal, interest and premium, if any, in accordance with their terms
will provide money in an amount sufficient, without reinvestment, to pay
the principal of, any premium or interest on such Notes. As a condition
to defeasance or covenant defeasance, Chicago Title must deliver to the
Trustee an Opinion of Counsel to the effect that the holders of such
Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of such defeasance or covenant defeasance and will
be subject to Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred. Such Opinion of
Counsel, in the case of defeasance under the first bullet paragraph
above, must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable Federal income tax law occurring after
the date of the Indenture. (Article IV.)
We may exercise our defeasance option with respect to the Notes
notwithstanding prior exercise of our covenant defeasance option. If we exercise
our defeasance option, payment of such Notes may not be accelerated because of a
Default or an Event of Default. (Section 4.04.) If Chicago Title exercises its
covenant defeasance option, payment of such Notes may not be accelerated by
reason of a Default or an Event of Default with respect to the covenants to
which such covenant defeasance is applicable. However, if such acceleration were
to occur by reason of another Event of Default, the realizable value at the
acceleration date of the money and Government Obligations in the defeasance
trust could be less than the
46
<PAGE> 48
principal and interest then due on such Notes, in that the required deposit in
the defeasance trust is based upon scheduled cash flow rather than market value,
which will vary depending upon interest rates and other factors.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting us to enter into one or more
supplemental indentures with the Trustee without the consent of the holders of
any of the Notes in order:
- to evidence the succession of another corporation to us and the
assumption of our covenants and obligations under the Indenture and the
Notes by our successor;
- to add to our covenants or surrender any of our rights or powers;
- to add additional Events of Default;
- to secure the Notes;
- to evidence and provide for successor Trustees;
- to correct any defect or supplement any inconsistent provisions or to
make any other provisions with respect to matters or questions arising
under such Indenture, provided that such action does not adversely affect
the interests of any holder of Notes; or
- to cure any ambiguity or correct any mistake.
The Indenture also contains provisions permitting us, with the consent of
the holders of a majority in aggregate principal amount of the outstanding
Notes, to execute supplemental indentures with the Trustee adding any provisions
to or changing or eliminating any of the provisions of such Indenture or any
supplemental indenture or modifying the rights of the holders of the Notes,
except that, without the consent of the holder of each Note, no such
supplemental indenture may:
- change the time for payment of principal or premium, if any, or interest
on the Notes;
- reduce the principal of, or any installment of principal of, or premium,
if any, or interest on the Notes, or change the manner in which the
amount of any of the foregoing is determined;
- reduce the amount of premium, if any, payable upon the redemption of the
Notes;
- change the currency in which the Notes or any premium or interest is
payable;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any Note;
- reduce the percentage in principal amount of the outstanding Notes
affected thereby the consent of whose holders is required for
modification or amendment of such Indenture or for waiver of compliance
with certain provisions of the Indenture or for waiver of certain
defaults;
- change our obligation to maintain an office or agency in the places and
for the purposes specified in the Indenture; or
- modify the provisions relating to waiver of certain defaults or any of
the foregoing provisions. (Section 8.02.)
THE TRUSTEE
LaSalle Bank National Association will be the Trustee under the Indenture.
We maintain banking and other commercial relationships with the Trustee and its
affiliates in the ordinary course of business.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
47
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, dated , 1999, between us and the several underwriters, we
have agreed to sell to the underwriters, and the underwriters have severally
agreed to purchase from us, the aggregate principal amount of the Notes set
forth after their respective names below. The obligations of the underwriters
are subject to certain conditions. The underwriters must purchase all of the
Notes if they purchase any.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES
UNDERWRITER ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... $
ABN AMRO >Incorporated......................................
-----------
Total.......................................... $75,000,000
===========
</TABLE>
The underwriters have advised us that they propose initially to offer the
Notes to the public at the public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a concession not in
excess of % of the principal amount of the Notes. The underwriters may
allow, and such dealers may reallow, a discount not in excess of % of the
principal amount of the Notes to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the Notes on a national securities
exchange. We have been advised by the underwriters that they intend to make a
market in the Notes, but they are not obligated to do so and may discontinue
market-making at any time without notice. We can provide no assurance as to the
liquidity of, or any trading market for, the Notes.
In connection with the offering, the underwriters are permitted to engage
in certain transactions that stabilize the price of the Notes in accordance with
Regulation M under the Securities Act of 1934, as amended. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Notes. If the underwriters create a short position in the Notes
in connection with the offering, i.e., if they sell a greater aggregate
principal amount of Notes than is set forth on the cover of this prospectus, the
underwriters may reduce that short position by purchasing Notes in the open
market. In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. Such activities, if
commenced, may be discontinued at any time.
Neither we nor any underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Notes. In addition, neither we nor any underwriter
makes any representation that the underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or if
indemnification is not allowed, to contribute to payments the underwriters may
be required to make because of those liabilities.
In the ordinary course of business, the underwriters from time to time
provided investment banking and financial advisory services to us and may do so
in the future.
We estimate that we will spend approximately $275,000 for fees and expenses
associated with the offering of the Notes, excluding underwriting discounts and
commissions.
48
<PAGE> 50
VALIDITY OF NOTES
The validity of the Notes offered hereby will be passed on for Chicago
Title by Dewey Ballantine LLP, New York, New York, and for the Underwriters by
Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedules of Chicago Title as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 included or incorporated by reference in this prospectus
have been audited by KPMG LLP, independent auditors, as stated in their report,
which is included or incorporated by reference in this prospectus, and has been
so included or incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
49
<PAGE> 51
CHICAGO TITLE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets at December 31, 1998 and 1997... F-2
Consolidated Statements of Income for the Three Years Ended
December 31, 1998......................................... F-3
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for the Three Years Ended
December 31, 1998......................................... F-4
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Independent Auditors' Report................................ F-27
Consolidated Balance Sheets at March 31, 1999 (unaudited)
and December 31, 1998..................................... F-28
Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and 1998 (unaudited)....................... F-29
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)................. F-30
Notes to Consolidated Quarterly Financial Statements........ F-31
</TABLE>
F-1
<PAGE> 52
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<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 statement.
F-2
<PAGE> 53
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1998
<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.
F-3
<PAGE> 54
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNEARNED OTHER COST OF TOTAL
COMMON PAID-IN COMPENSATION -- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL RESTRICTED 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.
F-4
<PAGE> 55
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
<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.
F-5
<PAGE> 56
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
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.
F-6
<PAGE> 57
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-7
<PAGE> 58
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-8
<PAGE> 59
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 60
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998
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>
F-10
<PAGE> 61
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
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>
F-11
<PAGE> 62
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-12
<PAGE> 63
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-13
<PAGE> 64
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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
F-14
<PAGE> 65
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-15
<PAGE> 66
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-16
<PAGE> 67
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 rate assumptions were
decreased 1.00 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.
F-17
<PAGE> 68
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-18
<PAGE> 69
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
FEDERAL STATE TOTAL
-------- ------ --------
<S> <C> <C> <C>
1998
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>
FEDERAL STATE TOTAL
-------- ------ --------
<S> <C> <C> <C>
1997
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>
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
-------- ------ --------
<S> <C> <C> <C>
1996
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.
F-19
<PAGE> 70
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-20
<PAGE> 71
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-21
<PAGE> 72
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-22
<PAGE> 73
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-23
<PAGE> 74
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
<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>
(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.
F-24
<PAGE> 75
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-25
<PAGE> 76
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
1998
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
======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
1997
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>
F-26
<PAGE> 77
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
F-27
<PAGE> 78
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash on hand and in banks................................... $ 41,924 $ 39,230
Cash pledged to secure trust and escrow deposits............ 202,162 93,887
Marketable securities, available-for-sale:
Fixed maturities, at fair value (amortized cost of
$1,012,760 and $1,136,432 in 1999 and 1998,
respectively).......................................... 1,026,826 1,158,664
Equity securities, at fair value (cost of $35,673 and
$33,079 in 1999 and 1998, respectively)................ 35,048 35,464
---------- ----------
Total marketable securities................................. 1,061,874 1,194,128
Receivables, including accrued investment income, less
allowance for doubtful accounts of $14,504 and $14,072 in
1999 and 1998, respectively............................... 76,651 75,840
Deferred federal income taxes............................... 95,756 89,553
Fixed assets, net........................................... 106,592 104,322
Title plants................................................ 152,420 151,600
Goodwill.................................................... 120,518 90,581
Other assets (Note 2)....................................... 97,729 42,618
---------- ----------
Total assets................................................ $1,955,626 $1,881,759
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 112,267 $ 112,136
Accrued expenses and other liabilities...................... 160,446 172,253
Bank and other long term debt............................... 21,467 21,648
Reserve for title losses.................................... 631,190 618,831
Trust and escrow deposits secured by pledged assets......... 562,531 495,299
---------- ----------
Total liabilities........................................... 1,487,901 1,420,167
========== ==========
Stockholders' Equity (Note 6):
Common stock-par value of $1 per share, authorized
66,000,000 shares; issued and outstanding 21,829,702
shares at March 31, 1999 (net of 155,771 treasury
shares) and 21,905,685 shares at December 31, 1998 (net
of 20,966 treasury shares)............................. 21,830 21,906
Additional paid-in capital................................ 124,713 127,270
Unearned compensation-restricted stock and employee stock
award plans............................................ (14,890) (15,573)
Retained earnings (Note 4)................................ 327,336 311,988
Accumulated other comprehensive income (Note 3)........... 8,736 16,001
---------- ----------
Total stockholders' equity.................................. 467,725 461,592
---------- ----------
Total liabilities and stockholders' equity.................. $1,955,626 $1,881,759
========== ==========
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-28
<PAGE> 79
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues:
Title, escrow, trust and other revenue.................... $471,810 $385,804
Investment income......................................... 16,607 14,805
Net realized investment gains............................. 1,034 371
-------- --------
Total revenues.................................... 489,451 400,980
-------- --------
Expenses:
Salaries and other employee benefits...................... 153,533 127,603
Commissions paid to agents................................ 172,196 131,490
Provision for title losses................................ 29,817 26,279
Interest expense.......................................... 1,079 1,295
Other operating and administrative expenses............... 97,686 82,273
-------- --------
Total expenses.................................... 454,311 368,940
-------- --------
Operating income from continuing operations before income
taxes..................................................... 35,140 32,040
Income taxes................................................ 11,951 10,799
-------- --------
Net income from continuing operations....................... 23,189 21,241
Net income from discontinued operations..................... -- 4,979
-------- --------
Net income.................................................. $ 23,189 $ 26,220
======== ========
Basic and diluted earnings per share (Note 5):
Continuing operations..................................... $ 1.06 $ 0.97
Discontinued operations................................... -- 0.23
-------- --------
Net earnings per share...................................... $ 1.06 $ 1.20
======== ========
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-29
<PAGE> 80
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from continuing operations activities:
Net income from continuing operations..................... $ 23,189 $ 21,241
Adjustments to reconcile net income from continuing
operations to net cash used in continuing operations
activities:
Depreciation and amortization.......................... 12,715 8,314
Changes in assets and liabilities:
Cash pledged to secure trust and escrow deposits..... (108,275) (162,992)
Receivables.......................................... (788) (4,172)
Current and deferred federal income taxes............ 11,838 9,860
Other assets......................................... (55,618) 3,129
Accounts payable and accrued expenses and other
liabilities......................................... (23,746) (32,391)
Reserves for title losses............................ 12,358 5,495
Trust and escrow deposits secured by pledged
assets.............................................. 67,232 90,850
Gain on sale of investments............................ (1,034) (371)
--------- ---------
Net adjustments............................................. (85,318) (82,278)
--------- ---------
Net cash used in continuing operations activities........... (62,129) (61,037)
--------- ---------
Dividends received from Alleghany Asset Management, Inc..... -- 5,300
--------- ---------
Net cash used in operations................................. (62,129) (55,737)
--------- ---------
Cash flows from investing activities:
Purchase of long-term marketable securities............... (164,395) (103,577)
Sales of long-term marketable securities.................. 125,309 37,257
Maturities and redemptions of long-term marketable
securities............................................. 86,492 36,255
Net sales of short-term investments....................... 74,147 120,967
Purchases of other invested assets........................ (2,222) (1,747)
Sales of other invested assets............................ 530 558
Purchases of fixed assets................................. (6,783) (7,485)
Sales of fixed assets..................................... 584 2,522
Purchases of title records and indexes.................... (51) (225)
Purchases of subsidiaries (Note 7)........................ (35,433) (13,095)
Cash of acquired subsidiaries............................. 1,791 1,736
--------- ---------
Net cash provided by investing activities................... 79,969 73,166
--------- ---------
Cash flows from financing activities:
Principal payments on bank and other long term debt....... (181) (707)
Payment of cash dividends (Note 4)........................ (7,453) --
Original issuance and reissuance of treasury stock........ 1,659 --
Purchases of treasury stock (Note 6)...................... (9,171) --
Cash remaining with discontinued operations............... -- (2,054)
--------- ---------
Net cash used in financing activities....................... (15,146) (2,761)
--------- ---------
Net increase in cash........................................ 2,694 14,668
Cash at beginning of year................................... 39,230 21,219
--------- ---------
Cash as of balance sheet date............................... $ 41,924 $ 35,887
========= =========
</TABLE>
See accompanying notes to consolidated quarterly financial statements.
F-30
<PAGE> 81
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
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. 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) 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. During the first quarter of
1999, costs in progress of $2,074 were incurred and capitalized 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 is effective for financial statements for fiscal years beginning after June
15, 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.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("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. Other comprehensive
income relates to the Company's change in unrealized appreciation (depreciation)
of marketable securities, net of deferred taxes. The Company's total
comprehensive income for the three months ended March 31, 1999 and 1998 was
$15,924 and $26,260, respectively. Other comprehensive income was $(7,265) and
$40 for the three months ended March 31, 1999 and 1998, respectively.
(4) DIVIDENDS
On January 26 and April 28, 1999, the Company's Board of Directors declared
cash dividends of $0.34 and $0.36 per share, payable on March 15 and June 15,
1999, respectively, to stockholders of record on March 1 and June 1, 1999,
respectively.
(5) EARNINGS PER SHARE
For the three months ended March 31, 1999 and 1998, earnings per share on
both a basic and diluted basis was $1.06 and $0.97, respectively. The weighted
average number of shares outstanding for the three months ended March 31, 1999
and 1998 were 21,885,200 and 21,906,651, respectively.
F-31
<PAGE> 82
CHICAGO TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) TREASURY STOCK
In March 1999, the Company's Board of Directors authorized the repurchase
of up to five percent of its currently outstanding shares. Such purchases will
be made on the open market or in privately negotiated transactions over the next
two years and in total would reach a maximum of 1.1 million shares. The timing
and amount of actual purchases will depend on market conditions and corporate
considerations. This new program is in addition to the Company's existing stock
repurchase plan, which authorizes the repurchase of up to 2.0 million shares for
various employee and director benefit plans. As of March 31, 1999, the Company
held a total of 155,771 shares in treasury.
(7) ACQUISITIONS
During the first quarter of 1999, the Company acquired the assets of, or
stock in, various companies for a total cost of $35,433. These acquisitions were
accounted for using the purchase method of accounting.
F-32
<PAGE> 83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$75,000,000
[CHICAGO TITLE LOGO]
CHICAGO TITLE CORPORATION
% SENIOR NOTES DUE 2009
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
securities offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission..... $ 20,850
Blue Sky fees and expenses.............................. 3,000
Accountants' fees and expenses.......................... 40,000
Legal fees and expenses................................. 150,000
Printing expenses....................................... 50,000
Transfer agent and registrar fees....................... 6,000
Miscellaneous........................................... 5,150
--------
Total......................................... $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chicago Title's certificate of incorporation eliminates to the fullest
extent now or hereafter permitted by Delaware law, liability of a director to
Chicago Title or its stockholders for monetary damages for any action taken, or
failure to take any action, as a director, except for liability:
(i) for any breach of the director's duty of loyalty to Chicago Title or
its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(iii) under Section 174 of the Delaware General Corporate Law (the "DGCL"),
relating to prohibited dividends, distributions and repurchases or
redemptions of stock; or
(iv) for any transaction for which the director derives an improper
personal benefit (the "Exculpatory Provision").
The Exculpatory Provision is intended to afford directors additional
protection from, and limit their potential liability for, suits alleging a
breach of duty by a director. Chicago Title believes this provision will assist
it in maintaining and securing the services of directors who are not employees
of Chicago Title. As a result of the inclusion of the Exculpatory Provision,
stockholders may be unable to recover monetary damages from directors for
actions taken by them that constitute negligence or gross negligence or that are
in violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions, such as an
injunction or rescission based on a director's breach of the duty of care; as a
practical matter, equitable remedies may not be available (e.g., after a
transaction has already been effected). If equitable remedies are found not to
be available to stockholders for any particular case, stockholders may not have
any effective remedy against the challenged conduct.
Section 145 of the DGCL ("Section 145") permits indemnification of
directors, officers, agents and controlling persons of a corporation under
certain conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer or agent of the corporation or
another enterprise if serving at the request of the corporation. Depending on
the character of the proceeding, a corporation may indemnify against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner such
person reasonably believed to be in or not opposed to, the best interests of the
corporation, and, with respect to any criminal
II-1
<PAGE> 85
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful. In the case of an action by or in the right of Chicago Title, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of Chicago Title has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Our certificate of incorporation contains provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by
Section 145 and Delaware law which, in general, presently requires that the
individual act in good faith and in a manner he or she reasonably believed to be
in or not opposed to Chicago Title's best interests and, in the case of any
criminal proceedings, that the individual has no reasonable cause to believe his
or her conduct was unlawful. Our certificate of incorporation also permits
Chicago Title to purchase insurance and Chicago Title has purchased and
maintains insurance on behalf of Chicago Title directors, officers, employees
and agents against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not Chicago Title would have the power to indemnify such person
against such liability under the foregoing provisions of the certificate of
incorporation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
1(a) -- Form of Underwriting Agreement.*
4(a) -- Form of Indenture between Chicago Title Corporation and
LaSalle Bank National Association, as trustee.*
4(b) -- Form of Senior Note due 2009.*
5 -- Opinion of Dewey Ballantine LLP.*
12(a) -- Statements re: Computation of Ratio of Earnings to Fixed
Charges.
23(a) -- Consent of KPMG LLP, independent auditors.
23(b) -- Consent of Dewey Ballantine LLP (included in Exhibit 5).*
24 -- Power of Attorney (included on page II-4).
25(a) -- Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939 of the Trustee.*
</TABLE>
- ---------------
* To be filed by amendment.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The required schedules are incorporated herein by reference to our Annual
Report on Form 10-K for the year ended December 31, 1998.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the
II-2
<PAGE> 86
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on June 1 , 1999.
CHICAGO TITLE CORPORATION
By: /s/ JOHN RAU
------------------------------------
John Rau
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Rau and Paul T. Sands, Jr., and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) and supplements to this Registration Statement or any prospectus
included herein, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ NORMAN R BOBINS Director June 1, 1999
- ---------------------------------------------
Norman R Bobins
/s/ JOHN J. BURNS, JR. Director June 1, 1999
- ---------------------------------------------
John J. Burns, Jr.
/s/ PETER H. DAILEY Director June 1, 1999
- ---------------------------------------------
Peter H. Dailey
/s/ JOHN F. FARRELL, JR. Director June 1, 1999
- ---------------------------------------------
John F. Farrell, Jr.
/s/ ROBERT M. HART Director June 1, 1999
- ---------------------------------------------
Robert M. Hart
/s/ PHILIP G. HEASLEY Director June 1, 1999
- ---------------------------------------------
Philip G. Heasley
/s/ ALLAN P. KIRBY, JR. Director June 1, 1999
- ---------------------------------------------
Allan P. Kirby, Jr.
</TABLE>
II-4
<PAGE> 88
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ M. LEANNE LACHMAN Director June 1, 1999
- ---------------------------------------------
M. Leanne Lachman
/s/ WILLIAM K. LAVIN Director June 1, 1999
- ---------------------------------------------
William K. Lavin
/s/ PETER G. LEEMPUTTE Executive Vice President, Chief June 1, 1999
- --------------------------------------------- Administrative Officer and
Peter G. Leemputte Chief Financial Officer
(principal financial officer)
/s/ LAWRENCE F. LEVY Director June 1, 1999
- ---------------------------------------------
Lawrence F. Levy
/s/ MARGARET P. MACKIMM Director June 1, 1999
- ---------------------------------------------
Margaret P. MacKimm
/s/ LANGDON D. NEAL Director June 1, 1999
- ---------------------------------------------
Langdon D. Neal
/s/ ALAN N. PRINCE Director June 1, 1999
- ---------------------------------------------
Alan N. Prince
/s/ JOHN RAU President, Chief Executive June 1, 1999
- --------------------------------------------- Officer and Director (principal
John Rau executive officer)
/s/ RICHARD P. TOFT Chairman of the Board June 1, 1999
- ---------------------------------------------
Richard P. Toft
/s/ BRYAN R. WILLIS Vice President and Corporate June 1, 1999
- --------------------------------------------- Controller (principal
Bryan R. Willis accounting officer)
</TABLE>
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
<S> <C> <C>
1(a) -- Form of Underwriting Agreement.*............................
4(a) -- Form of Indenture between Chicago Title Corporation and
LaSalle Bank National Association, as trustee.*.............
4(b) -- Form of Senior Note due 2009.*..............................
5 -- Opinion of Dewey Ballantine LLP.*...........................
12(a) -- Statements re: Computation of Ratio of Earnings to Fixed
Charges.....................................................
23(a) -- Consent of KPMG LLP, independent public accountants.........
23(b) -- Consent of Dewey Ballantine LLP (included in Exhibit 5).*...
24 -- Power of Attorney (included on page II-4)...................
25(a) -- Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939 of the Trustee.*............
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 12(A)
Ratio of Earnings to Fixed Charges:
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
3/31/99 3/31/99 3/31/98 12/31/98 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
------- ------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense 2,182 1,079 1,295 8,441 4,707 4,644 5,566 6,456 6,859
Rent expense* 5,448 5,448 4,592 20,410 20,410 18,849 19,768 20,732 20,033
------ ------ ------ ------ ------- ------- ------ ------ ------
Total 7,630 6,527 5,887 28,851 25,117 23,493 25,334 27,188 26,892
Net income from continuing
operations b/f taxes 35,140 35,140 32,040 141,705 141,705 83,603 69,693 36,823 58,990
Add back fixed charges 7,630 6,527 5,887 28,850 25,117 23,493 25,334 27,188 26,892
------ ------ ------ ------ ------- ------- ------ ------ ------
Total 42,770 41,667 37,927 170,556 166,822 107,096 95,027 64,011 85,882
Ratio 5.6x 6.4x 6.4x 5.9x 6.6x 4.6x 3.8x 2.4x 3.2x
</TABLE>
- ------------
* Calculated by multiplying rent expense from operating leases by 33 percent.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Chicago Title Corporation:
We consent to the use of our reports dated February 5, 1999, included herein or
incorporated herein by reference, on the consolidated financial statements and
financial statement schedules of Chicago Title Corporation and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Chicago, Illinois
May 28, 1999
