UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 0-11774
INVESTORS TITLE COMPANY
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1110199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 NORTH COLUMBIA STREET, CHAPEL HILL, NORTH CAROLINA 27514
(Address of principal executive offices)
Registrant's telephone number, including area code: (919) 968-2200
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE NONE
(Title of each class) (Name of the exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. Yes X No
On February 24, 2000 the aggregate market value of the voting and nonvoting
common equity held by nonaffiliates of the registrant was $24,627,777.
On February 24, 2000 the number of common shares outstanding was 2,620,667.
<TABLE>
<CAPTION>
DOCUMENTS INCORPORATED BY REFERENCE
<S> <C>
Documents Form 10-K Reference
--------- -------------------
Portions of Annual Report to Shareholders Part I, Items 1 and 2
for fiscal year ended December 31, 1999 Part II, Items 5 - 8
Part IV, Item 14
Portions of Proxy Statement (in connection with Annual Meeting Part III, Items 10 - 13
to be held on May 9, 2000)
Location of Exhibit Index: The Index to Exhibits is contained in Part IV herein on page 13.
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
General
- -------
Investors Title Company ("the Company") is a holding company which was
incorporated in the State of North Carolina on February 13, 1973. The Company
became operational June 24, 1976 when it acquired as a wholly-owned subsidiary
Investors Title Insurance Company, a North Carolina corporation ("ITIC"), under
a plan of exchange of shares of common stock. On September 30, 1983, the Company
acquired as a wholly-owned subsidiary Northeast Investors Title Insurance
Company ("NE-ITIC"), formerly Investors Title Insurance Company of South
Carolina, a South Carolina corporation, under a plan of exchange of shares of
common stock. The Company's executive offices are at 121 North Columbia Street,
Chapel Hill, North Carolina 27514. The Company's telephone number is (919)
968-2200.
Through its two wholly-owned title insurance subsidiaries, ITIC and
NE-ITIC, the Company underwrites land title insurance for owners and mortgagees
as a primary insurer and as a reinsurer for other title insurance companies.
ITIC was incorporated in the State of North Carolina on January 28,
1972, and became licensed to write title insurance in the State of North
Carolina on February 1, 1972. Since that date it has primarily written land
title insurance as a primary insurer and as a reinsurer in the States of North
Carolina and South Carolina. ITIC is the leading title insurer of North Carolina
property and has held this position for sixteen years. In addition, the Company
currently writes title insurance through issuing agents or branch offices in the
States of Alabama, Georgia, Indiana, Kentucky, Maryland, Michigan, Minnesota,
Mississippi, Nebraska, Pennsylvania, Tennessee, Virginia, West Virginia and
Wisconsin. Agents issue policies for ITIC and may also perform other services
such as acting as escrow agents.
ITIC is also licensed to write title insurance in the District of
Columbia and the States of Arizona, Arkansas, Colorado, Connecticut, Delaware,
Florida, Idaho, Illinois, Kansas, Louisiana, Massachusetts, Missouri, Montana,
Nevada, New Jersey, North Dakota, Ohio, Oklahoma, Rhode Island, Texas, Utah,
Vermont and Wyoming.
NE-ITIC was incorporated in the State of South Carolina on February 23,
1973, and became licensed to write title insurance in that State on November 1,
1973. It also currently writes title insurance as a primary insurer and as a
reinsurer in the State of New York.
Title insurance guarantees owners, mortgagees, and others with a lawful
interest in real property against loss by reason of encumbrances and defective
title to such property. The commitments and policies issued are the standard
American Land Title Association approved forms. Title insurance policies do not
insure against future risks. Most other types of insurance protect against
losses and events in the future.
In the State of North Carolina, title insurance commitments and
policies are issued by the home office and branch offices. ITIC has 28 branch
offices in North Carolina.
2
<PAGE>
In the ordinary course of business, ITIC and NE-ITIC reinsure certain
risks with other title insurers for the purpose of limiting their exposure and
also assume reinsurance for certain risks of other title insurers for which they
receive additional income. For the last three years, reinsurance activities
accounted for less than 1% of total premium volume.
ITIC currently assumes primary risks up to $1,500,000, reinsures the
next $250,000 of risk with NE-ITIC, and all risks above $1,750,000 are then
reinsured with a non-related reinsurer.
NE-ITIC currently assumes primary risks up to $250,000, reinsures the
next $1,500,000 of risk with ITIC, and reinsures all amounts above $1,750,000
with a non-related reinsurer.
Both ITIC and NE-ITIC have self-imposed risk retention limits that are
more conservative than state insurance regulations require. ITIC's self-imposed
retention of $1,500,000 is only 15.53% of its statutorily permitted retention of
$9,660,161. NE-ITIC's self-imposed retention of $250,000 is only 21.61% of its
statutorily permitted retention of $1,156,657.
ITIC's financial stability has been recognized by two Fannie Mae
approved actuarial firms with rating categories of "A Double Prime - unsurpassed
financial stability" and "A - strong overall financial condition."
NE-ITIC's financial stability has been recognized by two Fannie Mae
approved actuarial firms with rating categories of "A Prime - unsurpassed
financial stability" and "A - strong overall financial condition."
In 1988, the Company established Investors Title Exchange Corporation,
a wholly-owned subsidiary ("ITEC"), to provide services in connection with
tax-free exchanges of like-kind property. ITEC acts as an intermediary in
tax-free exchanges of property held for productive use in a trade or business or
for investments, and its income is derived from fees for handling exchange
transactions.
Operations of Subsidiaries
- --------------------------
ITIC offers primary title insurance coverage to owners and mortgagees
of real estate and reinsurance of title insurance risks to other title insurance
companies. Title insurance premiums written are for a one-time initial payment,
with no recurring premiums. Schedule A summarizes the net premiums written
during the years 1997 through 1999 by this subsidiary.
3
<PAGE>
NE-ITIC offers primary title insurance coverage to owners and
mortgagees of real estate and reinsurance of title insurance risks to other
title insurance companies. Title insurance premiums written are for a one-time
initial payment with no recurring premiums. Schedule A summarizes the net
premiums written during the years 1997 through 1999 by this subsidiary.
For a description of Net Premiums Written geographically, refer to the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the 1999 Annual Report to Shareholders incorporated by reference
in this Form 10-K Annual Report.
Seasonality
- -----------
Title insurance premiums are closely related to the level of real
estate activity and the average price of real estate sales. The availability of
funds to finance purchases directly affects real estate sales. Other factors
include consumer confidence, economic conditions, supply and demand, mortgage
interest rates and family income levels. Historically, the first quarter has the
least real estate activity, while the remaining quarters are more active.
Fluctuations in mortgage interest rates can cause shifts in real estate activity
outside of the normal seasonal pattern.
Marketing
- ---------
ITIC's current and future marketing plan is based upon providing fast
and efficient service in the delivery of title insurance coverage through a home
office, branch offices, and issuing agents. In North Carolina, ITIC operates
through a home office and 28 branch offices. In South Carolina, ITIC operates
through a branch office and issuing agents located conveniently to customers
throughout the State. ITIC also writes title insurance policies through issuing
agents in Alabama, Georgia, Indiana, Kentucky, Maryland, Michigan, Minnesota,
Mississippi, Nebraska, Pennsylvania, Tennessee, Virginia, West Virginia and
Wisconsin.
NE-ITIC currently operates through an agency office in the State of
New York.
ITIC and NE-ITIC strive to provide superior service to their customers
and consider this an important factor in attracting and retaining customers.
Branch and corporate personnel strive to develop new business relationships to
increase market share. The Company's marketing efforts are also enhanced through
advertising.
Customers
- ---------
The Company is not dependent upon any single customer, the loss of
which could have a material effect on the Company.
4
<PAGE>
SCHEDULE A
INVESTORS TITLE INSURANCE COMPANY
NET PREMIUMS WRITTEN
For The Years Ended December 31
1999 1998 1997
$43,276,169 $44,870,338 $29,434,155
=========== =========== ===========
NORTHEAST INVESTORS TITLE INSURANCE COMPANY
NET PREMIUMS WRITTEN
For The Years Ended December 31
1999 1998 1997
$543,396 $509,358 $441,195
======== ======== ========
5
<PAGE>
Reserves
- --------
The reserves for claims for financial reporting purposes are
established based on criteria discussed in Notes 1 and 6 to the Financial
Statements incorporated by reference in this Form 10-K Annual Report.
Regulations
- -----------
Title insurance companies are extensively regulated under applicable
state laws. The regulatory authorities possess broad powers with respect to the
licensing of title insurers and agents, rates, investments, policy forms,
financial reporting, reserve requirements, dividend restrictions as well as
examinations and audits of title insurers. The Company's two insurance
subsidiaries are subject to examination at any time by the insurance regulators
in the states where they are licensed.
ITIC is domiciled in North Carolina and subject to North Carolina state
insurance regulations. Financial examinations are scheduled every five years by
the North Carolina Department of Insurance. ITIC was last examined by the North
Carolina Department of Insurance commencing on May 15, 1995 for the period
January 1, 1992 through December 31, 1994 with no material deficiencies noted.
NE-ITIC is domiciled in South Carolina and subject to South Carolina
state insurance regulations. Financial examinations are scheduled periodically
by the South Carolina Department of Insurance. NE-ITIC was last examined by the
South Carolina Department of Insurance commencing on June 22, 1998 for the
period January 1, 1994 through December 31, 1997 with no material deficiencies
noted.
In addition to financial examinations, both ITIC and NE-ITIC are
subject to market conduct examinations. These audits examine domiciled state
activity. ITIC's last market conduct examination commenced on April 19, 1999 for
the period January 1, 1996 through December 31, 1998 with no material
deficiencies noted. NE-ITIC's last market conduct examination coincided with the
financial examination, which commenced on June 22, 1998 for the period January
1, 1994 through December 31, 1997. No material deficiencies were noted for
NE-ITIC by the market conduct examiners.
In accordance with the insurance laws and regulations applicable to
title insurance in the State of North Carolina, ITIC has established and
maintains a statutory premium reserve for the protection of policyholders. For
years prior to 1999, ITIC reserved an amount equal to 10% of current year
premiums written and reduced such amounts annually by 5%. For years after 1998,
10% of direct premiums written plus premiums for reinsurance assumed less
premiums for reinsurance ceded is reserved and reduced annually, over a period
of 20 years, as follows: 20% the first year, 10% the second and third year, 5%
the for years four through ten, 3% for years eleven through fifteen, and 2% for
years sixteen through twenty.
6
<PAGE>
NE-ITIC has established and maintains a statutory premium reserve as
required by the insurance laws and regulations of the State of New York. A $1.50
for each risk assumed under a policy or commitment plus one-eightieth of one
percent of the face amount of each commitment or policy, reduced by that portion
of the reserve established 15 years earlier are accumulated in a statutory
premium reserve for years up to 1985. In subsequent years, the addition to the
reserve is calculated in the same manner but is reduced annually by 5%.
These statutory premium reserve additions are not charged to operations
for financial reporting purposes and changes in the statutory premium reserve
have no effect on net income of the Company or its subsidiaries for financial
reporting purposes.
The Company is an insurance holding company, and is also subject to
regulation in the states in which its insurance subsidiaries do business. These
regulations, among other things, require insurance holding companies to register
and file certain reports and require prior regulatory approval of intercorporate
transfers including, in some instances, the payment of shareholders' dividends
by the insurance subsidiaries. All states set requirements for admission to do
business, including minimum levels of capital and surplus. State insurance
departments have broad administrative powers and monitor the stability and
service of insurance companies.
In addition to the financial statements which are required to be filed
as part of this report and are prepared on the basis of generally accepted
accounting principles, the Company's insurance subsidiaries also prepare
financial statements in accordance with statutory accounting principles
prescribed or permitted by state regulations. Based upon the latter principles,
as of December 31, 1999, ITIC reported $24,150,403 of capital and surplus, and
net income of $4,566,498; and NE-ITIC reported $2,313,314 of capital and
surplus, and net income of $36,844.
ITIC and NE-ITIC both meet the minimum capital and surplus requirements
of the states in which they are licensed.
Competition
- -----------
ITIC currently operates primarily in Michigan, North Carolina, South
Carolina and Virginia. ITIC's major competitors are Chicago Title Insurance
Company, Commonwealth Land Title Insurance Company, Fidelity National Title
Insurance Company, First American Title Insurance Company, Lawyers Title
Insurance Corporation, Old Republic National Title Insurance Company and Stewart
Title Guaranty Company. Key elements that affect competition are price,
expertise, timeliness and quality of service, financial strength and size of the
insurer.
7
<PAGE>
Investments
- -----------
The Company and its subsidiaries derive a substantial portion of their
income from investments in bonds (municipal and corporate) and equity
securities. The investment policy is designed to maintain a high quality
portfolio and maximize income. Some state laws impose certain restrictions upon
the types and amounts of investments that can be made by the Company's insurance
subsidiaries.
The Company, ITIC, NE-ITIC, ITEC and SCDP had investment income as set
out in the following table for the years 1995 through 1999:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Company $103,349 $ 76,390 $15,295 $67,162 $16,238
ITIC 1,922,272 1,612,066 1,476,807 1,161,795 1,007,255
NE-ITIC 139,088 133,975 126,426 121,007 111,939
Other 10,962 12,518 9,660 2,968 5,204
------ ------ ----- ----- -----
TOTAL $2,175,671 $1,834,949 $1,628,188 $1,352,932 $1,140,636
========== ========== ========== ========== ==========
</TABLE>
See Note 3 to the Financial Statements incorporated herein by reference
for the major categories of investments, earnings by investment categories,
scheduled maturities, amortized cost, and market values of investment
securities.
Employees
- ---------
The Company had no paid employees. NE-ITIC had two full-time paid
employees as of December 31, 1999. Officers of the Company are full-time paid
employees of ITIC, which had 202 full-time employees and 17 part-time employees
as of December 31, 1999.
Trademark
- ---------
The Company's subsidiary, ITIC, registered its logo with the U.S.
Patent-Trademark Office in February, 1987. The loss of said registration, in the
Company's opinion, would not materially affect its business.
8
<PAGE>
ITEM 2. PROPERTIES
The Company owns the office building and property located on the
corner of North Columbia and West Rosemary Streets in Chapel Hill, North
Carolina, which serves as the Company's corporate headquarters. The building
contains approximately 23,000 square feet. The Company's principal subsidiary,
ITIC, leases office space in 31 locations throughout North Carolina, South
Carolina, Michigan and Virginia. NE-ITIC leases office space in New York.
The Company also owns several parcels adjacent to the Company's
facility.
See Note 9 to the Financial Statements incorporated herein by reference
for the amounts of future minimum lease payments. Each of the office facilities
occupied by the Company and its subsidiaries are in good condition and adequate
for present operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation on a number
of claims which arise in the normal course of business, none of which, in the
opinion of management are expected to have a material adverse effect on the
Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
9
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
- ------------------------------------
The following table sets forth the executive officers of the Company as
of December 31, 1999. Each officer is appointed at the annual meeting of the
Board of Directors to serve until the next annual meeting of the board or until
his respective successor has been elected.
<TABLE>
<CAPTION>
Position with Officer Term to
Name Age Registrant Since Expire
- ---- --- ---------- ----- ------
<S> <C> <C> <C>
J. Allen Fine 65 Chairman, 1973 2000
Director and
CEO
James A. Fine, Jr. 37 President, Director 1987 2000
and Treasurer
W. Morris Fine 33 Executive Vice 1992 2000
President, Director
and Secretary
Elizabeth P. Bryan 39 Vice President 1987 2000
and Assistant Secretary
L. Dawn Martin 34 Vice President 1993 2000
and Assistant Secretary
</TABLE>
J. Allen Fine, Chief Executive Officer and Chairman of the Board of
Directors, is the father of James A. Fine, Jr., President, Director and
Treasurer of the Company, and W. Morris Fine, Executive Vice President, Director
and Secretary of the Company.
The business experience of the Executive Officers of the Company is set
forth below:
J. Allen Fine has been Chairman of the Board and Chief Executive Officer of the
Company since its incorporation. Mr. Fine also served as President of the
Company until May 1997. Mr. Fine is the father of James A. Fine, Jr., President,
Director and Treasurer of the Company, and W. Morris Fine, Executive Vice
President, Director and Secretary of the Company.
James A. Fine, Jr. was named Vice President of the Company in 1987. In 1997, Mr.
Fine was named President and Treasurer and appointed a Director of the Company.
James A. Fine, Jr. is the son of J. Allen Fine, Chairman of the Board and Chief
Executive Officer of the Company, and brother of W. Morris Fine, Executive Vice
President, Secretary and Director of the Company.
10
<PAGE>
W. Morris Fine joined the Company in July, 1992, and was subsequently named Vice
President of the Company. In 1993, Mr. Fine was named Treasurer of the Company
and served in that capacity until 1997. In 1997, Mr. Fine was named Executive
Vice President and Secretary of the Company. In 1999, Mr. Fine was elected
Director of the Company. Morris Fine is the son of J. Allen Fine, Chairman of
the Board and Chief Executive Officer of the Company, and brother of James A.
Fine, Jr., President, Treasurer and Director of the Company.
Elizabeth P. Bryan joined the Company in 1985 as Controller and in 1987, she was
named Vice President of the Company.
L. Dawn Martin joined the Company in February, 1991 and in 1993, she was named
Vice President of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The high and low sales prices for the common stock on NASDAQ and the
dividends paid per common share for each quarter in the last two fiscal years
are indicated under "Shareholder Information" in the 1999 Annual Report to
Shareholders and are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 1999
is in the 1999 Annual Report to Shareholders under the caption "Financial
Highlights" and is incorporated herein by reference. The information should be
read in conjunction with the Financial Statements and Notes and the Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are in the 1999 Annual Report to Shareholders and are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations in the 1999 Annual Report to Shareholders is incorporated herein
by reference.
11
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management's Discussion and Analysis of Quantitative and Qualitative
Disclosures about Market Risk in the 1999 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data in the 1999 Annual
Report to Shareholders are incorporated herein by reference.
The financial statement schedules meeting the requirements of
Regulation S-X are shown as Schedules I, II, III, IV and V included on pages 19
through 26.
The supplementary financial information (Selected Quarterly Financial
Data) in the 1999 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in, nor disagreements with, accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
- ---------------------------
Information pertaining to Directors of the Company under the heading
"Election of Directors" in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 9, 2000 is incorporated herein
by reference. Other information with respect to executive officers is contained
in Part I - Item 4(a) under the caption "Executive Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation under the heading
"Executive Compensation" in the Company's definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 9, 2000 is incorporated
herein by reference.
12
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to securities ownership of certain beneficial
owners and management under the heading "Ownership of Stock by Executive
Officers and Certain Beneficial Owners" in the Company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 9,
2000 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions under the heading "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 9, 2000 is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements in the 1999 Annual Report to
Shareholders are hereby incorporated by reference:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
13
<PAGE>
2. Financial Statement Schedules
- --------------------------------
The following is a list of financial statement schedules and the Auditors'
Report on such schedules filed as part of this report on Form 10-K:
Investors Title Company and Subsidiaries:
Independent Auditors' Report on Financial Statement Schedules
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Schedule Number Description
- --------------- -----------
I Summary of Investments - Other Than Investments
in Related Parties
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted, as the required information is not applicable
or required, or the information is presented in the consolidated financial
statements or the notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporation by
Number Description Reference to
- ------ ----------- ------------
<S> <C> <C>
(3)(i) Articles of Incorporation Exhibit 1 to Form 10,
dated June 12, 1984
(3)(ii) Bylaws Exhibit 2 to Form 10,
dated June 12, 1984
(3)(iii) Amendment to Bylaws adopted Exhibit 3(iii) to Form
March 10, 1997 10-K, page 27, dated
December 31, 1996
Management contract of compensatory plan or arrangement
(Exhibits (10)(i) - (10)(xi))
(10)(i) 1988 Incentive Stock Option Plan Exhibit 10 to Form
10-K, page 31, dated
December 31, 1989
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporation by
Number Description Reference to
- ------ ----------- ------------
<S> <C> <C>
(10)(ii) 1993 Incentive Stock Option Plan Exhibit 10 to Form
10-K, page 32, dated
December 31, 1993
(10)(iii) 1993 Incentive Stock Option Plan- Exhibit 10 to Form
W. Morris Fine 10-K, page 33, dated
December 31, 1993
(10)(iv) Employment Agreement dated Exhibit 10 to Form
February 9, 1984 with 10-K, page 14, dated
J. Allen Fine, Chairman December 31, 1985
(10)(v) Form of Incentive Stock Option Exhibit 10(v) to Form
Agreement under 1993 Incentive 10-K, page 29, dated
Stock Option Plans December 31, 1994
(10)(vi) Form of Amendment dated Exhibit 10(vi) to Form
November 8, 1994 to Stock Option 10-Q, page 11, dated
Agreement dated as of November 13, 1989 March 31, 1995
(10)(vii) Form of Stock Option Agreement Exhibit 10(vii) to Form
dated November 13, 1989 10-Q, page 13, dated
March 31, 1995
(10)(viii) 1997 Stock Option and Restricted Exhibit 10(viii) to Form
Stock Plan 10-K, page 29, dated
December 31, 1996
(10)(ix) Form of Nonqualified Stock Option Exhibit 10(ix) to Form
Agreement to Non-employee Directors 10-Q, page 13, dated dated
May 13, 1997 under the 1997 June 30, 1997
Stock Option and Restricted Stock Plan
(10)(x) Form of Nonqualified Stock Option Exhibit 10(x) to Form
Agreement under 1997 Stock Option 10-K, page 27, dated
and Restricted Stock Plan December 31, 1997
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporation by
Number Description Reference to
- ------ ----------- ------------
<S> <C> <C>
(10)(xi) Form of Incentive Stock Option Exhibit 10(xi) to Form
Agreement under 1997 Stock Option 10-K, page 34, dated and
Restricted Stock Plan December 31, 1997
(13) Portions of 1999 Annual Included herewith
Report to Shareholders
incorporated by reference
in this report as set forth
in Parts I and II hereof.
(21) Subsidiaries of Registrant Page 27 of this report
(27) Financial Data Schedule - 1999 Included herewith
(B) Reports on Form 8-K
No reports were filed on Form 8-K for the fourth quarter.
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INVESTORS TITLE COMPANY
By: /s/J. Allen Fine
--------------------
J. Allen Fine
Chairman and Chief Executive Officer
Date: March 29, 2000
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the 29th day of March, 2000.
/s/J. Allen Fine /s/William J. Kennedy III
- ------------------------------------ ---------------------------------
J. Allen Fine, Chairman and Chief William J. Kennedy III, Director
Executive Officer
/s/James A. Fine, Jr. /s/H. Joe King, Jr.
- ------------------------------------ ---------------------------------
James A. Fine, Jr., President, Treasurer and H. Joe King, Jr., Director
Director (Principal Financial Officer)
/s/Elizabeth P. Bryan /s/James R. Morton
- ------------------------------------ ---------------------------------
Elizabeth P. Bryan, Vice President and Asst. James R. Morton, Director
Secretary (Principal Accounting Officer)
/s/W. Morris Fine /s/Lillard H. Mount
- ------------------------------------ ---------------------------------
W. Morris Fine, Director Lillard H. Mount
/s/David L. Francis /s/A. Scott Parker III
- ------------------------------------ ---------------------------------
David L. Francis, Director A. Scott Parker III, Director
/s/Loren B. Harrell, Jr.
- -------------------------------------
Loren B. Harrell, Jr., Director
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Investors Title Company:
We have audited the consolidated financial statements of Investors Title Company
(the "Company") and its subsidiaries as of December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, and have issued
our report thereon dated February 9, 2000; such consolidated financial
statements and report are included in the 1999 Annual Report to Shareholders and
are incorporated herein by reference. Our audits also included the consolidated
financial statement schedules of the Company, listed in Item 14. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
February 9, 2000
18
<PAGE>
SCHEDULE I
----------
INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Amount at
which shown
in the
Type of Investment Cost(1) Market Value Balance Sheet (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
<S> <C> <C> <C>
States, municipalities and political
subdivisions $26,071,853 $25,342,460 $25,461,343
Public utilities 199,159 196,564 196,564
All other corporate bonds 4,825,757 4,740,900 4,740,900
Certificates of deposit 98,982 98,982 98,982
--------------------- -------------------- ---------------------
Total fixed maturities 31,195,751 30,378,906 30,497,789
--------------------- -------------------- ---------------------
Equity Securities:
Common Stocks:
Public utilities 385,394 639,244 639,244
Banks, trust and insurance companies 317,190 998,325 998,325
Industrial, miscellaneous and all other 1,249,804 2,853,746 2,853,746
Nonredeemable preferred stocks 558,117 520,944 520,944
--------------------- -------------------- ---------------------
Total equity securities 2,510,505 5,012,259 5,012,259
--------------------- -------------------- ---------------------
Total investments per the consolidated balance sheet 33,706,256 35,510,048
--------------------- ---------------------
Cash equivalents 7,200,644 7,200,644
--------------------- ---------------------
Total investments $40,906,900 $42,710,692
===================== =====================
</TABLE>
(1) Fixed maturities are shown at amortized cost and equity securities are shown
at original cost.
(2) Bonds of states, municipalities and political subdivisions are shown at
amortized cost for held-to-maturity bonds and fair value for
available-for-sale bonds.
19
<PAGE>
SCHEDULE II
-----------
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Assets
Cash and cash equivalents $ 579,058 $ 208,315
Investments in equity securities 75,000 75,000
Investments in affiliated companies 35,013,379 31,421,749
Income taxes receivable 847,084 1,171,548
Other receivables 103,011 94,133
Deferred income taxes 37,527 110,025
Prepaid expenses and other assets 20,197 2,423
Property, net 2,251,883 1,737,491
-------------------- --------------------
Total Assets $ 38,927,139 $ 34,820,684
==================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities $ 148,576 $ 119,826
-------------------- --------------------
Stockholders' Equity:
Common stock-no par (shares authorized,
6,000,000; 2,855,744 and 2,855,744 shares issued and
2,736,961 and 2,809,123 shares outstanding 1999 and
1998, respectively) 1,650,350 1,650,350
Retained earnings 37,128,213 33,050,508
-----------------------------------------------
Total stockholders' equity 38,778,563 34,700,858
-----------------------------------------------
Total Liabilities and Stockholders' Equity $ 38,927,139 $ 34,820,684
===============================================
</TABLE>
See notes to condensed financial statements.
20
<PAGE>
SCHEDULE II
-----------
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Revenues:
Investment income-interest and dividends $ 103,349 $ 76,390 $ 15,295
Rental income 445,440 435,821 362,889
Miscellaneous income 70 23,014 -
---------------------- ---------------------- ----------------------
Total 548,859 535,225 378,184
---------------------- ---------------------- ----------------------
Operating Expenses:
Office occupancy and operations 161,061 138,475 133,283
Business development 13,886 13,234 10,927
Taxes-other than payroll and income 46,117 48,569 30,499
Professional fees 30,398 22,269 43,516
Other expenses 44,599 105,857 184,492
---------------------- ---------------------- ----------------------
Total 296,061 328,404 402,717
---------------------- ---------------------- ----------------------
Equity in Net Income of Affiliated Cos.* 4,241,630 5,311,677 4,536,715
---------------------- ---------------------- ----------------------
Income Before Income Taxes 4,494,428 5,518,498 4,512,182
---------------------- ---------------------- ----------------------
Provision (Benefit) for Income Taxes 74,034 58,989 (18,200)
---------------------- ---------------------- ----------------------
Net Income $ 4,420,394 $ 5,459,509 $ 4,530,382
====================== ====================== ======================
Basic Earnings per Common Share $ 1.59 $ 1.95 $ 1.63
====================== ====================== ======================
Weighted Average Shares Outstanding-Basic 2,776,878 2,806,267 2,782,449
====================== ====================== ======================
Diluted Earnings Per Common Share $ 1.59 $ 1.92 $ 1.60
====================== ====================== ======================
Weighted Average Shares Outstanding-Diluted 2,786,282 2,841,035 $ 2,826,730
====================== ====================== ======================
</TABLE>
* Eliminated in consolidation
See notes to condensed financial statements.
21
<PAGE>
SCHEDULE II
-----------
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Operating Activities:
Net income $ 4,420,394 $ 5,459,509
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net earnings of subsidiaries less dividends received
of $700,000, $575,000 and $595,000 in 1999, 1998 and 1997,
respectively, plus $50,000 investment in subsidiary in 1999 (3,591,630) (4,736,677)
Gain on disposal of property - (20,475)
Depreciation 60,608 57,573
Provision (benefit) for deferred income taxes 72,498 (15,454)
(Increase) decrease in receivables (8,878) 21,906
(Increase) decrease in income taxes receivable-current 324,464 (779,017)
(Increase) decrease in prepaid expenses (17,774) 66,222
Increase (decrease) in accounts payable and accrued liabilities 28,750 (29,068)
------------------- ---------------------
Net cash provided by operating activities 1,288,432 24,519
------------------- ---------------------
Investing Activities:
Proceeds from sales of securities - -
Purchase of land (325,000) -
Purchases of furniture and equipment and building (250,000) (31,555)
Proceeds from the disposal of property - 22,475
------------------- ---------------------
Net cash used in investing activities (575,000) (9,080)
------------------- ---------------------
Financing Activities:
Dividends paid (342,689) (342,689)
------------------- ---------------------
Net cash used in financing activities (342,689) (342,689)
------------------- ---------------------
Net Increase (Decrease) in Cash and Cash Equivalents 370,743 (327,250)
Cash and Cash Equivalents, Beginning of Year 208,315 535,565
------------------- ---------------------
Cash and Cash Equivalents, End of Year $ 579,058 $ 208,315
=================== =====================
Supplemental Disclosures:
Cash Paid (Refunded) During the Year For:
Income Taxes $ (308,503) $ 853,460
=================== =====================
<CAPTION>
Operating Activities: <C>
Net income 1997
Adjustments to reconcile net income to net cash provided
by operating activities: $ 4,530,382
Equity in net earnings of subsidiaries less dividends received
of $700,000, $575,000 and $595,000 in 1999, 1998 and 1997,
respectively, plus $50,000 investment in subsidiary in 1999 (3,941,715)
Gain on disposal of property -
Depreciation 62,362
Provision (benefit) for deferred income taxes (68,883)
(Increase) decrease in receivables (70,806)
(Increase) decrease in income taxes receivable-current 70,914
(Increase) decrease in prepaid expenses 149,477
Increase (decrease) in accounts payable and accrued liabilities 27,967
----------------------
Net cash provided by operating activities 759,698
----------------------
Investing Activities:
Proceeds from sales of securities 15,000
Purchase of land -
Purchases of furniture and equipment and building (36,112)
Proceeds from the disposal of property -
----------------------
Net cash used in investing activities (21,112)
----------------------
Financing Activities:
Dividends paid (342,689)
----------------------
Net cash used in financing activities (342,689)
----------------------
Net Increase (Decrease) in Cash and Cash Equivalents 395,897
Cash and Cash Equivalents, Beginning of Year 139,668
----------------------
Cash and Cash Equivalents, End of Year $ 535,565
======================
Supplemental Disclosures:
Cash Paid (Refunded) During the Year For:
Income Taxes $ (20,231)
======================
</TABLE>
See notes to condensed financial statements.
22
<PAGE>
SCHEDULE II
-----------
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMAITON OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto of Investors Title Company and Subsidiaries.
2. Cash dividends paid to Investors Title Company by its wholly-owned
subsidiary, Investors Title Insurance Company, were $350,000, $350,000
and $350,000 in 1999, 1998 and 1997, respectively. Cash dividends paid
to Investors Title Company by its wholly-owned subsidiary, Investors
Title Exchange Corporation, were $350,000, $225,000 and $245,000 in
1999, 1998 and 1997, respectively.
23
<PAGE>
SCHEDULE III
------------
INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Future
Policy Other
Benefits, Policy Benefits
Deferred Losses, Claims Claims,
Policy Claims and Net Net Losses and
Acquisition and Loss Unearned Benefits Premium Investment Settlement
Segment Cost Expenses Premiums Payable Revenue Income Expenses
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1999
- -----------------
Title --- $15,864,665 --- $208,605 $43,819,565 $2,175,671 $6,026,064
Year Ended
December 31, 1998
- -----------------
Title --- $13,362,665 --- $ 84,598 $45,379,696 $1,834,949 $8,094,950
Year Ended
December 31, 1997
- -----------------
Title --- $ 7,622,140 --- $ 96,241 $29,875,350 $1,628,188 $4,679,333
<CAPTION>
- -----------------------------------------------------------
Amortization
of Deferred
Policy Other
Acquisition Operating Premiums
Segment Costs Expenses Written
- -----------------------------------------------------------
<S> <C> <C> <C>
Year Ended
December 31, 1999
- -----------------
Title --- $34,879,101 N/A
Year Ended
December 31, 1998
- -----------------
Title --- $32,685,804 N/A
Year Ended
December 31, 1997
- -----------------
Title --- $21,260,381 N/A
</TABLE>
24
<PAGE>
SCHEDULE IV
-----------
INVESTORS TITLE COMPANY AND SUBSIDIARIES
REINSURANCE
For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Ceded to Assumed from Percentage of
Gross Other Other Net Amount
Amount Companies Companies Amount Assumed to Net
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1999
- -----------------
Title Insurance Premiums $44,098,045 $325,212 $46,732 $43,819,565 0.1%
YEAR ENDED
DECEMBER 31, 1998
- -----------------
Title Insurance Premiums $45,618,518 $312,627 $73,805 $45,379,696 0.2%
YEAR ENDED
DECEMBER 31, 1997
- -----------------
Title Insurance Premiums $30,058,724 $241,821 $58,447 $29,875,350 0.2%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
----------
INVESTORS TITLE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------------
Balance at Additions Additions Charged
Beginning Charged to to Other Deductions- Balance at
Description of Period Costs and Expenses Accounts - Describe describe* End of Period
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Premiums Receivable
Valuation Provision $ 775,000 $ 2,793,975 $ - $ (2,793,975) $ 775,000
Impairment of
Building Plans $ 218,122 $ - $ - $ (218,122) $ -
Reserves for
Claims $13,362,665 $ 6,026,064 $ - $ (3,524,064) $ 15,864,665
Provision for
Equipment Disposal $ 280,000 $ - $ - $ (280,000) $ -
1998
- ----
Premiums Receivable
Valuation Provision $ 350,000 $ 2,106,316 $ - $ (1,681,316) $ 775,000
Impairment of
Building Plans $ 150,000 $ 68,122 $ - $ - $ 218,122
Reserves for
Claims $ 7,622,140 $ 8,094,950 $ - $ (2,354,425) $ 13,362,665
Provision for
Equipment Disposal $ - $ 280,000 $ - $ - $ 280,000
1997
- ----
Premiums Receivable
Valuation Provision $ 200,000 $ 1,065,805 $ - $ (915,805) $ 350,000
Impairment of
Building Plans $ - $ 150,000 $ - $ - $ 150,000
Reserves for
Claims $ 5,086,065 $ 4,679,353 $ - $ (2,143,278) $ 7,622,140
</TABLE>
*Cancelled premiums
*Wrote off building plans
*Payments of claims
*Disposed of impaired equipment
26
Investors Title Company and Subsidiaries
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net premiums written $43,819,565 $45,379,696 $29,875,350 $21,111,155 $15,854,140
- -----------------------------------------------------------------------------------------------------------------------
Revenues 47,366,559 48,476,263 32,390,516 22,991,182 17,365,950
- -----------------------------------------------------------------------------------------------------------------------
Investment income 2,175,671 1,834,949 1,628,188 1,352,932 1,140,636
- -----------------------------------------------------------------------------------------------------------------------
Net income 4,420,394 5,459,509 4,530,382 3,843,537 3,250,658
- -----------------------------------------------------------------------------------------------------------------------
Per Share Data
Basic earnings per common share $ 1.59 $ 1.95 $ 1.63 $ 1.39 $ 1.16
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Basic 2,776,878 2,806,267 2,782,449 2,772,286 2,804,632
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.59 $ 1.92 $ 1.60 $ 1.37 $ 1.15
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Diluted 2,786,282 2,841,035 2,826,730 2,813,001 2,816,544
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .12 $ .12 $ .12 $ .095 $ .08
- -----------------------------------------------------------------------------------------------------------------------
At Year End
Assets $55,156,564 $51,597,812 $41,293,007 $33,642,528 $28,224,276
- -----------------------------------------------------------------------------------------------------------------------
Investments in securities 35,510,048 33,799,124 31,124,410 23,573,663 19,742,639
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 37,501,740 36,328,665 31,128,908 25,988,177 22,209,814
- -----------------------------------------------------------------------------------------------------------------------
Book value/share 13.70 12.93 11.12 9.39 7.96
- -----------------------------------------------------------------------------------------------------------------------
Performance Ratios
Net income to:
Average stockholders' equity 11.97% 16.19% 15.86% 15.95% 15.95%
- -----------------------------------------------------------------------------------------------------------------------
Total revenues (profit margin) 9.33% 11.26% 13.99% 16.72% 18.72%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
[GRAPHIC]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements and the related footnotes on pages 12-22 of this report.
Overview
Investors Title Company's (the "Company") primary business activity is
the issuance of title insurance through its two title insurance subsidiaries,
Investors Title Insurance Company ("ITIC") and Northeast Investors Title
Insurance Company ("NE-ITIC.") Factors which influence the land title business
include mortgage interest rates, the availability of mortgage funds, the level
of real estate activity, the cost of real estate, consumer confidence, the
supply and demand of real estate, inflation and general economic conditions.
During the past three years, a strong economy and a general low level
of mortgage interest rates combined to favorably impact the level of real estate
activity. These factors have contributed to record levels of new and existing
home sales and until early 1999, a surge of refinance activity. Although
refinance activity decreased in 1999 due to an upward trend in mortgage rates,
the overall level of real estate activity and mortgage lending have increased
the demand for title insurance.
According to the Mortgage Bankers Association of America, the annual
average 30-year fixed mortgage interest rates over the past three years were
reported to be 7.4%, 6.9% and 7.6% in 1999, 1998 and 1997, respectively. Housing
starts were 1.66 million, 1.62 million and 1.47 million in 1999, 1998 and 1997,
respectively. New and existing home sales were 6.1 million, 5.86 million and
5.19 million in 1999, 1998 and 1997, respectively.
In January of 1997, 30-year fixed mortgage interest rates were 7.6%,
rose to 8.14% in April, and finally began a steady decline to end up the year at
7.1%. Over the course of the year, this .5% overall decline contributed to an
increase in real estate sales.
During 1998, 30-year fixed mortgage interest rates started out at 7.1%
and ended the year at 6.74%. The overall decline in interest rates spurred an
increase in real estate sales, which was a contributing factor to the increase
of $15,504,346 in the Company's 1998 net premiums written as compared with 1997
net premiums written.
In 1999, 30-year fixed mortgage interest rates climbed steadily,
starting the year at 6.74% and ending at 7.91%. The increase in mortgage
interest rates resulted in a slowdown in mortgage originations and virtually
halted refinance activity. The higher level of interest rates and resulting drop
in referral lending contributed substantially to the decrease of $1,560,131 in
premiums written in 1999 as compared with 1998 premiums written.
Management cannot predict the future level of mortgage interest rates
nor the impact such rates will have on home sales, housing starts, mortgage
lending or other real estate activity. The Company strives to offset the
cyclical nature of the real estate market by increasing its market share. These
efforts include expanding into new markets by continuing to develop agency
relationships, as well as improving market penetration with existing offices and
agents.
Credit Rating
ITIC has been recognized by two independent Fannie Mae approved
actuarial firms with rating categories of "A Double Prime - unsurpassed
financial stability" and "A - strong overall financial condition."
NE-ITIC's financial stability has been recognized by two Fannie Mae
approved actuarial firms with the rating categories of "A Prime - unsurpassed
financial stability" and "A - strong overall financial condition."
Results of Operations
Operating Revenues
Net premiums written decreased 3% and increased 52% in 1999 and 1998,
respectively. The decline in sales in 1999 resulted primarily from increases in
mortgage interest rates. In 1999, the number of policies and commitments issued
declined to 256,272, a decrease of 9% compared with 281,251 in 1998. In 1998,
policies and commitments issued rose by 97,014 policies, an increase of 53%
compared with 184,237 in 1997.
Management believes that factors contributing to the overall growth in
the Company's premiums written since 1997 have been (1) the establishment, in
1997, of a Commercial Real Estate Transactions Department to offer assistance in
connection with commercial transactions, (2) the refinement of employee
incentives and equity based compensation to achieve revenue targets, (3) the
increased use of tax-deferred exchanges by real estate investors, (4) continued
improvements to proprietary technologies that favorably impact labor costs and
increase productivity, and (5) the establishment of a National Accounts
Department, which through an extensive network of attorneys and agents, acts as
a liaison for customers by placing title orders and providing regular follow-up
throughout the entire settlement process.
Shown below is a schedule of net premiums written for 1999, 1998 and
1997 in all states where our two insurance subsidiaries, ITIC and NE-ITIC,
currently underwrite insurance:
1999 1998 1997
--------------------------------------------
Alabama $ 1,003 $ -- $ --
Arkansas -- 17,711 --
Florida -- 75,957 95,790
Georgia 499,194 715,560 558,988
Indiana 409,630 158,194 111,131
Kentucky 4,527 252 265
Maryland 597,470 515,763 94,253
Michigan 6,760,538 9,145,165 4,796,435
Minnesota 1,693,036 1,044,599 198,728
Mississippi 22,537 37,479 29,183
Nebraska 1,135,924 791,121 572,685
New York 542,497 507,324 441,479
North Carolina 19,713,637 21,188,663 15,368,830
Pennsylvania 45,682 7,783 1,019
South Carolina 5,016,808 3,940,872 3,006,167
Tennessee 607,047 219,649 140,937
Virginia 6,143,420 7,020,000 4,642,834
West Virginia 895,745 232,426 --
Wisconsin 9,350 -- --
------------ ------------ ------------
Direct Premiums 44,098,045 45,618,518 30,058,724
Reinsurance Assumed 46,732 73,805 58,447
Reinsurance Ceded (325,212) (312,627) (241,821)
------------ ------------ ------------
Net Premiums Written $ 43,819,565 $ 45,379,696 $ 29,875,350
============ ============ ============
8
[GRAPHIC]
<PAGE>
Branch net premiums written as a percentage of total net premiums
written were 45.2%, 46.9% and 51.9% in 1999, 1998 and 1997, respectively. Net
premiums written from branch operations decreased 6.9% in 1999 compared with
1998 and increased 37.2% in 1998 compared with 1997.
Agency net premiums written as a percentage of total net premiums
written were 54.8%, 53.1% and 48.1% in 1999, 1998 and 1997, respectively. Net
premiums written from agency operations remained virtually flat in 1999 compared
with 1998. Net premiums written from agency operations increased 67.8% in 1998
compared with 1997 due to the Company's efforts to increase the distribution of
its products through an agency network.
Seasonality
Title insurance premiums are closely related to the level of real
estate activity and the average price of real estate sales. The availability of
funds to finance purchases directly affects real estate sales. Other factors
include consumer confidence, economic conditions, supply and demand, mortgage
interest rates and family income levels. Generally, the first quarter has the
least real estate activity, while the remaining quarters are more active.
Fluctuations in mortgage interest rates can cause shifts in real estate activity
outside of the normal seasonal pattern, especially as these changes relate to
refinance activity.
Investment Income
Investments are an integral part of the Company's business. In
formulating its investment strategy, the Company has emphasized after-tax
income. Investments in marketable securities have increased from funds retained
in the Company. The investments are primarily in debt securities, and to a
lesser extent, equity securities. The maturity schedule of investments has
primarily remained within 20 years.
As new funds become available, they are invested in accordance with the
Company's investment policy and corporate goals. Securities purchased may
include a combination of taxable fixed income securities, tax-exempt securities
and equities. The Company strives to maintain a high quality investment
portfolio.
Investment income increased 18.6% and 12.7% in 1999 and 1998,
respectively. These increases were primarily attributable to increases in the
average investment portfolio balances coupled with a slight rise in interest
rates in 1999.
Expenses
Profit margins were 9.33%, 11.26% and 13.99% in 1999, 1998 and 1997,
respectively. The decrease in net premiums written coupled with increases in
operating expenses (primarily salaries and employee benefits, office occupancy
and operations, business development and professional fees), contributed to the
decline in profit margin for 1999. These operating expenses increased primarily
due to investments in technology and costs associated with entering and
supporting new marketing areas. In 1998, the profit margin declined primarily
due to increased commissions paid to agents coupled with a rise in the claims
provision. Margins from agent business are typically lower than those from
branch business since agent commissions are generally higher than the operating
expenses incurred for direct business. In order to maintain and improve margins,
the Company continues to refine operating procedures to better support its
branch offices and agents and has implemented cost control programs designed to
evaluate and reduce expenses.
Commissions decreased 2% in 1999 and increased 72.9% and 74.1% in 1998
and 1997, respectively. The increases in 1998 and 1997 were due to increased
business from agent sources. Overall, commission expense as a percentage of
agent premiums written has remained relatively constant for the last three
years. Commission rates vary geographically and may be influenced by state
regulations.
The provision for claims as a percentage of net premiums written was
13.8%, 17.8% and 15.7% in 1999, 1998 and 1997, respectively. The decrease in the
1999 claims provision was due to a decrease in the reserves necessary for
policies written in years prior to 1999. The increase in the 1998 claims
provisions was primarily due to increases in claims payments and the reserves
for claims. Payments of claims, net of recoveries, were $3,524,064, $2,354,425
and $2,143,278 in 1999, 1998 and 1997.
The Company has continued to strengthen its reserves for claims. At
December 31, 1999, the total reserves for claims were $15,864,665. Of that
total, $2,494,563 was reserved for specific claims, and $13,370,102 was reserved
for claims for which the Company had no notice. Management relies on actuarial
techniques to estimate future claims by analyzing historical claim payment
patterns. Claims reserves are reviewed and certified as to their adequacy by
independent actuaries annually. There are no known claims that are expected to
have a materially adverse effect on the Company's financial position.
Salaries as a percentage of net premiums written were 17.6%, 14.1% and
15.2% in 1999, 1998 and 1997, respectively. Office occupancy and operations as a
percentage of net premiums was 9.7%, 7.1% and 8.4% in 1999, 1998 and 1997,
respectively. In 1999, the increases in salaries and office occupancy and
operations were due to investments in technology and costs associated with
entering and supporting new market areas.
Premium and retaliatory taxes decreased 2.1% in 1999 and increased
48.6% and 40.8% in 1998 and 1997, in direct proportion to the fluctuations in
premium volume.
The Company recorded a reserve of $280,000 in 1998 in order to
write-off certain electronic data processing equipment. In 1999, the liability
related to this reserve was removed and the related equipment was replaced as a
result of internal technology upgrades and Year 2000 compliance initiatives. See
discussion of Year 2000 issues in "Other Matters."
Net Income
The Company reported a decrease in net income of 19% in 1999 and an
increase in net income of 20.5% and 17.9% in 1998 and 1997, respectively. The
decrease in 1999 was due to a decrease in net premiums written of 3.4% coupled
with increases in certain operating expenses. The increases in 1998 and 1997
were primarily attributable to increased revenues and improved operating
efficiencies resulting from expense control procedures, partially offset by
increased commissions and claims expense.
Liquidity and Capital Resources
Cash flows provided by operating activities were $7,738,524, $8,887,438
and $5,233,328 in 1999, 1998 and 1997, respectively. The decrease in 1999 was
primarily the result of the decrease in net income compared with 1998.
As of December 31, 1999 and 1998, approximately $33,322,000 and
$31,219,000 respectively, of the consolidated stockholders' equity represents
net assets of the Company's subsidiaries that cannot be transferred in the form
of dividends, loans or advances to the parent company under statutory
regulations without prior insurance department approval. The parent company's
ability to pay dividends and operating expenses is dependent on funds received
from the insurance subsidiaries. These funds should be adequate to meet the
parent company's operating needs.
9
[GRAPHIC]
<PAGE>
On December 9, 1996, the Board of Directors approved the repurchase by
the Company of up to 150,000 shares of the Company's common stock from time to
time at prevailing market prices. A portion of the repurchases is to avoid
dilution to existing shareholders as a result of issuances of stock in
connection with stock options and stock bonuses. Pursuant to this approval, the
Company has repurchased 99,645 shares at an average price of $19.05 during 1999,
22,010 shares at an average purchase price of $23.60 per share during 1998, and
22,134 shares at an average purchase price of $17.10 per share during 1997. On
May 11, 1999 the Board of Directors also approved the repurchase of an
additional 200,000 shares of the Company's common stock.
During the twelve months ended December 31, 1999, the Company
repurchased common stock valued at $1,897,895 and redistributed previously
acquired common stock valued at $348,843 in satisfaction of stock option
exercises and stock bonuses under the Company's Long Term Incentive Plans. In
1999, retained earnings and common stock combined had a net increase of
$2,528,653, after repurchases and distributions reduced retained earnings and
common stock by $816,600 and $732,452, respectively.
Management believes that funds generated from operations (primarily
underwriting and investment income) will enable the Company to adequately meet
its operating needs and is unaware of any trend likely to result in adverse
liquidity changes. In addition to operational liquidity, the Company maintains a
high degree of liquidity within its investment portfolio in the form of
short-term investments and other readily marketable securities.
Other Matters
Year 2000 Issues
The Company's Year 2000 Project Committee (the "Committee") is
comprised of department heads and high-level managers representing each of the
Company's departments. Under the leadership of the Vice President of Information
Systems, the Committee worked through the Year 2000 transition to ensure that
all aspects of the Company's business and operations continued normally.
As of March 6, 2000, the Company has not experienced business
interruptions from Year 2000 issues, either internally or with its third party
business partners and vendors. Business operations continued uninterrupted
through the December 31, 1999 to January 1, 2000 transition, as well as the Leap
Year transition (from February 29, 2000 through March 1, 2000.)
The Company's efforts to complete its regular technology refresh
project helped to mitigate the possibility of Year 2000 interruptions. The
planned technology refresh kept costs directly associated to Year 2000 to
approximately $20,000. At this time, the Company does not expect to incur
additional costs directly related to its Year 2000 initiative.
Although the Company believes it has completed all phases of its Year
2000 initiative in sufficient time to identify and remedy any non-compliant
programs and systems, future failures experienced by third party vendors could
negatively impact the Company's operations.
Quantitative and Qualitative Disclosures
About Market Risk
The Company's primary exposure to market risk relates to the impact of
adverse changes in market rates and prices of its investment portfolio. Adverse
changes in interest rates diminish the value of fixed income securities and
preferred stock and decreases in stock market values diminish the value of
common stocks held.
Corporate Oversight
The Company generates substantial investable funds from its two
insurance subsidiaries. In formulating and implementing policies for investing
new and existing funds, the Company has emphasized maximizing total after-tax
return on capital and earnings while ensuring the safety of funds under
management and adequate liquidity. The Company's Board of Directors administers
and oversees investment risk management processes. The Company seeks to invest
premiums and deposits to create future cash flows that will fund future claims,
employee benefits and expenses, and earn stable margins across a wide variety of
interest rate and economic scenarios. The Board has established specific
investment policies that define the overall framework for managing market and
other investment risks, including the accountabilities and controls over these
activities. The Company may use the following tools to manage its exposure to
market risk within defined tolerance ranges: 1) rebalance its existing asset
portfolios or 2) change the character of future investments.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur economic
losses due to adverse changes in interest rates. This risk arises from the
Company's investments in interest-sensitive debt securities. These securities
are primarily fixed-rate municipal and corporate bonds. The Company does not
purchase such securities for trading purposes. At December 31, 1999, the Company
had approximately $30.4 million in fixed rate bonds. The Company manages the
interest rate risk inherent in its assets by monitoring its liquidity needs and
by targeting a specific range for the portfolio's duration or weighted average
maturity.
To determine the potential effect of interest rate risk on
interest-sensitive assets, the Company calculates the effect of a 10% change in
prevailing interest rates ("rate shock") on the fair market value of these
securities considering stated interest rates and time to maturity. Based upon
the information and assumptions the Company uses in its calculation and in
effect at December 31, 1999, management estimates that a 10% immediate, parallel
increase in prevailing interest rates would decrease the net fair market value
of its debt securities by approximately $1.3 million. The selection of a 10%
immediate parallel increase in prevailing interest rates should not be construed
as a prediction by the Company's management of future market events; but rather,
to illustrate the potential impact of such an event. To the extent that actual
results differ from the assumptions utilized, the Company's rate shock measures
could be significantly impacted. Additionally, the Company's calculation assumes
that the current relationship between short-term and long-term interest rates
(the term structure of interest rates) will remain constant over time. As a
result, these calculations may not fully capture the impact of non-parallel
changes in the term structure of interest rates and/or large changes in interest
rates.
Equity Price Risk
Equity price risk is the risk that the Company will incur economic
losses due to adverse changes in a particular stock or stock index. At December
31, 1999, the Company had approximately $5 million in common stocks. By internal
policy, the Company's maximum exposure to the equity market is limited to 20% of
the Company's statutorily admitted assets. Equity price risk is addressed in
part by varying the specific allocation of equity investments over time pursuant
to management's assessment of market and business conditions and ongoing
liquidity needs analysis. The Company's largest equity exposure is declines in
the S&P 500; its portfolio of equity instruments is similar to those that
10
[GRAPHIC]
<PAGE>
comprise this index. Based upon the information and assumptions the Company uses
in its calculation and in effect at December 31, 1999, management estimates that
an immediate decrease in the S&P 500 of 10% would decrease the net fair value of
the Company's assets identified above by approximately $500,000. The selection
of a 10% immediate decrease in the S&P 500 should not be construed as a
prediction by the Company's management of future market events; but rather, to
illustrate the potential impact of such an event. Since this calculation is
based on historical performance, projecting future price volatility using this
method involves an inherent assumption that historical volatility and
correlation relationships will remain stable. Therefore, the results noted above
may not reflect the Company's actual experience if future volatility and
correlation relationships differ from such historical relationships.
Safe Harbor Statement
Except for the historical information presented, the matters disclosed
in the foregoing discussion and analysis and other parts of this report include
forward-looking statements. These statements represent the Company's current
judgment on the future and are subject to risks and uncertainties that could
cause actual results to differ materially. Such factors include, without
limitation: (1) that the demand for title insurance will vary with factors
beyond the control of the Company such as changes in mortgage interest rates,
availability of mortgage funds, level of real estate activity, cost of real
estate, consumer confidence, supply and demand for real estate, inflation and
general economic conditions; (2) that losses from claims may be greater than
anticipated such that reserves for possible claims are inadequate; (3) that
unanticipated adverse changes in securities markets could result in material
losses on investments made by the Company; and (4) the dependence of the Company
on key management personnel the loss of whom could have a material adverse
affect on the Company's business. The Company's discussion of Year 2000 issues
under the heading "Other Matters" contains forward-looking statements that are
subject to risks and uncertainties that could cause the actual results to differ
from those projected. These include the risks associated with unidentified
technological issues associated with the Company's own Year 2000 compliance
efforts and the compliance efforts of third parties on whose systems the Company
relies. Other risks and uncertainties may be described from time to time in the
Company's other reports and filings with the Securities and Exchange Commission.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1999
Net premiums written $10,694,237 $12,384,887 $11,258,080 $ 9,482,361
- -----------------------------------------------------------------------------------------
Investment income 470,127 498,650 544,322 662,572
- -----------------------------------------------------------------------------------------
Net income 1,176,318 1,472,027 1,303,516 468,533
- -----------------------------------------------------------------------------------------
Basic earnings per common share .42 .53 .47 .17
- -----------------------------------------------------------------------------------------
Diluted earnings per common share .42 .53 .47 .17
- -----------------------------------------------------------------------------------------
1998
Net premiums written $ 9,441,848 $11,306,051 $11,678,518 $12,953,279
- -----------------------------------------------------------------------------------------
Investment income 420,286 445,491 459,947 509,225
- -----------------------------------------------------------------------------------------
Net income 1,067,621 1,375,299 1,546,940 1,469,649
- -----------------------------------------------------------------------------------------
Basic earnings per common share .38 .49 .55 .52
- -----------------------------------------------------------------------------------------
Diluted earnings per common share .38 .48 .55 .52
- -----------------------------------------------------------------------------------------
</TABLE>
11
[GRAPHIC]
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents ......................................................................... $ 7,554,297 $ 8,141,354
Investments in securities (Notes 2 and 3):
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 1999: $4,446,988;
1998: $5,515,532 ............................................................................ 4,565,871 5,287,458
Available-for-sale, at fair value (amortized cost: 1999: $26,629,880;
1998: $22,131,173) .......................................................................... 25,931,918 23,235,754
Equity securities, at fair value (cost: 1999: $2,510,505; 1998: $2,522,793) ....................... 5,012,259 5,275,912
----------- -----------
Total investments ........................................................................... 35,510,048 33,799,124
Premiums receivable (less allowance for doubtful accounts: 1999 and 1998: $775,000) ............... 3,292,001 5,357,000
Accrued interest and dividends .................................................................... 521,624 481,741
Prepaid expenses and other assets ................................................................. 930,981 410,778
Property acquired in settlement of claims ......................................................... 191,617 108,500
Property, net (Note 4) ............................................................................ 5,836,466 3,299,315
Prepaid federal income taxes ...................................................................... 705,437 --
Deferred income taxes, net (Note 8) ............................................................... 614,093 --
----------- -----------
Total Assets ......................................................................................... $55,156,564 $51,597,812
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 6) ...................................................................... $15,864,665 $13,362,665
Accounts payable and accrued liabilities .......................................................... 1,560,936 1,258,802
Commissions and reinsurance payables (Note 5) ..................................................... 208,605 84,598
Premium taxes payable ............................................................................. 20,618 277,887
Current income taxes payable ...................................................................... -- 207,350
Deferred income taxes, net (Note 8) ............................................................... -- 77,845
----------- -----------
Total liabilities .............................................................................. 17,654,824 15,269,147
----------- -----------
Commitments and Contingencies
(Notes 5, 9 and 11)
Stockholders' Equity (Notes 2, 3, 7 and 12):
Common stock-no par value (shares authorized 6,000,000; 2,855,744 and
2,855,744 shares issued; and 2,736,961 and 2,809,123 shares
outstanding 1999 and 1998, respectively) ....................................................... 1 732,453
Retained earnings.................................................................................. 36,311,613 33,050,508
Accumulated other comprehensive income (net unrealized gain on investments)
(net of deferred taxes: 1999: $613,667; 1998: $1,311,995) (Note 8) ............................. 1,190,126 2,545,704
----------- -----------
Total stockholders' equity ..................................................................... 37,501,740 36,328,665
----------- -----------
Total Liabilities and Stockholders' Equity ........................................................... $55,156,564 $51,597,812
=========== ===========
</TABLE>
See notes to consolidated financial statements.
12
[GRAPHIC]
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Income
for the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Underwriting income:
Premiums written (Note 5) ....................... $44,144,777 $45,692,323 $30,117,171
Less-premiums for reinsurance ceded (Note 5) ....... 325,212 312,627 241,821
----------- ----------- -----------
Net premiums written ............................ 43,819,565 45,379,696 29,875,350
Investment income-interest and dividends (Note 3) .. 2,175,671 1,834,949 1,628,188
Net realized gain on sales of investments (Note 3) . 418,395 398,610 269,396
Other .............................................. 952,928 863,008 617,582
----------- ----------- -----------
Total ........................................... 47,366,559 48,476,263 32,390,516
----------- ----------- -----------
Operating Expenses:
Commissions to agents .............................. 17,045,552 17,399,629 10,065,249
Provision for claims (Note 6) ...................... 6,026,064 8,094,950 4,679,353
Salaries ........................................... 7,699,812 6,384,965 4,543,598
Employee benefits and payroll taxes (Notes 7 and 10) 2,142,516 1,863,400 1,578,688
Office occupancy and operations (Note 9) ........... 4,238,753 3,241,118 2,512,370
Business development ............................... 1,662,485 1,381,717 1,091,812
Taxes, other than payroll and income ............... 265,467 262,995 168,607
Premium and retaliatory taxes ...................... 862,414 880,885 592,660
Professional fees .................................. 782,331 391,971 317,294
Provision for equipment disposal ................... -- 280,000 --
Other .............................................. 179,771 599,124 390,103
----------- ----------- -----------
Total ........................................... 40,905,165 40,780,754 25,939,734
----------- ----------- -----------
Income Before Income Taxes ............................ 6,461,394 7,695,509 6,450,782
Provision For Income Taxes (Note 8) ................... 2,041,000 2,236,000 1,920,400
----------- ----------- -----------
Net Income (Note 12) .................................. $ 4,420,394 $ 5,459,509 $ 4,530,382
=========== =========== ===========
Basic Earnings per Common Share ....................... $ 1.59 $ 1.95 $ 1.63
=========== =========== ===========
Weighted Average Shares Outstanding - Basic ........... 2,776,878 2,806,267 2,782,449
=========== =========== ===========
Diluted Earnings per Common Share (Note 7) ............ $ 1.59 $ 1.92 $ 1.60
=========== =========== ===========
Weighted Average Shares Outstanding - Diluted ......... 2,786,282 2,841,035 2,826,730
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
13
[GRAPHIC]
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Income (Net Total
Common Stock Retained Unrealized Gain Stockholders'
Shares Amount Earnings on Investments) Equity
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance,
January 31, 1997 ......................... 2,767,830 $ 722,321 $ 23,745,995 $ 1,519,861 $ 25,988,177
Net income ............................... 4,530,382 4,530,382
Dividends ($.12 per share) ............... (342,689) (342,689)
Distributions of 32,410 shares
of common stock (net of purchases) .... 32,410 157,291 157,291
Net unrealized gain on investments ....... 795,747 795,747
--------- ------------ ------------ ------------ ------------
Balance,
December 31, 1997 ........................ 2,800,240 879,612 27,933,688 2,315,608 31,128,908
Net income ............................... 5,459,509 5,459,509
Dividends ($.12 per share) ............... (342,689) (342,689)
Distributions of 8,883 shares
of common stock (net of purchases) .... 8,883 (147,159) (147,159)
Net unrealized gain on investments ....... 230,096 230,096
--------- ------------ ------------ ------------ ------------
Balance,
December 31, 1998 ........................ 2,809,123 732,453 33,050,508 2,545,704 36,328,665
Net income ............................... 4,420,394 4,420,394
Dividends ($.12 per share) ............... (342,689) (342,689)
Purchases of 72,162 shares
of common stock (net of distributions) (72,162) (732,452) (816,600) (1,549,052)
Net unrealized gain on investments ....... (1,355,578) (1,355,578)
--------- ------------ ------------ ------------ ------------
Balance,
December 31, 1999 ........................ 2,736,961 $ 1 $ 36,311,613 $ 1,190,126 $ 37,501,740
========= ============ ============ ============ ============
</TABLE>
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Income ................................................................... $ 4,420,394 $ 5,459,509 $ 4,530,382
----------- ----------- -----------
Other comprehensive income, before tax:
Unrealized gain (loss) on investments arising during the year.............. (1,635,511) 747,240 1,475,645
Less: reclassification adjustment for gains
realized in net income ................................................. (418,395) (398,610) (269,396)
----------- ----------- -----------
Other comprehensive income (loss), before tax.............................. (2,053,906) 348,630 1,206,249
Income tax expense (benefit) related to unrealized
gain (loss) on investments arising during the year ..................... (556,074) 254,061 501,719
Income tax benefit related to reclassification
adjustment for net gain realized in net income ......................... (142,254) (135,527) (91,217)
----------- ----------- -----------
Net income tax expense (benefit) on other comprehensive income ............ (698,328) 118,534 410,502
----------- ----------- -----------
Other comprehensive income (loss)............................................. (1,355,578) 230,096 795,747
----------- ----------- -----------
Comprehensive income ......................................................... $ 3,064,816 $ 5,689,605 $ 5,326,129
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
14
[GRAPHIC]
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income .....................................................................$ 4,420,394 $ 5,459,509 $ 4,530,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................. 470,843 393,026 346,547
Amortization (accretion), net ............................................ 34,195 (4,141) 3,767
Provision for losses on premiums receivable .............................. -- 425,000 150,000
Provision for equipment disposal ......................................... -- 280,000 --
(Gain) loss on disposals of property ..................................... 45,216 (16,182) 7,326
Net realized gain on sales of investments ................................ (418,395) (398,610) (269,396)
Provision (benefit) for deferred income taxes ............................ 6,390 (1,238,097) (445,238)
Provision for claims...................................................... 6,026,064 8,094,950 4,679,353
Payments of claims, net of recoveries..................................... (3,524,064) (2,354,425) (2,143,278)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets....................... 1,421,796 (2,237,678) (1,635,116)
Increase in accounts payable and accrued liabilities ..................... 302,134 189,430 71,613
Increase (decrease) in commissions and reinsurance payables .............. 124,007 (11,643) 35,339
Increase (decrease) in premium taxes payable ............................. (257,269) 124,030 52,091
Increase (decrease) in current income taxes payable ...................... (912,787) 182,269 (150,062)
----------- ----------- -----------
Net cash provided by operating activities................................. 7,738,524 8,887,438 5,233,328
----------- ----------- -----------
Investing Activities:
Purchases of available-for-sale securities................................... (6,036,921) (4,354,272) (9,036,039)
Purchases of held-to-maturity securities .................................... (100,986) (1,025,057) (297,951)
Proceeds from sales of available-for-sale securities ........................ 1,948,391 2,880,022 2,530,426
Proceeds from sales of held-to-maturity securities .......................... 808,886 575,974 724,123
Purchases of property........................................................ (3,077,730) (1,187,008) (422,111)
Proceeds from disposals of property ......................................... 24,520 30,928 32,229
----------- ----------- -----------
Net cash used in investing activities..................................... (6,433,840) (3,079,413) (6,469,323)
----------- ----------- -----------
Financing Activities:
Distributions (repurchases) of common stock.................................. (1,549,052) (147,159) 157,291
Dividends paid .............................................................. (342,689) (342,689) (342,689)
----------- ----------- -----------
Net cash used in financing activities..................................... (1,891,741) (489,848) (185,398)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... (587,057) 5,318,177 (1,421,393)
Cash and Cash Equivalents, Beginning of Year.................................... 8,141,354 2,823,177 4,244,570
----------- ----------- -----------
Cash and Cash Equivalents, End of Year .........................................$ 7,554,297 $ 8,141,354 $ 2,823,177
=========== =========== ===========
Supplemental Disclosures:
Cash Paid During the Year for:
Income Taxes .............................................................$ 2,947,397 $ 3,293,000 $ 2,516,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
15
[GRAPHIC]
<PAGE>
Investors Title Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business - Investors Title Company ("the Company"),
through its wholly-owned subsidiaries, Investors Title Insurance Company
("ITIC") and Northeast Investors Title Insurance Company ("NE-ITIC"), is
licensed to insure titles to residential, institutional, commercial, and
industrial properties. The Company issues title insurance policies through
approved attorneys from underwriting offices in North Carolina and South
Carolina, and through independent issuing agents in Alabama, Georgia, Indiana,
Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New York,
Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin.
The majority of the Company's business is concentrated in Michigan, North
Carolina, South Carolina and Virginia. Investors Title Exchange Corporation
("ITEC"), a wholly-owned subsidiary, acts as an intermediary in tax-free
exchanges of property held for productive use in a trade or business or for
investments. ITEC's income is derived from fees for handling exchange
transactions.
Principles of Consolidation and Basis of Presentation - The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Significant Accounting Policies - The significant accounting policies
of the Company are summarized below:
Cash and Cash Equivalents
For the purpose of presentation in the Company's statements of cash
flows, cash equivalents are highly liquid investments with original maturities
of three months or less.
Investments in Securities
Securities for which the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at cost, adjusted for
amortization of premiums or accretion of discounts and other-than-temporary
declines in fair value. Securities held principally for resale in the near term
are classified as trading securities and recorded at fair values. Realized and
unrealized gains and losses on trading securities are included in other income.
Securities not classified as either trading or held-to-maturity are classified
as available-for-sale and reported at fair value, adjusted for
other-than-temporary declines in fair value, with unrealized gains and losses
reported as accumulated other comprehensive income. Fair values of all
investments are based on quoted market prices. Realized gains and losses are
determined on the specific identification method.
Property Acquired in Settlement of Claims
Property acquired in settlement of claims is carried at estimated
realizable value. Adjustments to reported estimated realizable values and
realized gains or losses on dispositions are recorded as increases or decreases
in claim costs.
Property and Equipment
Property and equipment is recorded at cost and is depreciated
principally under the straight-line method over the estimated useful lives (3 to
25 years) of the respective assets.
Reserves for Claims
The reserves for claims and the annual provision for claims are
established based on: (1) estimated amounts required to settle claims for which
notice has been received (reported) and (2) the amount estimated to be required
to satisfy incurred claims of policyholders which may be reported in the future.
Claims and losses paid are charged to the reserves for claims (see Note 6).
Deferred Income Taxes
The Company provides for deferred income taxes (benefits) on temporary
differences between the financial statements' carrying values and the tax bases
of assets and liabilities.
Premiums Written and Commissions to Agents
Premiums are recorded and policies or commitments are issued upon
receipt of final certificates or preliminary reports with respect to titles.
Title insurance commissions earned by the Company's agents are recognized as
expense concurrently with premium recognition.
Earnings Per Common Share
The employee stock options discussed in Note 7 are considered
outstanding for the diluted earnings per common share calculation.
Comprehensive Income
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130".) Adoption of this standard required the
Company to (a) classify items of other comprehensive income by their nature in
the financial statements and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The Company's other
comprehensive income is solely comprised of its unrealized holding gains on
available-for-sale securities.
16
[GRAPHIC]
<PAGE>
Escrows and Trust Deposits
As a service to its customers, the Company, through its subsidiaries,
administers escrow and trust deposits representing undisbursed amounts received
for settlements of mortgage loans and indemnities against specific title risks.
In administering tax-free exchanges, ITEC serves as qualified intermediary for
exchangers, holding the net sales proceeds from relinquished property to be used
for purchase of replacement property. Cash and other assets held by the Company
for these purposes were approximately $33,783,000 and $18,564,000 as of December
31, 1999 and 1998, respectively. These amounts are not considered assets of the
Company and, therefore, are excluded from the accompanying consolidated balance
sheets.
Accounting Changes Pending Implementation
In June 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt the new reporting guidelines for the fiscal year beginning
January 1, 2001. The Company has not fully analyzed the provisions of this
statement or its effects on the Company.
Use of Estimates and Assumptions
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Statutory Restrictions on Consolidated Stockholders' Equity and Investments
The Company has designated approximately $17,740,000 and $16,753,000 of
retained earnings as of December 31, 1999 and 1998, respectively, as
appropriated to reflect the required statutory premium reserve. See Note 8 for
the tax treatment of the statutory premium reserve.
As of December 31, 1999 and 1998, approximately $33,322,000 and
$31,219,000 respectively, of consolidated stockholders' equity represents net
assets of the Company's insurance subsidiaries that cannot be transferred in the
form of dividends, loans or advances to the parent company under statutory
regulations without prior insurance department approval.
Bonds and certificates of deposit totaling approximately $3,120,000 at
December 31, 1999 and 1998, respectively, are deposited with the insurance
departments of the states in which business is conducted. These investments are
restricted as to withdrawal as required by law.
3. Investments in Securities
The aggregate fair value, gross unrealized holding gains, gross
unrealized holding losses, and amortized cost for securities by major security
type at December 31 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1999
- -----------------
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit ................................. $ 98,982 $ -- $ -- $ 98,982
Obligations of states and political subdivisions ........ 4,466,889 48,784 167,667 4,348,006
----------- ----------- ----------- -----------
Total ................................................... $ 4,565,871 $ 48,784 $ 167,667 $ 4,446,988
=========== =========== =========== ===========
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions ........ $21,604,961 $ 188,372 $ 798,879 $20,994,454
Corporate debt securities ............................... 5,024,919 3,029 90,484 4,937,464
----------- ----------- ----------- -----------
Total ................................................... $26,629,880 $ 191,401 $ 889,363 $25,931,918
=========== =========== =========== ===========
Equity securities, at fair value -
Common stocks and nonredeemable preferred stocks............ $ 2,510,505 $ 2,686,419 $ 184,665 $ 5,012,259
=========== =========== =========== ===========
</TABLE>
17
[GRAPHIC]
<PAGE>
Investments in Securities (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
- -----------------
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit ........................ $ 98,982 $ -- $ -- $ 98,982
Obligations of states and political subdivisions 5,188,476 229,215 1,141 5,416,550
----------- ----------- ----------- -----------
Total .......................................... $ 5,287,458 $ 229,215 $ 1,141 $ 5,515,532
=========== =========== =========== ===========
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions $21,196,280 $ 1,060,745 $ 5,711 $22,251,314
Corporate debt securities ...................... 934,893 49,547 -- 984,440
----------- ----------- ----------- -----------
Total .......................................... $22,131,173 $ 1,110,292 $ 5,711 $23,235,754
=========== =========== =========== ===========
Equity securities, at fair value
Common stocks and nonredeemable preferred stocks ........ $ 2,522,793 $ 2,975,216 $ 222,097 $ 5,275,912
=========== =========== =========== ===========
</TABLE>
The scheduled maturities of fixed maturities at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less .......................................... $ 450,000 $ 450,778 $ 158,982 $ 159,550
Due after one year through five years ............................ 5,737,931 5,707,285 78,824 83,975
Due after five years through ten years ........................... 6,028,967 5,970,829 1,242,181 1,252,139
Due after ten years .............................................. 14,412,982 13,803,026 3,085,884 2,951,324
----------- ----------- ----------- -----------
Total .......................................... $26,629,880 $25,931,918 $ 4,565,871 $ 4,446,988
=========== =========== =========== ===========
</TABLE>
Earnings on investments and net realized gains for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities .................................................................. $1,571,121 $1,433,063 $1,186,248
Equity securities ................................................................. 191,741 168,904 191,471
Invested cash and other short-term investments .................................... 401,060 212,652 245,907
Miscellaneous interest ............................................................ 11,749 20,330 4,562
Net realized gains ................................................................ 418,395 398,610 269,396
---------- ---------- ----------
Investment income ............................................... $2,594,066 $2,233,559 $1,897,584
========== ========== ==========
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities for
the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Gross realized gains:
Debt securities ........................................................... $ -- $ 3,133 $ 1,520
Obligations of states and political subdivisions .......................... 8,509 12,192 2,121
Common stocks and nonredeemable preferred stocks .......................... 520,429 751,493 369,779
--------- --------- ---------
Total ............................................................ 528,938 766,818 373,420
--------- --------- ---------
Gross realized losses:
Obligations of states and political subdivisions .......................... (563) (3,983) (1,554)
Debt securities ........................................................... -- (125,000) (29,278)
Common stocks and nonredeemable preferred stocks .......................... (109,980) (239,225) (73,192)
--------- --------- ---------
Total ............................................................ (110,543) (368,208) (104,024)
--------- --------- ---------
Net realized gain ......................................................... $ 418,395 $ 398,610 $ 269,396
========= ========= =========
</TABLE>
4. Property
Property and equipment and estimated useful lives at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
----------- -----------
Land ........................................................................................ $ 1,107,582 $ 782,582
Office buildings and improvements (25 years) ................................................ 1,599,321 1,349,321
Furniture, fixtures and equipment (5 to 10 years) ........................................... 4,335,523 2,830,207
Automobiles (3 years) ....................................................................... 338,564 257,257
----------- -----------
Total .............................................................................. 7,380,990 5,219,367
Less accumulated depreciation ...................................................... (1,544,524) (1,920,052)
----------- -----------
Property and equipment, net ........................................................ $ 5,836,466 $ 3,299,315
=========== ===========
</TABLE>
18
[GRAPHIC]
<PAGE>
5. Reinsurance
The Company assumes and cedes reinsurance with other insurance
companies in the normal course of business. Premiums assumed and ceded were
approximately $47,000 and $325,000, respectively for 1999, $74,000 and $313,000,
respectively for 1998, and $58,000 and $242,000, respectively for 1997. Ceded
reinsurance is comprised of excess of loss treaties, which protects against
losses over certain amounts. In the event that the assuming insurance companies
are unable to meet their obligations under these contracts, the Company is
contingently liable.
6. Reserves for Claims
Changes in the reserves for claims for the years ended December 31 are
summarized as follows based on the year in which the policies were written:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year ................................................ $ 13,362,665 $ 7,622,140 $ 5,086,065
Provision related to:
Current year ..................................................... 6,651,832 4,868,576 2,394,138
Prior years ...................................................... (625,768) 3,226,374 2,285,215
------------ ------------ ------------
Total provision charged to operations ................... 6,026,064 8,094,950 4,679,353
------------ ------------ ------------
Claims paid, net of recoveries, related to:
Current year ..................................................... (1,142,117) (280,079) (333,160)
Prior years ...................................................... (2,381,947) (2,074,346) (1,810,118)
------------ ------------ ------------
Total claims paid, net of recoveries .................... (3,524,064) (2,354,425) (2,143,278)
------------ ------------ ------------
Balance, end of year .................................... $ 15,864,665 $ 13,362,665 $ 7,622,140
============ ============ ============
</TABLE>
In management's opinion, the reserves are adequate to cover claim losses which
might result from pending and possible claims.
7. Common Stock and Stock Options
The Company has adopted Employee Stock Option Purchase Plans (the
"Plans") under which options to purchase shares (not to exceed 443,300 shares)
of the Company's stock may be granted to key employees of the Company at a price
not less than the market value on the date of grant. All options are exercisable
at 10 to 20% per year beginning on the date of grant or one year from the date
of grant and generally expire in five to ten years. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its plans and, accordingly, no compensation cost has been
recognized. Had compensation cost for the Plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income:
As reported ............................................... $ 4,420,394 $ 5,459,509 $ 4,530,382
Pro forma ................................................. 4,414,260 4,872,247 4,427,593
Basic earnings per common share:
As reported ............................................... $ 1.59 $ 1.95 $ 1.63
Pro forma ................................................. 1.59 1.74 1.59
Diluted earnings per common share:
As reported ............................................... $ 1.59 $ 1.92 $ 1.60
Pro forma ................................................. 1.58 1.72 1.57
The estimated weighted average grant-date fair value of options
granted for the years ended December 31 are as follows:
1999 1998 1997
------------- ------------- -------------
Exercise price equal to market price on date of grant:
Weighted average exercise price ........................... $ 20.30 $ 25.62 $ 17.80
Weighted average grant-date fair value .................... 9.55 11.14 7.09
Exercise price greater than market price on date of grant:
Weighted average exercise price ........................... $ -- $ 29.15 $ --
Weighted average grant-date fair value .................... -- 10.70 --
</TABLE>
19
[GRAPHIC]
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of .6%, .5% and .7%; expected volatility of 26%, 22% and 22%; risk-free interest
rates of approximately 6%, 5% and 6%; and expected lives of 5 to 10 years. A
summary of the status of the Company's plans as of December 31 and changes
during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............... 96,524 $ 19.93 80,319 $ 11.29 114,010 $ 8.84
Granted........................................ 9,700 20.30 52,150 27.51 14,500 17.80
Exercised......................................(17,774) 8.44 (24,985) 8.90 (42,091) 7.18
Terminated..................................... (6,130) 16.16 (10,960) 18.69 (6,100) 9.30
------ ------ ------
Outstanding at end of year..................... 82,320 $ 22.74 96,524 $ 19.93 80,319 $11.29
====== ====== ======
Options exercisable at year-end................ 27,890 $ 18.14 37,389 $ 12.67 40,896 $9.62
====== ====== ======
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding at Year-End Options Exercisable at Year-End
---------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$6.75 - $ 9.75 5,800 1 $ 8.69 5,800 $ 8.69
10.00 - 15.50 17,064 3 14.66 11,544 14.78
17.25 - 25.00 12,866 9 20.72 1,596 21.16
25.25 - 29.15 46,590 8 28.00 8,950 28.06
------ ------
$6.75 - $ 29.15 82,320 7 $ 22.74 27,890 $ 18.14
====== ======
</TABLE>
The employee stock options are considered outstanding for the diluted
earnings per common share calculation. The total increase in the weighted
average shares outstanding related to these equivalent shares was 9,404, 34,768
and 44,281 for 1999, 1998 and 1997, respectively.
Options to purchase 58,456, 47,840 and 4,900 shares of common stock
were outstanding during 1999, 1998 and 1997, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares.
20
[GRAPHIC]
<PAGE>
8. Income Taxes
At December 31 the approximate effect on each component of deferred
income taxes and liabilities is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Recorded reserves for claims net of statutory premium reserves .................................. $ 1,067,546 $ 858,349
Accrued vacation ................................................................................ 145,727 105,049
Reinsurance payable ............................................................................. 28,998 11,431
Bad debt reserve ................................................................................ 263,500 263,500
Provision for equipment disposal ................................................................ -- 95,200
Other ........................................................................................... 27,376 90,521
----------- -----------
Total......................................................................................... 1,533,147 1,424,050
----------- -----------
Deferred income tax liabilities:
Net unrealized gain on investments .............................................................. 613,667 1,311,995
Excess of tax over book depreciation ............................................................ 260,452 148,923
Discount accretion on tax-exempt obligations .................................................... 43,196 34,157
Other ........................................................................................... 1,739 6,820
----------- -----------
Total ........................................................................................ 919,054 1,501,895
----------- -----------
Net deferred income tax assets (liabilities) ........................................................ $ 614,093 $ (77,845)
=========== ===========
A reconciliation of income tax as computed for the years ended December 31 at
the U.S. federal statutory income tax rate (34%) to income tax expense follows:
1999 1998 1997
----------- ----------- -----------
Anticipated income tax expense ..........................................................$ 2,196,874 $ 2,616,473 $ 2,193,266
Increase (reduction) related to:
State income taxes, net of the federal income tax benefit ........................... 35,483 32,778 11,626
Tax-exempt interest income (net of amortization) .................................... (477,926) (461,731) (352,477)
Other, net .......................................................................... 286,569 48,480 67,985
----------- ----------- -----------
Provision for income taxes ..............................................................$ 2,041,000 $ 2,236,000 $ 1,920,400
=========== =========== ===========
The components of income tax expense for the years ended December 31 are
summarized as follows:
1999 1998 1997
----------- ----------- -----------
Current:
Federal .............................................................................$ 1,994,169 $ 3,421,954 $ 2,329,333
State ............................................................................... 40,441 52,143 36,305
----------- ----------- -----------
Total............................................................................. 2,034,610 3,474,097 2,365,638
Deferred expense (benefit) .............................................................. 6,390 (1,238,097) (445,238)
----------- ----------- -----------
Total ............................................................................$ 2,041,000 $ 2,236,000 $ 1,920,400
=========== =========== ===========
</TABLE>
For state income tax purposes, ITIC and NE-ITIC must pay only a gross premium
tax.
9. Leases
Rent expense totaled approximately $509,000, $460,000 and $409,000 in 1999,
1998 and 1997, respectively. The future minimum lease payments under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1999 are summarized as follows:
<PAGE>
Year End:
2000 $327,699
2001 228,203
2002 148,931
2003 27,371
----------
Total $ 732,204
==========
21
[GRAPHIC]
<PAGE>
10. Employee Benefit Plan
After three years of service, employees are eligible to participate in
a Simplified Employee Pension Plan. Contributions, which are made at the
discretion of the Company, are based on the employee's salary, but in no case
will such contribution exceed $24,000 per employee. All contributions are
deposited in Individual Retirement Accounts for participants. Contributions
under the plan were approximately $337,000, $290,000 and $259,000 for 1999, 1998
and 1997, respectively.
11. Commitments and Contingencies
The Company and its subsidiaries are involved in litigation on a number
of claims which arise in the normal course of business, none of which, in the
opinion of management, is expected to have a material adverse effect on the
Company's consolidated financial position.
12. Statutory Accounting
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
which differ in some respects from statutory accounting practices prescribed or
permitted in the preparation of financial statements for submission to insurance
regulatory authorities.
Stockholders' equity on a statutory basis was $30,463,866 and
$29,069,033 as of December 31, 1999 and 1998, respectively. Net income on a
statutory basis was $5,129,055, $6,667,605 and $4,564,782 for the twelve months
ended December 31, 1999, 1998 and 1997, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS
Investors Title Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Investors Title Company (the "Company") and its subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Investors Title Company and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 9, 2000
22
[GRAPHIC]
<PAGE>
Shareholder Information
- --------------------------------------------------------------------------------
COMMON STOCK DATA
The common stock of the Company is traded under the symbol "ITIC" in the
over-the-counter market and is quoted on the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The Company has approximately 1,450 shareholders of record,
including shareholders whose shares are held in street name. The following table
shows the 1999 and 1998 high and low sales prices reported on the NASDAQ
National Market System.
1999 1998
---------------- --------------
High Low High Low
------ ------- ------ ------
First Quarter $23.00 $20.25 $28.50 $21.25
Second Quarter $22.50 $15.375 $28.00 $24.50
Third Quarter $19.625 $14.00 $26.50 $21.00
Fourth Quarter $18.50 $13.75 $24.50 $16.50
The Company paid cash dividends of $.03 per share in each of the four quarters
during 1999 and 1998.
MARKET MAKERS
Davenport & Co. of Virginia Scott & Stringfellow Wachovia Securities
Knight Securities L.P. Spear, Leeds & Kellog
23
[GRAPHIC]
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME OF PERCENT NAMES UNDER WHICH STATE OF
SUBSIDIARY OWNERSHIP SUBSIDIARIES DO BUSINESS INCORPORATION
- ---------- --------- ------------------------ -------------
Investors Title 100% Investors Title Insurance North Carolina
Insurance Company Company
Northeast Investors 100% Northeast Investors Title South Carolina
Title Insurance Insurance Company
Company
Investors Title 100% Investors Title Exchange North Carolina
Exchange Corporation Corporation
South Carolina 100% South Carolina Document South Carolina
Document Preparation Preparation Company
Company
Investors Title 100% Investors Title Management North Carolina
Management Services, Inc.
Services, Inc.
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-1999 JAN-31-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999 SEP-30-1999 DEC-31-1999
<DEBT-HELD-FOR-SALE> 22,998,439 24,345,874 26,000,644 25,931,918
<DEBT-CARRYING-VALUE> 4,895,576 4,792,704 4,565,227 4,486,890
<DEBT-MARKET-VALUE> 0 0 0 4,368,007
<EQUITIES> 4,749,709 5,194,177 4,826,765 5,012,259
<MORTGAGE> 0 0 0 0
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 32,722,706 34,411,737 35,471,618 35,510,048
<CASH> 10,250,583 8,851,471 8,560,999 7,554,297
<RECOVER-REINSURE> 0 0 0 0
<DEFERRED-ACQUISITION> 0 0 0 0
<TOTAL-ASSETS> 52,792,928 53,846,585 55,556,792 55,156,564
<POLICY-LOSSES> 14,187,665 15,152,665 15,562,665 15,864,665
<UNEARNED-PREMIUMS> 0 0 0 0
<POLICY-OTHER> 153,767 179,501 235,661 208,605
<POLICY-HOLDER-FUNDS> 0 0 0 0
<NOTES-PAYABLE> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 356,281 1 1 1
<OTHER-SE> 36,519,111 37,254,981 37,811,568 37,501,739
<TOTAL-LIABILITY-AND-EQUITY> 52,792,928 53,846,585 55,556,792 55,156,564
10,694,237 23,079,124 34,337,204 43,819,565
<INVESTMENT-INCOME> 470,127 968,777 1,513,099 2,175,671
<INVESTMENT-GAINS> 191,405 280,358 418,395 418,395
<OTHER-INCOME> 160,547 385,068 629,593 952,928
<BENEFITS> 1,580,868 3,293,729 4,880,219 6,026,064
<UNDERWRITING-AMORTIZATION> 0 0 0 0
<UNDERWRITING-OTHER> 8,215,628 17,557,953 26,258,361 34,879,101
<INCOME-PRETAX> 1,719,820 3,861,645 5,759,711 6,461,394
<INCOME-TAX> 543,502 1,213,300 1,807,850 2,041,000
<INCOME-CONTINUING> 1,176,318 2,648,345 3,951,861 4,420,394
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,176,318 2,648,345 3,951,861 4,420,394
<EPS-BASIC> 0.42 0.95 1.42 1.59
<EPS-DILUTED> 0.42 0.94 1.41 1.59
<RESERVE-OPEN> 0 0 0 0
<PROVISION-CURRENT> 0 0 0 0
<PROVISION-PRIOR> 0 0 0 0
<PAYMENTS-CURRENT> 0 0 0 0
<PAYMENTS-PRIOR> 0 0 0 0
<RESERVE-CLOSE> 0 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0 0
</TABLE>
