As filed with the Securities and Exchange Commission on January 8, 1998.
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____
LAWYERS TITLE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1589611
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6630 West Broad Street
Richmond, Virginia 23230
(804) 281-6700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Russell W. Jordan, III, Esquire
Lawyers Title Corporation
6630 West Broad Street
Richmond, Virginia 23230
(804) 281-6700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Communications to:
Theodore L. Chandler, Jr., Esquire Joseph L. Seiler III, Esquire
Robert E. Spicer, Jr., Esquire LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Williams Mullen Christian & Dobbins 125 West 55th Street
1021 East Cary Street, 16th Floor New York, New York 10019-5389
Richmond, Virginia 23219
Approximate date of commencement of proposed sale to the public: as
soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================== ====================== ======================= ======================= =====================
Title of Each Class of Amount Proposed Maximum Proposed Maximum
Securities to to be Offering Price Aggregate Amount of
be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
===================================== ====================== ======================= ======================= =====================
<S> <C> <C> <C> <C>
Common Stock, no par value 2,012,500 Shares $31.66 $63,715,750 $18,797
Rights to Purchase Series A Junior
Participating Preferred Stock, no
par value 2,012,500 Rights N/A (3) (3)
===================================== ====================== ======================= ======================= =====================
</TABLE>
(1) Includes 262,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Pursuant to Rule 457(c), the offering price is based upon the average of
the high ($31.9375) and low ($31.375) prices reported on the New York Stock
Exchange Composite Tape on January 5, 1998.
(3) The Rights to Purchase Series A Junior Participating Preferred Stock will
be attached to and will trade with the shares of Common Stock offered
hereby. Value attributable to such Rights, if any, will be reflected in the
market price of the shares of the Common Stock.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS
________ __, 1998
Subject to Completion, Dated ________ __, 1998
1,750,000 Shares
[LOGO]
LAWYERS TITLE CORPORATION
Common Stock
All of the 1,750,000 shares of Common Stock, no par value (the "Common
Stock"), offered hereby (the "Shares") are being sold by Lawyers Title
Corporation (the "Company"). The Common Stock is listed on the New York Stock
Exchange under the symbol "LTI" ("LFG" upon consummation of the Acquisition, as
defined below). On January 2, 1998, the closing sales price of the Common Stock
as reported on the New York Stock Exchange Composite Tape was $31.69 per share.
See "Price Range of Common Stock and Dividends."
The net proceeds of this offering (the "Offering") to the Company will
be used to fund part of the cash portion of the consideration for the pending
acquisition (the "Acquisition") by the Company of Commonwealth Land Title
Insurance Company and Transnation Title Insurance Company (collectively referred
to as "Commonwealth/Transnation") from Reliance Insurance Company ("RIC"), a
subsidiary of Reliance Group Holdings, Inc. Consummation of the Acquisition is a
condition to the consummation of the Offering. See "The Acquisition" and "Use of
Proceeds."
See "Risk Factors" beginning on page 14 for a discussion of certain
factors that should be considered in connection with an investment in the Common
Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Price Underwriting Proceeds
to the Discounts and to the
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share.......... $ $ $
Total (3).......... $ $ $
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, estimated at $430,000, which, pursuant to the
terms of the Acquisition, will be deducted from amounts payable to RIC
thereunder. See "Use of Proceeds."
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
262,500 shares of Common Stock, at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$________, $________ and $________, respectively. See "Underwriting."
---------------
The Shares offered hereby are being offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters and subject to various prior conditions, including their
right to reject orders in whole or in part. See "Underwriting." It is expected
that delivery of the Shares will be made in New York, New York, on or about
________ __, 1998.
Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz
Wheat First Butcher Singer
Ferris, Baker Watts
Incorporated
<PAGE>
LAWYERS TITLE CORPORATION
OPERATING TERRITORY
[Map of United States showing existing operations
of the Company and Commonwealth/Transnation]
* Lawyers Title Offices
* Commonwealth/Transnation Offices
The map above sets forth, as of January 7, 1998, the locations of the
direct operations and national sales offices of both Lawyers Title and
Commonwealth/Transnation, excluding offices of independent agents and approved
attorneys. The map assumes consummation of the Acquisition.
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<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF
SECURITIES IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL
SERVICES ACT 1986 AND THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 WITH
RESPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO ANY SECURITIES IN, FROM OR
OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH.
---------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004, and
at the following Regional Offices of the Commission: New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048 and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can also be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549-1004, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission. The Common Stock is listed on the New York Stock Exchange,
Inc. (the "NYSE"), and such reports, proxy statements and other information
relating to the Company can also be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form
S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement. For further
information, reference is hereby made to the Registration Statement and to the
exhibits thereto, which may be inspected and copied in the manner and at the
locations described above. Statements contained herein concerning provisions of
any document filed as an exhibit to the Registration Statement, incorporated by
reference into this Prospectus or otherwise filed with the Commission are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of such document filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following reports and other documents previously filed by the
Company with the Commission under the Exchange Act are incorporated by reference
into this Prospectus:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "Form 10-K");
(b) the portions of the Company's Proxy Statement for the Annual
Meeting of Shareholders held on May 20, 1997 that have been incorporated by
reference into the Form 10-K;
(c) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997;
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(d) the Company's Current Reports on Form 8-K filed September 2,
1997, November 20, 1997 and December 23, 1997;
(e) the description of the Common Stock and associated preferred
share purchase rights contained in the Registration Statement on Form 8-A dated
September 29, 1995 and filed October 2, 1995, as amended by Amendment No. 1 and
Amendment No. 2 thereto, dated August 29, 1997 and December 23, 1997,
respectively, and filed September 2, 1997 and December 23, 1997, respectively;
and
(f) the Company's preliminary Proxy Statement for the Special
Meeting of Shareholders to be held in February 1998, filed with the Commission
on December 24, 1997.
All reports and other documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering contemplated hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing of such reports and other documents. Any
statement contained herein or in a report or document incorporated or deemed to
be incorporated by reference into this Prospectus shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in any other subsequently filed document that also is
incorporated or deemed to be incorporated by reference into this Prospectus)
modifies or supersedes such previous statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the foregoing documents incorporated by reference into
this Prospectus (other than certain exhibits to such documents). Requests for
such copies should be directed to Russell W. Jordan, III, Esquire, Secretary and
General Counsel, Lawyers Title Corporation, 6630 West Broad Street, Richmond,
Virginia 23230, telephone number (804) 281-6700.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain information that is included or incorporated by reference into
this Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Among
other things, these statements relate to the financial conditions, results of
operations and businesses of the Company and Commonwealth/Transnation and,
assuming the consummation of the Acquisition, the combined operations of the
Company and Commonwealth/Transnation (the "Combined Company"), including
statements relating to: (i) the cost savings and accretion to reported earnings
that will be realized from the Acquisition; and (ii) the potential impact on
financial ratios, margins, revenues and profitability as a result of the
Acquisition. These forward-looking statements are generally identified by
phrases such as "the Company expects" or words of similar import. These forward
looking statements involve certain risks and uncertainties and other factors
that may cause the actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements, as discussed in the sections of this
Prospectus in which they appear and in the documents incorporated by reference
into this Prospectus. Further, any such statement is specifically qualified in
its entirety by the following cautionary statements and the "Risk Factors"
appearing elsewhere in this Prospectus. See "Risk Factors."
In connection with the Acquisition, factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include the following: (i) expected costs savings from the
Acquisition cannot be fully realized or realized within the expected time frame;
(ii) costs or difficulties related to the integration of the businesses of the
Company and Commonwealth/Transnation are greater than expected; (iii) revenues
following the Acquisition are lower than expected; (iv) competitive pressure in
the title insurance industry increases significantly; (v) general economic
conditions, either nationally or in one or more of the states in which the
Combined Company will conduct business, are less favorable than expected; or
(vi) legislation or regulatory changes adversely affect the businesses conducted
by the Combined Company.
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In connection with the title insurance industry in general, factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include the following: (i) the costs of
producing title evidence are relatively high, whereas premium revenues are
subject to regulatory and competitive restraints; (ii) the amount of title
insurance business available is influenced by housing starts, housing resales
and commercial real estate transactions; (iii) real estate activity levels have
historically been cyclical and are influenced by such factors as interest rates
and the condition of the overall economy; (iv) the value of the Company's
investment portfolio is subject to fluctuation based on similar factors; (v) the
title insurance industry may be exposed to substantial claims by large classes
of claimants; and (vi) the industry is regulated by state laws that require the
maintenance of minimum levels of capital and surplus and that restrict the
amount of dividends that may be paid by the Company's insurance subsidiaries
without prior regulatory approval.
The Company cautions that the foregoing lists of important factors are
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
--------------------
Upon consummation of the Acquisition, the Company will own, directly or
indirectly, all of the shares of capital stock of certain title insurance
companies domiciled or deemed commercially domiciled in the states of Alabama,
Arizona, California, Florida, Maryland, New Jersey, New York, Ohio, Oregon,
Pennsylvania, Tennessee, Texas and Virginia. The insurance laws of such states
require prior approval by their respective state insurance regulatory officials
of any acquisition of control of a domestic (or commercially domiciled)
insurance company or any company which controls a domestic (or commercially
domiciled) insurance company. "Control" is generally presumed to exist through
the ownership, direct or indirect, or the holding of proxies with respect to 10%
(5% in Alabama and Florida) or more of the voting securities of an insurance
company or of any company which controls an insurance company. Any purchaser of
Common Stock holding the power to vote 5% or more of the outstanding shares of
Common Stock will be presumed to have acquired control of the Company's Alabama
and Florida title insurance company subsidiaries unless the insurance regulatory
official of those states, following application by such purchaser, determines
otherwise; and any purchaser of 10% or more of such shares will be presumed to
have acquired control of the Company's title insurance company subsidiaries
domiciled or commercially domiciled in any of the other named states unless the
relevant insurance regulatory official of such other state, following
application by such purchaser, determines otherwise.
No action has been or will be taken in any jurisdiction by the Company
or by any Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Shares and the distribution of this Prospectus.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. Unless the context
otherwise requires, (i) the "Company" refers to Lawyers Title Corporation, (ii)
"Lawyers Title" refers to Lawyers Title Insurance Corporation, the Company's
principal operating subsidiary, (iii) "Commonwealth" refers to Commonwealth Land
Title Insurance Company, (iv) "Transnation" refers to Transnation Title
Insurance Company, (v) "Commonwealth/Transnation" refers to the combined
operations of Commonwealth and Transnation, (vi) the "Combined Company" refers
to the post-Acquisition combined operations of the Company and
Commonwealth/Transnation, (vii) "Reliance" refers to Reliance Group Holdings,
Inc., (viii) "RIC" refers to Reliance Insurance Company, a subsidiary of
Reliance, (ix) all of the foregoing defined terms refer to such corporations and
their respective subsidiaries and (x) all financial information in this
Prospectus is presented in accordance with generally accepted accounting
principles ("GAAP"), unless specified as being in accordance with statutory
accounting practices.
The Company
The Company, through its principal operating subsidiary, Lawyers Title,
is one of the largest companies in the United States issuing title insurance
policies and performing other real estate-related services for both residential
and commercial real estate transactions, based on premium and fee revenues.
Title insurance is generally accepted as the most efficient means of determining
title to, and priority of interests in, real estate in nearly all parts of the
United States. In addition to title coverage, Lawyers Title provides search,
examination, escrow and closing services to a broad-based customer group that
includes lenders, developers, real estate brokers, attorneys and home buyers.
The Company has a strong presence in the residential real estate market and is a
premier provider of title insurance for commercial transactions. Commercial
transactions tend to be more profitable than residential transactions and
historically the volume of such transactions has not been as directly affected
by interest rate movements as residential business.
The Company's long term objective is to become the premier low cost
national provider of diversified real estate-related services, providing a broad
array of title insurance, information and closing services for transactions
involving the transfer and financing of real estate. The Company's strategy is
to maximize profits by: (i) improving margins through revenue growth and
aggressive management of operating costs in the title insurance business; (ii)
diversifying its earnings stream through the expansion of real estate-related
services other than title insurance through both internal growth and selective
acquisitions; (iii) improving efficiency and customer service through the
development and integration of innovative technology solutions; and (iv)
increasing its share of the title insurance market through the provision of
responsive, flexible and high quality service to lenders, developers, real
estate agents, attorneys and other real estate professionals who influence the
placement of title insurance.
The Acquisition
The Company has entered into a Stock Purchase Agreement by and among
the Company, Lawyers Title, RIC and Reliance dated as of August 20, 1997, as
amended and restated by an Amended and Restated Stock Purchase Agreement by and
among such parties, dated as of December 11, 1997 (the "Stock Purchase
Agreement"), under which the Company will acquire all of the issued and
outstanding shares of capital stock of Commonwealth and Transnation from RIC
(the "Acquisition"). With the acquisition of Commonwealth/Transnation, the
Company will grow from the sixth largest to the largest title insurer in the
U.S., based on pro forma 1996 title operating revenues (premiums and title
search, escrow and other fees) of the Combined Company of over $1.3 billion.
Management believes that the Acquisition will afford the Company (i) significant
expense savings, (ii) a broader distribution network with added geographic reach
and diversity, (iii) increased ability to make and derive benefits from
investments in technology, (iv) greater product breadth and (v) a stronger
position in the commercial title insurance business. See "The Combined Company."
Management projects that in the near term the Acquisition will result in a
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significant increase in earnings per share as expense savings from the
Acquisition are realized and that in the long term the Acquisition will
significantly enhance the Company's competitive position. In particular,
management believes that the Acquisition will enhance the Company's position as
a low cost provider of title insurance and real estate-related services.
Management anticipates that the Combined Company will be able to
materially reduce annual operating expenses in the near term by consolidating
infrastructure, reducing management and administrative expenses and negotiating
better terms with third party vendors in areas such as employee benefits,
telecommunications and office supplies. While title insurers generally have low
claims loss experience compared to other insurance underwriters, operating
expenses tend to be significantly higher due to the costs associated with
maintaining local marketing offices and production centers, and the personnel
required to process forms, search titles, collect information on specific
properties and prepare title insurance commitments and policies. By combining
the operations of Lawyers Title and Commonwealth/Transnation, duplicative
headquarters will be eliminated, substantially all corporate departments will be
consolidated and the number of regional production centers and field head count
will be reduced. As a result, management of the Company believes that the
combination of the two operations will yield recurring pre-tax cost savings of
approximately $40.0 million. To implement the changes necessary to realize such
earnings, the Combined Company will incur certain expenses, including expenses
associated with severance and lease terminations. Accordingly, the Combined
Company anticipates that in the quarter in which the Acquisition occurs, it will
record a one-time after-tax charge to earnings ranging from approximately $16.3
million to $19.5 million (approximately $25.0 million to $30.0 million before
tax).
The Acquisition will significantly broaden the Company's distribution
network and increase its geographic reach and diversity. In addition to
providing geographic diversification of earnings, the Combined Company's
increased presence throughout the United States and particularly in the largest
real estate markets will enable it to better service the large national
residential mortgage originators who prefer to work with title companies that
can service their needs in all geographic locations. This is particularly
important since these large national mortgage originators are becoming
increasingly dominant; the market share of the top ten national residential
mortgage originators increased from 15.3% in 1989 to 27.3% in 1996, according to
the Mortgage Market Statistical Annual for 1997 of Inside Mortgage Finance.
The Company believes that the continued application of new information
technology will enable it to lower unit costs, as well as increase the speed of
delivery of products and services to customers. The Combined Company will have
greater resources to make investments in technology and will be able to spread
such investments over its larger revenue base. The amount budgeted by the
Combined Company for investments in technology in 1998 is equal to the sum of
the separate pre-Acquisition technology budgets of Commonwealth/Transnation and
the Company. Elimination of certain duplicative expenditures will enable the
Combined Company to fund additional projects and thereby acquire greater
technological capabilities. Technology enhancements will include the continued
automation of title plants (compilations of public title records which
facilitate the preparation of title reports), the implementation of enhanced
title escrow productions systems, document imaging, and on-line order taking and
delivery of information and multiple products to customers and lenders, thus
streamlining paper-intensive processes.
The Acquisition will improve the Company's market position and product
breadth in real-estate related services. While real estate-related services --
such as relocation services, flood certification, appraisal management, tax
disbursement processing services, credit reporting and document preparation to
mortgage originators -- presently represent only a small part of the Company's
revenues, management believes that these services are strategically important to
the Combined Company's success and will provide an increasing percentage of the
Company's revenues and income in the future. The Acquisition will broaden the
Company's product offerings and enable it to better compete for business from
national customers. Management believes that the Combined Company, with its
broader product offerings and customer base, will have a stronger competitive
position in marketing such ancillary products and services. The major mortgage
originators are increasingly purchasing from a limited number of vendors who
offer the full array of such products and services.
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Management believes that Lawyers Title and Commonwealth//Transnation
are two of the leading providers of title insurance for commercial transactions.
As a result, the Combined Company will rank among the strongest competitors in
the commercial title insurance market. In addition, the Combined Company will be
one of the most strongly capitalized title insurers in the industry with an
aggregate statutory surplus of $353.0 million as of September 30, 1997.
Management believes that this will enhance its commercial title business
capabilities, enabling the Combined Company to underwrite larger title policies
without having to purchase third party reinsurance. Also, management anticipates
that the increased capital position will enhance the Company's claims-paying
ability rating, an important factor in competing for commercial title insurance
business.
The Stock Purchase Agreement and Related Agreements
Pursuant to the Stock Purchase Agreement, the Company will acquire all
of the issued and outstanding shares of capital stock of Commonwealth and
Transnation from RIC. The purchase price for Commonwealth and Transnation will
consist of a combination of cash from bank financing, shares of Common Stock,
shares of the Company's 7% Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") and the net proceeds from the 1,750,000 Shares
offered hereunder. In addition, the Company, Reliance and RIC have agreed to
enter into a Voting and Standstill Agreement (the "Voting and Standstill
Agreement") to be executed at the closing of the Acquisition that provides for,
among other things, the designation by RIC of three directors to the Board of
Directors of the Company and certain prohibitions and requirements on Reliance
and RIC and their affiliates with respect to (i) acquiring additional shares of
Common Stock or Series B Preferred Stock, (ii) voting their shares of Common
Stock, (iii) selling or transferring shares of Common Stock, shares of Series B
Preferred Stock and shares of Common Stock issuable upon conversion of the
Series B Preferred Stock, and (iv) converting shares of Series B Preferred Stock
into shares of Common Stock. See "The Acquisition."
The purchase price to be paid by the Company in the Acquisition
consists specifically of (i) 4,039,473 shares of Common Stock, (ii) 2,200,000
shares of Series B Preferred Stock, which shares are initially convertible into
4,824,561 shares of Common Stock, (iii) the greater of the net proceeds from the
sale of 1,750,000 shares offered by the Company hereunder, or $31.6 million; and
(iv) $207.5 million in cash, subject to reduction in certain circumstances, to
be financed by a senior credit facility in an aggregate principal amount of up
to $237.5 million with a group of financial institutions (the "Credit
Facility"). The Company anticipates that the Acquisition will close in February
1998, subject to the receipt of shareholder and regulatory approval. See "The
Acquisition" and "Use of Proceeds."
Upon the consummation of the Acquisition and approval of the change in
the name of the Company by its shareholders, the Company will change its name to
"LandAmerica Financial Group, Inc." The new name is intended to reflect the
broader array of services and increased geographic coverage to be provided by
the Combined Company.
Lawyers Title and Commonwealth/Transnation
Currently, Lawyers Title markets through its nationwide branch office
network, consisting of 14 National Division offices and approximately 260 branch
and closing/escrow offices, and through approximately 3,800 independent agents
and 36,000 approved attorneys. Lawyers Title has two wholly owned non-insurance
subsidiaries devoted to computer automation of various aspects of the title
insurance business, including on-line title plants, policy issuance, and closing
documentation and support functions. In 1996, Lawyers Title further diversified
its business by engaging in two separate joint ventures with third parties to
provide employee relocation and flood certification services. Lawyers Title
conducts business in 49 states (Iowa does not authorize title insurance) and in
the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the Bahamas and
a number of Canadian provinces. Lawyers Title became an independent entity in
1991 when it was spun-off from its former parent, Universal Corporation. See
"Business -- Lawyers Title."
The Company's executive offices are located at 6630 West Broad Street,
Richmond, Virginia 23230, and its telephone number is (804) 281-6700.
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<PAGE>
Founded in 1876, Commonwealth/Transnation is the oldest title insurance
underwriter for residential and commercial real estate in the United States.
Commonwealth/Transnation operates as a single organization under a single
management team, and comprises the third largest title insurance operation in
the United States, based on 1996 total premiums and fees.
Commonwealth/Transnation, through its respective subsidiaries and divisions,
provides a complete range of title and closing services through an extensive
network of more than 4,000 policy-issuing locations nationwide, including branch
offices, independent agents and approved attorneys. Commonwealth/Transnation is
organized into five regions with approximately 340 offices in 49 states, as well
as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. See
"Business -- Commonwealth/Transnation."
The Stock Offering
Common Stock Offered by the Company....... 1,750,000 shares
Common Stock to be Outstanding
After the Offering (1).................. 14,757,843 shares
Use of Proceeds........................... The net proceeds of the Offering
will be used to fund part of the
cash portion of the consideration
for the Acquisition. If the net
proceeds of the Offering are not
adequate, the Company expects to
utilize additional borrowings under
the Credit Facility. See "The
Acquisition" and "Use of Proceeds."
Dividend Policy........................... The Company initially intends to
continue to pay quarterly dividends
of $0.05 per share of Common Stock
($0.20 annually). The declaration
of dividends will be in the
discretion of the Board of
Directors and subject to certain
regulatory and other constraints.
See "Price Range of Common Stock
and Dividends."
Conditions to the Offering................ Consummation of the Acquisition is
a condition to the consummation of
the Offering.
NYSE Symbol............................... "LTI" ("LFG" upon consummation of
the Acquisition)
- ------------
(1) Based on 8,968,370 shares outstanding as of January 7, 1998, and
includes 4,039,473 shares issuable in the Acquisition and excludes (i) 732,897
shares issuable upon the exercise of outstanding stock options, (ii) the
conversion of the 2,200,000 shares of Series B Preferred Stock into shares of
Common Stock, and (iii) 262,500 shares of Common Stock which may be sold by the
Company upon exercise of the Underwriters' over-allotment option.
9
<PAGE>
SUMMARY HISTORICAL AND
PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth (i) certain selected historical
financial information for the Company and certain unaudited combined pro forma
financial information giving effect to the Acquisition as if it had occurred on
the dates and for the periods indicated herein, after giving effect to the pro
forma adjustments described in the notes to the unaudited pro forma combined
financial statements appearing elsewhere in this Prospectus, and (ii) certain
selected historical financial information for Commonwealth and Transnation on a
combined basis. The pro forma financial information is not necessarily
indicative of the results that actually would have occurred had the Acquisition
been consummated on the dates indicated or that may be obtained in the future.
See "Pro Forma Condensed Combined Financial Statements (Unaudited)."
The historical operating results data, per share data and balance sheet
data for the Company are derived from the consolidated audited financial
statements of the Company for the five year period ended December 31, 1996. The
historical operating results data, per share data and balance sheet data set
forth below for the nine months ended September 30, 1996 and 1997 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals only, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of results that may be
expected for the entire year ending December 31, 1997.
The historical operating results data and balance sheet data for
Commonwealth and Transnation on a combined basis are derived from the audited
combined financial statements of Commonwealth and Transnation for the five year
period ended December 31, 1996. The historical operating results data and
balance sheet data set forth below for the nine months ended September 30, 1996
and 1997 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals only, which Commonwealth and Transnation consider necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1997.
All historical operating results data, per share data and balance sheet
data set forth below should be read in conjunction with the consolidated
financial statements, related notes and other financial information of the
Company included or incorporated by reference into this Prospectus.
The unaudited pro forma financial data presented do not reflect any
future events that may occur after the Acquisition has been consummated. The
Company believes that operating expense synergies of the combined operations of
the Company and Commonwealth/Transnation will be realized after the Company has
completed the Acquisition. However, for the purposes of the unaudited pro forma
financial data presented herein, these synergies have not been reflected because
their realization cannot be assured.
10
<PAGE>
Lawyers Title Corporation
Summary Historical and Pro Forma Combined Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996(1)
---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share and other data)
<S> <C> <C> <C> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................ $ 389,279 $ 405,080 $ 413,857 $ 385,871 $ 456,377 $1,125,184
Title search, escrow and other fees..... 59,274 78,965 73,200 81,490 101,381 212,731
------ ------ ------ ------ ------- -------
Operating revenues...................... 448,553 484,045 487,057 467,361 557,758 1,337,915
Net investment income................... 12,444 11,850 12,478 12,501 13,053 43,508
Net realized investment gains........... 10,164 7,986 1,665 2,970 23,371 _23,717
------ ------ ------ ------ ------- -------
Total revenues...................... 471,161 503,881 501,200 482,832 594,182 1,405,140
Expenses:
Salaries and employee benefits.......... 118,672 137,328 143,817 155,920 184,274 390,357
Agents' commissions..................... 199,636 192,454 205,147 167,031 192,590 548,424
Provision for policy and contract claims
(2)................................... 59,594 54,139 46,775 24,297 29,211 90,327
General, administrative and other....... 81,395 90,995 96,492 111,724 132,567 301,764
------ ------ ------ ------- ------- -------
Total expenses...................... 459,297 474,916 492,231 458,972 538,642 1,330,872
Income before income taxes................ 11,864 28,965 8,969 23,860 55,540 74,268
Provision for income taxes................ -- -- 2,155 6,809 19,021 25,420
------ ------ ------ ------ ------- -------
Net income................................ $ 11,864 $ 28,965 $ 6,814 $ 17,051 $ 36,519 48,848
========= ========= ======== ========= =========
Preferred stock dividends................. 7,700
----------
Net income available to common shareholders $ 41,148
=========
Per Share Data:
Earnings per common and common equivalent
share (3)................................ $ 1.85 $ 4.23 $ 0.79 $ 1.89 $ 4.01 $ 2.76
Earnings per common share assuming full
dilution (3)............................. 1.84 4.21 0.79 1.87 4.01 2.48
Operating earnings per common share
assuming full dilution (4)............... 0.82 3.46 0.67 1.66 2.34 1.69
Weighted average number of common and
common equivalent shares outstanding
(000s)................................... 6,424 6,853 8,606 9,039 9,102 14,891
Weighted average number of shares assuming
full dilution (000s)..................... 6,437 6,876 8,607 9,099 9,118 19,732
Dividends declared per common share....... -- $ 0.06 $ 0.12 $ 0.18 $ 0.20 $ 0.20
Other Data:
Title policies issued..................... 812,770 923,065 866,621 670,447 790,829 2,025,484
Title insurance operating revenues:
Percentage direct operations............ 43.0% 47.6% 44.1% 51.7% 53.5% 46.4%
Percentage agency operations............ 57.0% 52.4% 55.9% 48.3% 46.5% 53.6%
Employees at period end................... 2,800 3,429 3,453 3,523 3,757 7,691
Loss ratio (5)............................ 13.3% 11.2% 9.6% 5.2% 5.2% 6.8%
Expense ratio (6)......................... 88.9% 86.7% 91.2% 92.5% 91.0% 91.1%
----- ----- ----- ----- ----- -----
Combined ratio (7)........................ 102.2% 97.9% 100.8% 97.7% 96.2% 97.9%
====== ===== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------
Pro Forma
1996 1997 1997(1)
---- ---- ----
(Dollars in thousands, except per share and other data)
<S> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................ $ 328,438 $ 353,775 $ 871,697
Title search, escrow and other fees..... 74,503 85,769 180,744
------ ------ -------
Operating revenues...................... 402,941 439,544 1,052,441
Net investment income................... 10,057 12,299 35,535
Net realized investment gains........... 5,381 120 1,307
------ ------ -------
Total revenues...................... 418,379 451,963 1,089,283
Expenses:
Salaries and employee benefits.......... 137,127 148,596 322,443
Agents' commissions..................... 134,116 149,944 418,904
Provision for policy and contract claims
(2)................................... 21,075 23,910 53,380
General, administrative and other....... 96,396 102,994 238,755
------ ------- -------
Total expenses...................... 388,714 425,444 1,033,482
Income before income taxes................ 29,665 26,519 55,801
Provision for income taxes................ 10,046 9,220 19,201
------ ------ -------
Net income................................ $ 19,619 $ 17,299 36,600
========== =========
Preferred stock dividends................. 5,775
---------
Net income available to common shareholders $ 30,825
=========
Per Share Data:
Earnings per common and common equivalent
share (3)................................ $ 2.16 $ 1.87 $ 2.06
Earnings per common share assuming full
dilution (3)............................. 2.14 1.85 1.83
Operating earnings per common share
assuming full dilution (4)............... 1.76 1.85 1.79
Weighted average number of common and
common equivalent shares outstanding
(000s)................................... 9,097 9,231 14,973
Weighted average number of shares assuming
full dilution (000s)..................... 9,158 9,332 19,946
Dividends declared per common share....... $ 0.15 $ 0.15 $ 0.15
Other Data:
Title policies issued..................... 572,141 594,837 1,524,527
Title insurance operating revenues:
Percentage direct operations............ 54.9% 54.4% 48.3%
Percentage agency operations............ 45.1% 45.6% 51.7%
Employees at period end................... 3,785 3,932 8,075
Loss ratio (5)............................ 5.2% 5.4% 5.1%
Expense ratio (6)......................... 90.9% 91.0% 91.5%
----- ----- -----
Combined ratio (7)........................ 96.1% 96.4% 96.6%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------------------------------------------------- ---------------------------
Pro Forma
1992 1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments...................... $ 233,146 $ 269,370 $ 252,011 $ 285,472 $ 316,052 $ 317,715 $ 781,675
Total assets.............................. 363,673 438,140 453,259 475,843 520,968 540,944 1,460,384
Total debt................................ 1,218 1,165 8,872 4,146 4,200 8,216 215,716
Reserve for policy and contract claims
(2)..................................... 179,022 187,619 198,906 193,791 196,285 199,865 465,458
Shareholders' equity...................... 143,978 201,161 203,323 238,385 262,168 281,330 640,854
Book value per share...................... 22.26 23.90 22.89 26.83 29.49 31.51 31.61
</TABLE>
11
<PAGE>
(1) The Company expects to achieve approximately $40.0 million of recurring
annual pre-tax operating cost savings through reductions in staff,
consolidation of data processing and elimination of certain duplicate
or excess facilities. It is expected to take four quarters to fully
realize these expense savings. No adjustment has been included in the
unaudited pro forma condensed financial statements for the anticipated
expense savings. There can be no assurance that anticipated expense
savings will be achieved in the amounts or at the times anticipated.
(2) In the fourth quarter of 1996, the Company made a change from reporting
policy and contract claims on a discounted basis to reporting such
claims on an undiscounted basis. In addition, the Company changed its
estimate of reserves for policy and contract claims to reflect the
favorable loss experience that has emerged over the past few years.
These changes had no material net effect on the provision for policy
and contract claims. See "Lawyers Title Corporation Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Index to Financial Statements."
(3) The increase in price of the Common Stock during the third quarter of
1997 resulted in there being outstanding potentially dilutive
securities having a dilutive effect in excess of 3% on the Company's
earnings per share for the nine months ended September 30, 1997. Prior
to September 30, 1997, the effect of outstanding potentially dilutive
securities was immaterial and accordingly the Company has not
previously reported fully diluted and primary earnings per share.
Earnings per share as previously reported (as shown in the financial
statements included herein) were as follows:
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 1.88 $ 4.31 $ 0.80 $ 1.92 $ 4.11 $ 2.21
</TABLE>
(4) Excludes after tax net realized investment gains.
(5) Provision for policy and contract claims as a percentage of operating
revenues.
(6) Total operating expenses excluding interest expense, amortization of
goodwill and provision for policy and contract claims as a percentage
of operating revenues.
(7) The sum of the loss ratio and the expense ratio.
12
<PAGE>
Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company
Summary Historical Combined Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands, except other data)
<S> <C> <C> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................... $ 704,110 $ 747,202 $ 792,919 $ 582,329 $ 668,807
Title search, escrow and other fees........ 66,409 146,148 63,843 89,607 111,350
------- ------- ------- ------- -------
Operating revenues......................... 770,519 893,350 856,762 671,936 780,157
Net investment income...................... 15,126 24,224 26,455 27,933 30,455
Net realized investment gains.............. 1,576 4,786 516 1,729 346
------- ------- ------- ------- -------
Total revenues......................... 787,221 922,360 883,733 701,598 810,958
Expenses:
Salaries and employee benefits............. 185,443 219,904 211,150 188,097 206,083
Agents' commissions........................ 374,419 426,885 432,041 310,729 355,834
Provision for policy and contract claims... 68,210 81,803 75,867 58,486 61,116
General, administrative and other.......... 127,114 133,002 132,871 130,076 149,345
------- ------- ------- ------- -------
Total expenses......................... 755,186 861,594 851,929 687,388 772,378
Income before income taxes................... 32,035 60,766 31,804 14,210 38,580
Provision for income taxes................... 10,248 20,480 10,809 4,755 13,347
Income from continuing operations............ 21,787 40,286 20,995 9,455 25,233
Income from discontinued mortgage insurance
operations, net of taxes.................... 10,649 -- -- -- --
Gain on disposal of discontinued mortgage
insurance operations, net of taxes.......... 7,549 -- -- -- --
Cumulative effect of change in accounting for
income taxes................................ -- 1,316 -- -- --
------- ------- ------- ------- -------
Net income................................... $ 39,985 $ 41,602 $ 20,995 $ 9,455 $ 25,233
======== ======== ======== ======= ========
Common stock dividends......................... $ 22,700 $ 19,500 $ 19,000 $ 4,000 $ 18,216
Per Share Data (1)
Other Data:
Title policies issued........................ 1,496,960 1,651,806 1,736,134 1,094,467 1,234,655
Title insurance operating revenues:
Percentage direct operations............... 40.0% 40.9% 35.0% 40.2% 41.4%
Percentage agency operations............... 60.0% 59.1% 65.0% 59.8% 58.6%
Employees at end of period................... 3,977 4,623 4,035 3,755 3,934
Loss ratio (2)............................... 9.0% 9.3% 8.9% 8.7% 7.8%
Expense ratio (3)............................ 89.1% 87.3% 90.5% 93.5% 91.1%
----- ----- ----- ----- -----
Combined ratio (4)........................... 98.1% 96.6% 99.4% 102.2% 98.9%
===== ===== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1997
---- ----
(Dollars in thousands, except other data)
<S> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................... $488,980 $517,922
Title search, escrow and other fees........ 87,000 94,975
------- -------
Operating revenues......................... 575,980 612,897
Net investment income...................... 22,663 23,236
Net realized investment gains.............. 376 1,187
------- -------
Total revenues......................... 599,019 637,320
Expenses:
Salaries and employee benefits............. 153,695 173,847
Agents' commissions........................ 263,138 268,960
Provision for policy and contract claims... 47,461 29,470
General, administrative and other.......... 109,880 120,872
------- -------
Total expenses......................... 574,174 593,149
Income before income taxes................... 24,845 44,171
Provision for income taxes................... 8,520 15,192
Income from continuing operations............ 16,325 28,979
Income from discontinued mortgage insurance
operations, net of taxes.................... -- --
Gain on disposal of discontinued mortgage
insurance operations, net of taxes.......... -- --
Cumulative effect of change in accounting for
income taxes................................ -- --
------- -------
Net income................................... $ 16,325 $ 28,979
========= ========
Common stock dividends......................... -- $ 21,000
Per Share Data (1)
Other Data:
Title policies issued........................ 925,052 929,690
Title insurance operating revenues:
Percentage direct operations............... 41.3% 43.9%
Percentage agency operations............... 58.7% 56.1%
Employees at end of period................... 3,922 4,143
Loss ratio (2)............................... 8.2% 4.8%
Expense ratio (3)............................ 91.4% 91.8%
----- -----
Combined ratio (4)........................... 99.6% 96.6%
===== =====
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------- -----------------------
At December 31, At September 30,
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments......................... $371,808 $423,801 $416,533 $440,071 $475,430 $458,425 $463,960
Total assets................................. 483,198 546,968 552,390 573,820 620,754 610,119 626,532
Total debt................................... -- -- -- -- -- -- --
Reserve for policy and contract claims....... 173,327 200,874 228,063 240,777 264,838 262,341 265,593
Shareholders' equity......................... 236,262 260,863 253,466 270,737 273,657 265,833 284,116
</TABLE>
- --------------
(1) Per share data for Commonwealth and Transnation are not meaningful
because all of the outstanding shares of those companies are held by
one shareholder, RIC. Therefore, per share data of Commonwealth and
Transnation have not been provided.
(2) Provision for policy and contract claims as a percentage of operating
revenues.
(3) Total operating expenses excluding interest expense, amortization of
goodwill and provision for policy and contract claims as a percentage
of operating revenues.
(4) The sum of the loss ratio and the expense ratio.
13
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors,
in addition to the other information presented elsewhere in this Prospectus,
before purchasing the Shares offered hereby.
Competition
The title insurance business is very competitive, primarily in the
areas of price, service and expertise. For larger commercial customers and
mortgage originators, the size and financial strength of the title insurer are
also important factors. Although the Company expects the Combined Company to be
one of the largest title insurance organizations in the country, based on
premium and fee revenues, at least five other title insurance underwriters have
the size, capital base and agency networks to compete effectively with the
Company. Also, the removal of regulatory barriers in the future might result in
new competitors, including financial institutions, entering the title insurance
business. Intense competition among the major title insurance companies and any
such new entrants could lower premium and fee revenues for the Combined Company.
See "Business -- Competition."
Realization of Expense Savings
While the Combined Company expects to realize recurring annual pre-tax
expense savings of approximately $40.0 million over the four quarters following
the consummation of the Acquisition from the elimination of duplicative
personnel, facilities and services, no assurance can be given that any
particular level of savings will, in fact, be realized or that such savings will
be realized over any particular time period. See "The Combined Company."
Susceptibility to Change in Economic Conditions
The amount of title insurance business available is dependent upon,
among other things, the volume of commercial and residential real estate
transactions. The volume of such transactions has historically been influenced
by such factors as interest rates and the health of the overall economy. When
interest rates are increasing, real estate activity typically declines and the
title insurance industry tends to experience lower revenues. Accordingly, no
assurance can be given that historical levels of premiums and fees received by
the Company and Commonwealth/Transnation will be available to the Combined
Company in the future. See "Lawyers Title Corporation Management's Discussion
and Analysis of Financial Condition and Results of Operations -- General" and
"Business -- Seasonality, Backlog and Cyclicality."
Increased Leverage
The Company historically has utilized little or no funded debt. To
finance the Acquisition, the Company has entered into the Credit Facility and
anticipates thereby financing $207.5 million of the cash portion of the purchase
price. This debt, and the issuance of Series B Preferred Stock in the
Acquisition, will create increased demands upon the available cash of the
Company to pay debt service on the Credit Facility and dividends on the Series B
Preferred Stock. No assurance can be given that such increased debt service and
preferred stock dividend requirements will not have an adverse impact on the
Company's liquidity and capital position. See "Lawyers Title Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "The Acquisition -- Bank
Financing."
Concentration of Share Ownership
Upon consummation of the Acquisition and the issuance by the Company of
1,750,000 shares of Common Stock in this Offering, RIC will hold 4,039,473
shares of Common Stock representing approximately 27.4% of the issued and
outstanding shares of Common Stock. As a result, RIC will be a substantial
shareholder and, subject to the limitations of the Voting and Standstill
Agreement, will have significant influence on the outcome of certain matters
requiring a shareholder vote. See "The Acquisition -- Certain Related
Agreements." To the extent that the Company's Articles of Incorporation (the
"Company's Charter") requires the affirmative vote of the holders of at
14
<PAGE>
least 80% of the Common Stock to approve certain business combination
transactions, RIC and its affiliates will be able to prevent approval of such
transactions so long as it holds at least 20% of the issued and outstanding
shares of Common Stock. See "Description of Capital Stock -- Certain Provisions
of the Company's Charter and Bylaws."
In addition, upon consummation of the Acquisition, RIC will acquire
shares of Series B Preferred Stock that are initially convertible into 4,824,561
shares of Common Stock. Under the terms of the Voting and Standstill Agreement,
unless certain specified events occur, RIC and its affiliates are prohibited
from converting the Series B Preferred Stock into Common Stock until RIC and its
affiliates dispose completely of the 4,039,473 shares of Common Stock acquired
by RIC on the date upon which the Acquisition is consummated (the "Closing
Date"). See "The Acquisition -- Certain Related Agreements" and "Description of
Capital Stock -- Series B Preferred Stock." However, if any of certain specified
events were to occur, then RIC and its affiliates would be able to convert some
or all of the Series B Preferred Stock into Common Stock. If all of the shares
of Series B Preferred Stock were converted into 4,824,561 shares of Common Stock
following the Acquisition and RIC and its affiliates had not disposed of any of
the shares of Common Stock acquired on the Closing Date, RIC and its affiliates
would hold in the aggregate 8,864,034 shares of Common Stock, or approximately
45.3% of the issued and outstanding shares of Common Stock following
consummation of all of the transactions contemplated by the Stock Purchase
Agreement. As a result, RIC and its affiliates would be able to exercise,
subject to the limitations of the Voting and Standstill Agreement, significant
influence on the outcome of matters requiring a shareholder vote. See
"Description of Capital Stock -- Series B Preferred Stock" and "-- Acquisition
Covenants Regarding Non-Performance Remedies."
Potential Change of Control
The Voting and Standstill Agreement provides that RIC and its
affiliates will vote the shares of Common Stock held by them (i) in accordance
with the recommendation of the Company's Board of Directors with respect to
nominees to the Board of Directors (other than the three (3) directors
designated by RIC), (ii) with respect to any contest for the election of
directors in connection with any tender offer, in the same proportion as the
total votes cast by or on behalf of all shareholders of the Company, (iii) with
respect to any matters related to share issuance, mergers, acquisitions and
divestitures, in accordance with the independent judgment of RIC and its
affiliates, and (iv) with respect to all other matters not otherwise provided,
in accordance with the recommendation of the Company's Board of Directors. See
"The Acquisition -- Certain Related Agreements." These voting requirements
terminate if certain events occur. See "Description of Capital Stock -
Acquisition Covenants Regarding Non-Performance Remedies."
The provisions of the Series B Preferred Stock provide that, in the
event of certain defaults related primarily to the Company's financial
performance and to dividend payments on the shares of Series B Preferred Stock,
the size of the Company's Board of Directors will be increased by three
directors and RIC will be entitled to designate three additional directors to
fill the increased seats. In addition, if the Company defaults on any of its
material debt obligations in excess of $15,000,000 or the Company fails to pay
the stated dividend on the Series B Preferred Stock on three occasions, whether
or not consecutive, the Company must increase the size of the Board of Directors
to allow additional directors to be designated by RIC such that the total number
of RIC designated directors will constitute a majority of the Board of
Directors. See "Description of Capital Stock -- Acquisition Covenants Regarding
Non-Performance Remedies."
Dilution
As discussed under "Dilution," after giving effect to sale of the
Common Stock offered hereby, purchasers in the Offering will suffer immediate
and substantial dilution in the net tangible book value of their shares. See
"Dilution."
15
<PAGE>
Holding Company Structure; Reliance on Dividends from Insurance Subsidiaries
As a holding company whose principal assets are the securities of its
insurance subsidiaries, the Combined Company's ability to meet debt service
obligations and pay operating expenses and dividends, if authorized by its Board
of Directors, depends primarily on the receipt of sufficient dividends from such
insurance subsidiaries. The insurance statutes and related regulations of
Virginia, Pennsylvania and Arizona, among other states, require the maintenance
of minimum amounts of statutory capital and place certain restrictions upon the
amount of dividends that the insurance subsidiaries may pay. See "Price Range of
Common Stock and Dividends."
The Company's ability to pay dividends on the Common Stock will also be
subject to the dividend priority of the Series B Preferred Stock and certain
financial covenants relating to the Credit Facility. See "The Acquisition --
Bank Financing" and "Description of Capital Stock -- Series B Preferred Stock."
Regulation
The Company's subsidiaries are subject to regulation by the state
insurance authorities of the various states in which they transact business. The
nature and extent of such regulation vary from jurisdiction to jurisdiction, but
typically involve regulation of dividend payments and other transactions between
affiliates, prior approval of the acquisition and control of an insurance
company or of any company controlling an insurance company, regulation of
certain transactions entered into by an insurance company with any of its
affiliates, approval of premium rates for insurance, standards of solvency and
minimum amounts of capital surplus which must be maintained, limitations on
types and amounts of investments, restrictions on the size of risks which may be
insured by a single company, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, approval of policy forms, methods
of accounting, establishing reserves for losses and loss adjustment expenses,
regulation of underwriting and marketing practices, regulation of reinsurance
and filing of annual and other reports with respect to financial condition or
other matters. These regulations may impede, or impose burdensome conditions on,
rate increases or other actions that the Company might want to take to enhance
its operating results. Such regulation is generally intended for the protection
of policyholders rather than security holders. In addition, state regulatory
examiners perform periodic examinations of insurance companies.
See "Business -- Regulation."
The insurance regulatory framework has recently been subject to
increased scrutiny by the National Association of Insurance Commissioners (the
"NAIC"), state legislators and insurance regulators in the United States
Congress. No assurance can be given that future legislative or regulatory
changes resulting from such activity will not adversely affect the Company or
its subsidiaries.
Provisions Having Possible Anti-Takeover Effects
The Company's Charter and Bylaws and the Amended and Restated Rights
Agreement, as well as Virginia corporation law and the insurance laws of various
states, all contain certain provisions that could have the effect of
discouraging a prospective acquiror from making a tender offer, or which may
otherwise delay, defer or prevent a change in control of the Company. See
"Description of Capital Stock -- Preferred Share Purchase Rights," "-- Certain
Provisions of the Company's Charter and Bylaws," "-- Affiliated Transactions,"
"-- Control Share Acquisitions," and "Business -- Regulation."
Uncertainties Relating to Integration of Operations
The Company has entered into the Stock Purchase Agreement with the
expectation that the Acquisition will result in operating and strategic
benefits. The anticipated benefits of the Acquisition may not be achieved unless
the operations of the Company are successfully combined with those of
Commonwealth/Transnation in a coordinated, timely and efficient manner, and
there can be no assurance this will occur. The transition to a combined company
will require substantial attention from management. Any diversion of the
attention of management and any difficulties encountered in the transition
process could have an adverse impact on the revenues and operating results of
the Combined Company. The combination of the two operations will also require
integration of the two organizations' product offerings and systems and the
coordination of their sales and
16
<PAGE>
marketing efforts. Difficulties in assimilation may be increased by the
necessity of integrating personnel with different business backgrounds and
combining two different corporate cultures. In addition, the process of
combining the Company and Commonwealth/Transnation could cause the interruption
of, or a loss of momentum in, the activities of either or both of the
organizations' businesses, which could have an adverse effect on their combined
operations. There can be no assurance that either organization will retain its
key management, technical, sales and marketing personnel or that the Combined
Company will realize any of the other anticipated benefits of the Acquisition.
Failure to achieve the anticipated benefits of the Acquisition or to
successfully integrate the operations of Commonwealth/Transnation with those of
the Company could have a material adverse affect upon the business, operating
results and financial condition of the Combined Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,750,000 Shares of
Common Stock offered hereby, based on an assumed offering price of $31.94 per
Share, will be approximately $53.1 million after deducting estimated offering
expenses (approximately $61.1 million after deducting such expenses if the
Underwriters exercise their over-allotment option in full). Such net proceeds to
the Company from the sale of the 1,750,000 Shares will be used to fund part of
the cash portion of the consideration payable by the Company in the Acquisition.
Pursuant to the Stock Purchase Agreement, the Company is required to pay RIC, at
the closing of the Acquisition, the greater of the net proceeds of the 1,750,000
Shares offered by the Company hereunder, or $31.6 million. To the extent that
the net proceeds of the Offering are less than $31.6 million, the Company
expects to obtain the funds necessary to complete the Acquisition from
borrowings under the Credit Facility. See "The Acquisition -- Bank Financing."
However, the Company anticipates that such borrowings will not be necessary
unless the public offering price of the Shares is less than $19.00 per share.
The Stock Purchase Agreement requires that any additional net proceeds
to the Company from the exercise by the Underwriters of their over-allotment
option will be used to pay transaction costs relating to the Acquisition and
reduce indebtedness under the Credit Facility that would otherwise be incurred
to fund the Acquisition.
The consummation of the Acquisition is a condition to the consummation
of the Offering. Pursuant to the Stock Purchase Agreement, the consummation of
the Acquisition is conditioned upon the Company completing a private sale or
public offering (such as the Offering) of 1,750,000 shares of Common Stock. See
"The Acquisition - Description of the Acquisition."
Pending application of the net proceeds for the purposes described
above, all of the net proceeds will be managed in a manner consistent with the
Company's current investment philosophy.
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Since October 1995, the Common Stock has been listed on the NYSE under
the symbol "LTI." Before October 1995, the Common Stock was listed with The
Nasdaq National Market under the symbol "LTCO." The Company has reserved the
symbol "LFG" on the NYSE for use upon consummation of the Acquisition and
shareholder approval of the proposed change in the name of the Company to
"LandAmerica Financial Group, Inc."
The following table sets forth the reported high and low sales prices
per share of the Common Stock on the NYSE Composite Tape, based on published
financial sources, and the dividends per share declared on the Common Stock for
the calendar quarter indicated.
<TABLE>
<CAPTION>
Market Price Dividends
High Low
<S> <C> <C> <C>
Year Ended December 31, 1995
First quarter $13.25 $10.50 $0.03
Second quarter 15.88 12.38 0.05
Third quarter 16.63 13.50 0.05
Fourth quarter 19.25 14.63 0.05
Year Ended December 31, 1996
First quarter $19.13 $16.63 $0.05
Second quarter 19.88 16.00 0.05
Third quarter 22.38 17.38 0.05
Fourth quarter 21.75 17.63 0.05
Year Ended December 31, 1997
First quarter $23.75 $19.00 $0.05
Second quarter 21.13 16.75 0.05
Third quarter 33.69 18.00 0.05
Fourth quarter 33.38 28.25 0.05
Year Ended December 31, 1998
First quarter (through January 2, 1998) $31.75 $31.00 --
</TABLE>
On August 20, 1997, the last day on which the Common Stock traded prior
to the announcement of the Acquisition, the closing price of the Common Stock as
reported on the NYSE Composite Tape was $24.63 per share. On December 11, 1997,
the day on which the original Stock Purchase Agreement was amended and restated,
the closing price of the Common Stock as reported on the NYSE Composite Tape was
$32.19 per share. On January 2, 1998, the closing price of the Common Stock as
reported on the NYSE Composite Tape was $31.69 per share.
The Company's current dividend policy anticipates the payment of
quarterly dividends in the future. The declaration and payment of dividends to
holders of Common Stock will be in the discretion of the Board of Directors,
will be subject to contractual restrictions contained in a Company loan
agreement and will be dependent upon the future earnings, financial condition
and capital requirements of the Company and other factors.
Because the Company is a holding company, its ability to pay dividends
will depend largely on the earnings of, and cash flow available from, its
subsidiaries. In a number of states, certain of the Company's subsidiaries are
subject to regulations that require minimum amounts of statutory surplus and
that require that the payment of any extraordinary dividends receive prior
approval of the insurance regulators of these states. Specifically, the
insurance regulations of Virginia restrict the amount of dividends that Lawyers
Title can distribute to the Company in any 12-month period without prior
approval. Under Virginia law, payment of dividends or distributions by a
domestic insurer in any 12-month period without the prior approval of the
Virginia Department of Insurance is limited to the lesser of (i) 10% of such
insurer's surplus as of the preceding December 31 or (ii) the net income, not
including realized capital gains, of such insurer for the preceding calendar
year. Accordingly, under
18
<PAGE>
this and other such statutory requirements, the net assets of the Company's
consolidated subsidiaries aggregating approximately $269.0 million were not
available for dividends, loans or advances to the Company at September 30, 1997.
Based on statutory financial results for the year ended December 31,
1996, Lawyers Title was able to distribute to the Company in calendar year 1997
aggregate dividends not to exceed $14.1 million without the prior approval of
the Virginia insurance commissioner. Based on the amounts that had been
distributed in the preceding twelve-month period, as of September 30, 1997,
approximately $12.3 million was available for the payment of dividends by
Lawyers Title pursuant to the insurance regulations of Virginia.
In a number of states, Commonwealth and Transnation are subject to
regulations that require minimum amounts of statutory surplus and that require
that the payment of any extraordinary dividends receive prior approval of the
Insurance Commissioners of these states. Specifically, the insurance regulations
of Arizona and Pennsylvania restrict the amount of dividends that Transnation
and Commonwealth, respectively, can distribute to RIC in any 12-month period
without prior approval. Under Arizona law, payment of dividends or distributions
by a domestic insurer in any 12-month period without prior approval of the
Arizona Department of Insurance is limited to the lesser of (i) 10% of such
insurer's statutory surplus as of the preceding December 31 or (ii) such
insurer's net investment income for the preceding calendar year. Under
Pennsylvania law, payment of dividends or distributions by a domestic insurer in
any 12-month period without the prior approval of the Pennsylvania Department of
Insurance may not exceed the greater of (i) 10% of such insurer's surplus as of
the preceding year end or (ii) the net income of such insurer for such preceding
year. Under these and other such statutory requirements, the net assets of the
combined companies aggregating approximately $284.1 million were not available
for dividends, loans or advances to RIC at September 30, 1997.
Based on statutory financial results for the year ended December 31,
1996, Commonwealth and Transnation were able to distribute to RIC in calendar
year 1997 aggregate dividends not to exceed $37.3 million without the prior
approval of state insurance commissioners. Based on the amounts that had been
distributed in the preceding twelve-month period, as of September 30, 1997, no
additional amounts were currently available for the payment of dividends by
Commonwealth or Transnation without prior regulatory approval.
In addition to regulatory restrictions, the Company's ability to
declare dividends is subject to restrictions under a Revolving Credit Agreement,
dated as of November 7, 1997 (the "Credit Agreement"), between the Company and
Bank of America National Trust and Savings Association ("Bank of America"),
which generally limits the aggregate amount of all cash dividends and stock
repurchases by the Company to 25% of its cumulative consolidated net income
arising after December 31, 1996. As of September 30, 1997, approximately $4.3
million was available for the payment of dividends by the Company under the
Credit Agreement. Management does not believe that the restrictions contained in
the Credit Agreement will, in the foreseeable future, adversely affect the
Company's ability to pay cash dividends at the current dividend rate. See "The
Acquisition -- Bank Financing."
19
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the
Company, as of September 30, 1997, and the pro forma capitalization as adjusted
to give effect to (i) the Offering by the Company of the 1,750,000 Shares
offered hereby and the use of the net proceeds from the Offering as described
under "Use of Proceeds," (ii) the Acquisition and (iii) anticipated borrowings
under the Credit Facility. See "Use of Proceeds." The information set forth in
the table should be read in conjunction with the historical consolidated
financial statements and notes thereto, the pro forma financial information and
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," for the Company and Commonwealth/Transnation,
respectively, included elsewhere in this Prospectus. See "Index to Financial
Statements," "Lawyers Title Corporation and Subsidiaries Pro Forma Condensed
Combined Financial Statements," "Lawyers Title Corporation Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------
Historical Pro Forma
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
Long term debt:
Credit Facility........................................ $8,216 $215,716
----- -------
Total long term debt............................... $8,216 $215,716
----- -------
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; no shares of Series A Preferred
Stock issued or outstanding and 2,200,000
shares of Series B Preferred Stock issued
and outstanding pro forma.......................... - 175,700
Common Stock, no par value, 45,000,000 shares
authorized; 8,928,041 shares issued and
outstanding and 14,717,514 shares issued
and outstanding pro forma (1)...................... 167,621 351,445
Unrealized investment gains (less related
deferred income tax of $2,863).................... 5,317 5,317
Retained earnings...................................... 108,392 108,392
------- -------
Total shareholders' equity........................ 281,330 640,854
------- -------
Total capitalization.......................... $289,546 $856,570
======= =======
</TABLE>
- -----------------------
(1) Does not include (i) 476,551 shares of Common Stock issuable upon the
exercise of stock options, (ii) the conversion of the 2,200,000 shares of
Series B Preferred Stock into shares of Common Stock, and (iii) 262,500
shares of Common Stock which may be sold by the Company upon exercise of
the Underwriters' over-allotment option. See "Underwriting."
20
<PAGE>
DILUTION
At September 30, 1997, the Company had a consolidated net tangible book
value of approximately $222.5 million, or $24.92 per share of Common Stock.
After giving effect to the sale of the 1,750,000 Shares offered by the Company
hereby at an assumed public offering price of $31.94 per share and the receipt
by the Company of approximately $53.1 million in net proceeds from the Offering
after deducting underwriting discounts and offering expenses estimated at $2.8
million, and after giving effect to the Acquisition and payment of estimated
expenses of $5.0 million in connection therewith, the pro forma net tangible
book value at September 30, 1997 would have been $114.8 million, or $7.80 per
share of Common Stock, assuming no conversion of the Series B Preferred Stock
issued to RIC in connection with the Acquisition. This represents an immediate
decrease in net tangible book value of $17.12 per share to existing shareholders
and an immediate dilution of $24.14 per share to new investors. The following
table illustrates in Column (A) the pro forma per share dilution assuming no
conversion of the Series B Preferred Stock and in Column (B) the pro forma per
share dilution assuming conversion of the Series B Preferred Stock as of
September 30, 1997.
<TABLE>
<CAPTION>
(B)
(A) Pro Forma Net
Pro Forma Net Tangible Book
Tangible Book Value Value Assuming
Assuming No Conversion of
Conversion of Series Series B
B Preferred Stock Preferred Stock
------------------------------ ----------------------------
<S> <C> <C>
Public offering price per share............... $31.94 $31.94
Historical net tangible book value per
share prior to the Offering and the
Acquisition (1)............................ $24.92 $24.92
Increase per share in pro forma net
tangible book value attributable to the
Offering (2)............................... $ 0.89 $ 0.89
Decrease per share in pro forma net
tangible book value attributable to the
Acquisition (3)........................... $18.01 $10.94
Pro forma net tangible book value per
share after the Offering and the
Acquisition (4)........................... $7.80 $14.87
Dilution per share to the new
investors (5)............................... $24.14 $17.07
Pro forma full book value per share after the
Offering and the Acquisition................ $31.61 $32.79
</TABLE>
- -----------------------
(1) Historical net tangible book value per share prior to the Offering and the
Acquisition represents the total amount of tangible assets of the Company
reduced by the amount of its total liabilities, divided by the number of
shares of Common Stock outstanding.
(2) Based on the assumed offering price of $31.94 per share of Common Stock and
after deducting underwriting discounts and commissions and estimated
Offering expenses.
21
<PAGE>
(3) Column B assumes the immediate conversion of the 2,200,000 shares of Series
B Preferred Stock issued to RIC in connection with the Acquisition into
4,824,561 shares of Common Stock. Unless certain events occur, the Series B
Preferred Stock is not convertible into shares of Common Stock until such
time as RIC and its affiliates have sold, conveyed or transferred all of
the 4,039,473 shares of Common Stock received by RIC in connection with the
Acquisition. See "Description of Capital Stock -- Series B Preferred
Stock."
(4) Based on total pro forma net tangible book value of $114.8 million,
assuming no conversion of preferred stock, and $290.5 million, assuming
conversion of preferred stock, divided by the total number of shares of
Common Stock to be outstanding upon consummation of the Offering and the
Acquisition.
(5) Dilution is determined by subtracting net tangible book value per share of
Common Stock after the Offering and Acquisition from the public offering
price of $31.94 per share of Common Stock.
22
<PAGE>
THE COMBINED COMPANY
Background
In 1995, the Company adopted a long term strategy focused on becoming
the premier, low cost national provider of a broad array of information, title
insurance and closing services related to transactions involving the transfer
and financing of real estate. Such services would include traditional title
insurance, as well as title information, closing, relocation, and other real
estate-related services. The Company's Board of Directors and management
determined that the acquisition of another large title insurance underwriter was
an attractive means of implementing this strategy. Such an acquisition would
create a platform for deriving greater benefits from investments in technology,
diversify the Company's product offerings and customer base, broaden the
Company's distribution capabilities and improve the Company's market position in
the commercial title insurance business. During the period from 1995 through May
1997, the Company considered the potential benefits of several acquisition
candidates. In August 1997, the Company entered into the Stock Purchase
Agreement for the acquisition of Commonwealth/Transnation.
Benefits of the Acquisition
Following the announcement of the Acquisition, the Company formed
several task forces to study and prepare for the integration of the two
organizations. Specific areas addressed by these task forces include human
resources and benefits, claims, technology, underwriting, finance, real estate
and facilities, field structure and combined production centers. These groups
have met regularly since August 1997 and have developed detailed plans for
realizing the anticipated expense savings and integrating the Combined Company's
business operations. Accordingly, management believes that, following the
Acquisition, the operations of the two organizations will be combined swiftly
and without undue disruption to the business of the Combined Company, although
there can be no assurance in this regard. Management believes that the
Acquisition will yield significant benefits as outlined below.
Expense Savings. Management has identified certain expense savings
which it believes will be achieved by the Combined Company in the near term by
consolidating infrastructure and reducing management and administrative
expenses. While title insurers generally have low claims loss experience
compared to other insurance underwriters, operating expenses tend to be
significantly higher due to the costs associated with maintaining local
marketing offices and production centers, and the personnel required to process
forms, search titles, collect information on specific properties, prepare title
insurance commitments and policies and perform closings. By combining the
operations of the Company and Commonwealth/Transnation, duplicate headquarters
will be eliminated, substantially all corporate departments will be consolidated
and the Combined Company will be able to negotiate better terms with third party
vendors. The number of regional offices and field head count will be reduced
with the elimination of redundant title plants and back office production
centers. Management has identified approximately 20 metropolitan markets where
the back office and title production facilities will be combined. These
multi-county production facilities will service each of the Combined Company's
title insurance subsidiaries. As a result, management of the Company believes
that the combination of the two operations will yield recurring annual pre-tax
expense savings of approximately $40.0 million. It is expected to take four
quarters to fully realize these expense savings. To implement the changes
necessary to realize such savings, the Combined Company will incur certain
expenses, primarily relating to the payment of employee severance benefits and
the termination of leases on certain offices to be closed. Accordingly, the
Combined Company anticipates that, in the quarter in which the Acquisition
occurs, it will record a one-time after-tax charge to earnings of approximately
$16.3 million to $19.5 million (approximately $25.0 million to $30.0 million
before taxes).
Broader Distribution Network. The Acquisition will significantly
broaden the Company's distribution network, resulting in one of the most
extensive branch and agency networks in the industry. The distribution
advantages of the Acquisition are threefold. First, the Company will gain a
presence in markets where only a minimal representation existed previously. For
example, Commonwealth/Transnation has offices in the state of Washington and in
northern California where the Company is not well represented, has a more
extensive network than the Company in certain other western markets, such as
Arizona and Colorado, and has a strong presence in western Michigan, which
complements the Company's presence in the eastern region of that state. The
Combined
23
<PAGE>
Company's increased presence throughout the United States, particularly in the
largest real estate markets, will enable it to better serve the large national
residential mortgage originators. This is particularly important since these
lenders are becoming increasingly dominant; the market share of the top ten
national residential mortgage originators increased from 15.3% in 1989 to 27.3%
in 1996, according to the Mortgage Market Statistical Annual for 1997 of Inside
Mortgage Finance.
The second major distribution advantage of the Acquisition is the
addition of branch offices in markets where the Company is currently represented
solely by agents. Such markets include northern California and upstate New York.
Generally there is a higher profit margin for the Company on orders referred to
a branch office.
Third, each of Lawyers Title, Commonwealth, Transnation and their
respective subsidiaries have developed brand name recognition in particular
markets and long standing referral networks. Management believes this brand
identity can be sustained following the Acquisition by using a "multiple
storefront strategy." Each of the subsidiaries of the Combined Company will
continue to sell under its own name. The separate brand identity and customer
contact personnel of each title insurance operation can be maintained, while
enabling the Company to realize expense savings and improve service by
consolidating back office operations. Management believes this multiple
storefront strategy takes advantage of established brand awareness, will leave
important customer/referral source relationships essentially undisturbed, and
will give the Combined Company the ability to target different market segments
with different brand names.
Geographic Diversity. The Combined Company will be geographically
better diversified than either Lawyers Title or Commonwealth/Transnation
individually, thereby reducing its exposure to particular regional real estate
markets. Based on fiscal year 1996 combined financial results, no one state
constituted more than 9.1% of total premiums with the exception of Texas, which
generated 15.5% of total premiums. The top five revenue producing states
accounted for 47.5% of the Combined Company's revenues in 1996. The Company
anticipates that this diversification will reduce the Company's exposure to a
regional economic downturn. The chart below shows the Combined Company's
breakdown of premiums by state for the fiscal year ended December 31, 1996.
Combined Company
Combined 1996 Title Insurance Premiums
(Dollars in Thousands)
Amount %
--------- -----
Texas $ 173,936 15.5
Florida 102,536 9.1
California 100,950 9.0
New York 81,414 7.2
Pennsylvania 75,459 6.7
Michigan 61,472 5.5
New Jersey 42,676 3.8
Washington 36,264 3.2
Ohio 34,215 3.0
Virginia 32,021 2.8
All others 384,241 34.2
------- ----
Total $ 1,125,184 100.0%
========= ======
Platform for Investment in Technology. A major element of the Company's
strategic plan is the continued application of new information technology to its
operations. Management believes that appropriate investments in information
technology will enable it to reduce unit costs and increase the speed of
delivery of products and services to customers. The Combined Company will be
able to derive greater benefits from investments in technology and will be able
to spread such investments over its larger revenue base. For example, in 1998
the amount budgeted by the Combined Company for investments in technology is
equal to the sum of the
24
<PAGE>
separate pre-Acquisition technology budgets of Commonwealth/Transnation and the
Company. Elimination of duplicative items such as planned expenditures for the
development of office automation software - will enable the Combined Company to
fund additional projects and thereby acquire greater technological capabilities.
Following the Acquisition, planned technology enhancements include the
continued automation of title plants (compilations of public title records which
facilitate the preparation of title reports), the implementation of enhanced
title escrow production systems, document imaging, and on-line order taking and
delivery of information and multiple products to customers and lenders, thus
streamlining paper intensive processes. Management anticipates that these
improvements will increase productivity and reduce staffing levels, thereby
lowering the unit costs of its products and services. An example of this
includes the introduction of "single seat underwriting," a concept made possible
by the application of imaging technology to new work flow processes.
Commonwealth/Transnation's current pilot project enables a single person to
complete a substantial portion of the entire title insurance process. Advances
relating to electronic order taking should also significantly speed up delivery
of the Company's services and allow it to expand its delivery of bundled real
estate-related services, resulting in improved service quality.
As a result of the Acquisition, the Company will obtain certain
beneficial technology and technological expertise which will enable it to
continue to improve its service further. Nite Owl, an innovative, state of the
art service developed by Commonwealth/Transnation, provides real estate
professionals with on-line access to property information over the Internet. Day
One, Inc., a Commonwealth/Transnation subsidiary, develops and markets property
valuation software. The importance to the Company of effectively utilizing
information technology is demonstrated by the establishment by the Company of a
new executive officer position of "Executive Vice President - Information
Technology," which will be held by G. William Evans, the Company's current Chief
Financial Officer.
Expanded Real Estate-Related Services. The Acquisition will improve the
Company's market position and product breadth in real estate-related services.
While real estate-related services, other than title and closing, constitute a
small part of the Company's current revenues, management believes that these
services are strategically important to the Combined Company's success and will
constitute an increasing percentage of the Company's revenues and income in the
future. The major mortgage originators and other national customers such as
large developers and realtors are increasingly purchasing these products and
services on a "bundled/one stop" basis from a limited number of vendors who
offer the full array of such products and services. The Acquisition will broaden
the Company's product offerings and enable it to better compete for business
from national customers. For example, CLT Appraisal Services, Inc., a subsidiary
of Commonwealth/Transnation, will add appraisal management services to the
Company's appraisal capabilities, which are currently supplied by a third party.
Management believes that the Combined Company, with its broader product
offerings and customer base, will have a stronger competitive position in
marketing such ancillary services as relocation services, flood certification,
appraisal management, tax disbursement processing services, credit reporting and
document preparation to mortgage originators.
Enhanced Presence in Commercial Title Insurance. Management believes
that Lawyers Title and Commonwealth/Transnation are two of the leading providers
of title insurance for commercial transactions. As a result, the Combined
Company will be among the strongest competitors in the commercial title
insurance market. In addition, the Combined Company will be one of the most
strongly capitalized title insurers in the industry with an aggregate statutory
surplus of $353.0 million as of September 30, 1997. Management believes this
will enhance the Combined Company's commercial title business capabilities,
enabling it to underwrite larger title policies without having to purchase
reinsurance from a third party. Also, the increased capital position is
anticipated to enhance Lawyers Title's claims-paying ability ratings. On August
21, 1997, Duff & Phelps Credit Rating Co. ("Duff & Phelps") placed the
claims-paying ability rating of Lawyers Title on "Rating Watch - Up" following
the announcement of the Acquisition. Duff & Phelps has indicated that it will
assign an "A" claims-paying ability rating to the Combined Company following the
consummation of the Acquisition. The claims-paying ability rating is an
important factor in competing for commercial title insurance business.
25
<PAGE>
Seasoned Management. As separate companies, the Company and
Commonwealth/Transnation have benefited from the knowledge and experience of
their respective management teams, which have both successfully integrated
significant acquisitions. The Company has successfully completed and integrated
19 acquisitions during the last four years, with a combined value of over $50
million and total combined pre-acquisition annual revenue of approximately $100
million. In 1990, Commonwealth acquired and integrated Transnation, which had
pre-acquisition annual revenue of $209.8 million, equaling 45% of Commonwealth's
revenue for the same period. Since the Transnation acquisition,
Commonwealth/Transnation has made several other smaller acquisitions.
Business and Growth Strategies
The principal components of the Company's business and growth strategy,
many of which are furthered by the Acquisition, are as follows:
Develop and Integrate Technology to Increase the Speed,
Efficiency and Reliability of Product Delivery. The Company believes
that the proper application of information technology to its operations
will be a key in determining its future success in the rapidly changing
real estate services marketplace. Mortgage lenders and banks have
already taken major strides in computerization, and have begun offering
their services online. Consumers can now search for mortgage loans over
the Internet. Lenders can search data bases for credit, employment,
previous mortgage or rent history and deposit information. With the
speedy availability of credit and mortgage information, lenders are
beginning to demand that basic title information be made available more
quickly as well. Significantly, the demand for a faster real estate
transaction process is coming in substantial part from the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). According to A.M. Best Co., these
companies are committed to "the ambitious goal of reducing the time and
expense of obtaining an average mortgage from several weeks to a matter
of days time and reducing closing costs and associated charges by up to
$2,000 within the next five years." (John H. Snyder, "Title Insurance:
An Industry on The Verge of Transformation," BestWeek Property Casualty
Supplement (A.M. Best Co., April 15, 1996)). Their intent is to make
home ownership more affordable for American families.
Both Fannie Mae and Freddie Mac are developing online computer
systems that are designed to standardize and facilitate the exchange of
data between all parties in the mortgage origination process, including
title insurers (or their agents). It is anticipated that all real
estate-related services will be ordered and provided in a single
combined package, with title insurance being bundled and sold, along
with appraisals, credit reports and other necessary services.
Management believes that this will eventually result in most real
estate and loan closings taking place electronically. Given the
importance of Fannie Mae, Freddie Mac and major primary lenders to the
real estate transaction process, the Company believes it must adapt to
and take advantage of the automation strategies being pursued by these
organizations by continuing to enhance its technological capabilities.
Some mortgage lenders are relying on title reports instead of
title insurance for their smaller loan transactions. Expansion of this
practice could have the future effect of transforming title companies
into suppliers of a wide range of title information and other data. The
Company is already supplying such data to certain second mortgage and
equity line lenders who obtain "title letters" from the Company to
confirm their lien position, without purchasing a title policy. Because
of consumer expectations and competitive pressures, these lenders
demand very quick turnaround of an order (48 hours or less). If this
trend were to continue, management believes that the successful
competitors would be those that are technologically well advanced and
offer exceptionally quick, reliable service. The Company's technology
initiatives are intended to position the Company to be one of these
successful competitors.
In these efforts, the Company will be building on its history
of technological innovation. Elliptus Software Solutions, Inc.
("Elliptus"), a Lawyers Title subsidiary develops and markets title and
escrow production software. In 1997, Elliptus released Title Quest, the
first title and escrow production software to use 32 bit architecture.
It also provides Electronic Data Interchange ("EDI") software
solutions. Datatrace Information Services Company, Inc., also a
subsidiary of Lawyers Title, provides automated title
26
<PAGE>
plant services. In 1996, Lawyers Title Services Company, Inc. ("LTSC"),
a Lawyers Title subsidiary, implemented electronic ordering of bundled
real estate-related services with its lender customers.
Expand Bundle of Services. In addition to the speed and
convenience of the technological solutions discussed above, lenders in
recent times have been seeking from title insurers - in addition to
title services - a variety of real estate products related to the
mortgage financing process. Lenders are increasingly demanding that
these real estate-related services be available from and billed by a
single source. Further, so called "Lender Pay" legislation has been
proposed which would amend the federal Real Estate Settlement
Procedures Act to allow a consumer to purchase all of his settlement
services in one place at a guaranteed price. Adoption of the proposed
legislation could lead to packaged pricing of all closing costs.
Accordingly, it is one of the Company's strategies to offer "one stop
shopping" to lenders, developers, attorneys, real estate agents and
other real estate professionals who influence the placement of title
insurance. The Company intends to be not merely a purveyor of title
insurance, but rather a provider of a broad array of services relating
to real estate. This broad based service strategy also seeks to
diversify the Company's earnings through product diversification. In
certain cases, such as relocation services, it may have the effect of
softening the impact of cyclical downturns in the real estate economy.
Pursuant to this strategy, in 1996 the Company organized LTSC
to offer and coordinate bundled real estate-related services to
national customers under the trade name "Single Source." Such services
include property inspections and warranties, credit reporting,
centralized closing, document preparation and regulatory compliance,
property appraisal and valuation, flood certification and real estate
tax services. These various services are provided through subsidiaries
of Lawyers Title, or joint ventures or strategic alliances with third
parties. In 1996, Single Source began working with several large
lenders in the southeast. In 1997, its expanded customer base included
lenders throughout the United States averaging more than 5,500 orders
per month in the fourth quarter of 1997.
The Company offers employee relocation services to large
national customers such as General Motors Corporation through Argonaut
Relocation Services, LLC, and facilitates tax-free property exchanges
pursuant to Section 1031 of the Internal Revenue Code through Lawyers
Title Exchange Company. Commonwealth/Transnation also has a relocation
subsidiary and following the Acquisition, the Combined Company will be
one of the largest providers of relocation services in the U.S. See
"Business - Lawyers Title."
The Acquisition will broaden the Company's product offerings,
primarily in the area of appraisal management. Commonwealth/Transnation
offers bundled services through its Commonwealth OneStop(R) marketing
umbrella. Commonwealth OneStop(R) provides appraisal management
services, title insurance services through its National Residential
Title Services division, employee relocation and property disposition
services, and appraisal information systems. Where appropriate,
following the Acquisition, these services will be consolidated. See " -
Benefits of the Acquisition" and "Business - Commonwealth/Transnation."
Diversify and Expand through Acquisitions. Over the past
decade, the Company has diversified and expanded in part through a
strategy of carefully selected acquisitions. The primary focus has been
on the acquisition of small to medium-sized title insurance agencies
and underwriters, and more recently on joint ventures to expand the
Company's product mix. The Acquisition of Commonwealth/Transnation
represents a significant step in this strategy. See "Business - Lawyers
Title - Recent Acquisitions."
Following the consummation of the Acquisition, the Combined
Company intends to continue the acquisition strategy of the Company,
albeit focusing primarily on relatively small to medium-sized additions
in two separate areas. First, in order to diversify its product mix and
strengthen existing product capabilities, the Combined Company intends
to acquire, and engage in joint ventures with, providers of real
estate-related services. In expanding its portfolio of services in
response to the changing real estate marketplace, management believes
that, in many cases, the acquisition of established organizations with
27
<PAGE>
developed expertise or market presence with respect to a particular
real estate-related service will be more expedient and cost effective,
as opposed to de novo development by the Combined Company.
Second, the Combined Company intends to make selected
acquisitions in order to enhance its distribution system and strengthen
its presence in particularly attractive markets. In order to meet the
needs of its national customers, the Combined Company intends to seek
out opportunities to expand and enhance its already substantial
geographic presence and distribution network through acquisitions of
both providers of real estate-related services, and agents and
underwriters with proven track records.
While the Company, actively considers strategic acquisitions,
as discussed above, it does not have any current or pending plans,
negotiations, arrangements or understandings, with respect to any
material acquisitions, other than in connection with the Acquisition.
Provide Customers with High Quality Service. Throughout its
history, the Company has been committed to meeting its customers'
individual needs and providing superior service. In order to maintain
the accuracy and integrity of its products, the Company continually
updates its records by regularly adding information from the public
records and other sources. In certain areas where demand warrants,
title plants have been automated. The Company has also placed great
emphasis on the application of technology to streamline paper intensive
processes and speed up communications, in order to respond to customers
more quickly and to lower costs.
In addition, the Company's primary source of business is from
the real estate community, such as attorneys, real estate brokers and
developers, financial institutions, mortgage brokers and independent
escrow agents. Maintenance of superior service is critical to
maintaining these referral sources. The Company seeks to accomplish
this by employing and retaining qualified professionals. As an example,
the major transaction counsel and other real estate professionals in
Lawyers Title's National Division have gained it a favorable reputation
for their expertise in handling and providing customized solutions for
complex commercial and multi-property transactions.
In the future, management believes that service quality will
continue to be a critical factor in the industry. With respect to
traditional title insurance products, the industry through its national
and state trade associations has largely standardized product language
and endorsements. Management believes this has resulted in title
insurers primarily competing on the basis of price and service with
respect to these traditional services. Also, service quality has been
effectively redefined by the Company's national residential customers
to include the providing of an extensive bundle of real estate-related
services very quickly through a national distribution network utilizing
advanced technology. The Company intends to respond to this challenge
by expanding its technological resources, service capabilities and
distribution network through the Acquisition, as well as implementing
its complementary strategies regarding development and integration of
technology, expansion of its portfolio of services and its commitment
to a widespread distribution network.
Aggressively Manage Operating Costs. Operating costs
constitute the largest portion of a title company's expenses and are
relatively high compared to other types of insurers, due to the
necessity of establishing and maintaining a large and costly
infrastructure of field personnel and title plants. As a result,
controlling operating expenses has been of paramount concern to the
Company. An example is the special staff and salary reduction program
which the Company implemented in 1994 in response to a severe fall in
orders as a result of rising interest rates. The Company was able to
reduce overall head count on a same store basis by 25% from its peak
level, and effect salary reductions for continuing employees of up to
10% for a period of approximately six months. Because of high salaries
expense, the Company is committed to electronic commerce so orders can
be received electronically, thus eliminating the need to rekey the
customer's information. Single Source and OneStop both utilize this
electronic commerce. In addition, the Company has begun a workflow
redesign in many offices which will lower cost and improve service, the
benefits of which will increase as additional investments are made in
technology.
28
<PAGE>
In the future, management believes that controlling operating
costs will become even more crucial, as significant players in the
national mortgage markets - such as Fannie Mae, Freddie Mac and the
large national lenders - seek to drastically reduce mortgage closing
and related costs. Management believes that the leading title companies
of the future will be the efficient, low cost, high service providers.
Through the Acquisition and the elimination of duplicative
headquarters and other redundant operational infrastructure, the
Combined Company will further its goal of becoming the lowest cost
provider of title insurance and other real estate-related services.
Further, the Acquisition will provide the Company with the revenue base
to better leverage investments in technology, which management
anticipates will result in additional operating efficiencies.
Management also believes that automation of operations will increase
productivity, thereby giving it more flexibility to control costs and
maintain service quality during periods marked by sudden increases in
volume.
Another component of the Combined Company's cost control
strategy will be the maintenance of a balance between direct offices
and agents. Direct operations tend to be more profitable during periods
of favorable mortgage activity, given the size of agency commissions
which range between approximately 60% to 90% of the premium. However,
it is easier to control operating costs of agency-based operations
during periods of business contraction, because of the extent to which
operating costs are borne by agents and the lower fixed costs of agency
operations. For the year ended December 31, 1996, approximately 53.5%
of the Company's total title insurance revenues were derived from
direct operations (company branches and wholly owned subsidiary
agencies) and 46.5% came from independent agents. During this same
period, approximately 40.0% of Commonwealth/Transnation's total title
insurance revenues were derived from direct operations and 60.0% came
from agency operations. Based on 1996 combined title insurance
revenues, the Combined Company would have derived approximately 48%
from direct operations and 52% from independent agents. The Combined
Company's goal will be to maintain the balance between direct offices
and agents. However, as opportunities arise to acquire agents or
regional underwriters, the percentage of revenue from agency operations
in any one calendar year may vary from 45% to 55%.
29
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited Pro Forma Condensed Combined Balance Sheet as
of September 30, 1997 and the unaudited Pro Forma Condensed Combined Statements
of Operations for the nine months ended September 30, 1997 and for the year
ended December 31, 1996 (the "Pro Forma Financial Statements") are based upon
the respective consolidated/combined financial statements of the Company and of
Commonwealth/Transnation, which are included herein. See "Index to Financial
Statements."
The Pro Forma Condensed Combined Balance Sheet as of September 30, 1997
is presented as if the Acquisition had occurred on September 30, 1997. The Pro
Forma Condensed Combined Statements of Operations for the nine months ended
September 30, 1997 and the year ended December 31, 1996 are presented as if the
Acquisition had occurred on January 1, 1996. The Pro Forma Financial Statements
give effect to the Acquisition under the purchase method of accounting in
accordance with Accounting Standards Board Opinion No. 16.
The Pro Forma Financial Statements are presented for comparative
purposes only and are not necessarily indicative of what the actual financial
position of the Company would have been at September 30, 1997 had the
Acquisition occurred at that date or of what the actual results of the Company
would have been if the Acquisition had occurred on January 1, 1996 nor
indicative of the results of operations in future periods. The Pro Forma
Financial Statements should be read in conjunction with, and are qualified in
their entirety by, the respective unaudited financial statements and notes
thereto, of the Company and of Commonwealth/Transnation for the nine months
ended September 30, 1997 and the respective historical financial statements and
notes thereto of the Company and of Commonwealth/Transnation for the year ended
December 31, 1996.
The Pro Forma Financial Statements presented do not reflect future
events that may occur after the Acquisition has been consummated. The Company
believes that operating expense synergies of the combined operations of the
Company and Commonwealth/Transnation will be realized after the Company has
completed the Acquisition. However, for the purposes of the Pro Forma Financial
Statements presented herein, these synergies have not been reflected because
their realization cannot be assured.
30
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 1997
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Lawyers Commonwealth/
Title Transnation Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments......................................... $ 281,457 $ 452,214 $ 733,671
Cash 36,258 11,746 $207,500 [1d] 48,004
53,096 [1b]
(207,500) [1d]
( 53,096) [1b]
Notes and accounts receivable....................... 33,506 31,664 65,170
Property and equipment - net........................ 21,070 23,764 44,834
Title plants........................................ 48,930 50,174 99,104
Goodwill............................................ 58,813 16,209 287,908 [1] 350,354
(12,576) [2]
Deferred income tax benefit......................... 25,500 26,237 17,576 [2] 69,313
Other assets........................................ 35,410 14,524 49,934
------- ------- ------- -------
Total assets................................. $ 540,944 $ 626,532 $ 292,908 $ 1,460,384
========= ========= ========= ===========
LIABILITIES
Policy and contract claims.......................... $ 199,865 $ 265,593 $ 465,458
Accounts payable and accrued
expenses.......................................... 51,533 76,823 5,000 [1e] 138,356
5,000 [2]
Long term debt...................................... 8,216 - 207,500 [1d] 215,716
----- -------- ------- -------
Total liabilities............................ 259,614 342,416 217,500 819,530
------- ------- ------- -------
SHAREHOLDERS' EQUITY
Preferred stock..................................... 175,700 [1c] 175,700
Common stock........................................ 167,621 11,649 130,728 [1a] 351,445
53,096 [1b]
(11,649) [1]
Additional paid in capital........................... 127,551 (127,551) [1] 0
Unrealized gains..................................... 5,317 6,127 (6,127) [1] 5,317
Retained earnings................................... 108,392 138,789 (138,789) [1] 108,392
------- ------- --------- -------
Total shareholders' equity................... 281,330 284,116 75,408 640,854
------- ------- ------ -------
Total liabilities and
shareholders' equity............................... $540,944 $ 626,532 $ 292,908 $ 1,460,384
======== ========= ========= ===========
</TABLE>
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
31
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Nine Months
Ended September 30, 1997 (In
thousands of dollars, except
shares and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Lawyers Commonwealth/
Title Transnation Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums.......................................... $ 353,775 $ 517,922 $ 871,697
Title search, escrow and other.................... 85,769 94,975 180,744
Net Investment income............................. 12,299 23,236 35,535
Realized investment gains......................... 120 1,187 1,307
--- ----- -----
451,963 637,320 $ 0 1,089,283
------- ------- - ---------
EXPENSES
Salaries and employee benefits.................... 148,596 173,847 322,443
Agents' commissions............................... 149,944 268,960 418,904
Provision for policy and contract
claims.......................................... 23,910 29,470 53,380
General, administrative and other................. 102,994 120,872 14,889 [3] 238,755
------- ------- ------ -------
425,444 593,149 14,889 1,033,482
------- ------- ------ ---------
OPERATING INCOME BEFORE
INCOME TAXES...................................... 26,519 44,171 (14,889) 55,801
INCOME TAX EXPENSE..................................... 9,220 15,192 (5,211) [3] 19,201
----- ------ ------- ------
NET INCOME............................................ $ 17,299 $ 28,979 $ (9,678) 36,600
======== ======== =========
PREFERRED STOCK DIVIDENDS.............................. 5,775
--------
INCOME AVAILABLE TO COMMON
SHAREHOLDERS........................................ $ 30,825
========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE............................. $ 1.87 $ 2.06
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION.............................. $ 1.85 $ 1.83
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.................................. 9,231 14,973
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
ASSUMING FULL DILUTION.............................. 9,332 19,946
NET OPERATING EARNINGS PER
COMMON SHARE ASSUMING FULL
DILUTION............................................ $1.85 $1.79
</TABLE>
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
32
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Year Ended
December 31, 1996 (In thousands
of dollars, except shares and
per share data)
(Unaudited)
<TABLE>
<CAPTION>
Lawyers Commonwealth/
Title Transnation Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums.......................................... $ 456,377 $ 668,807 $ 1,125,184
Title search, escrow and other.................... 101,381 111,350 212,731
Net investment income............................. 13,053 30,455 43,508
Realized investment gains......................... 23,371 346 23,717
------ --- ------
594,182 810,958 $ 0 1,405,140
------- ------- - ---------
EXPENSES
Salaries and employee benefits.................... 184,274 206,083 390,357
Agents' commissions............................... 192,590 355,834 548,424
Provision for policy and contract
claims.......................................... 29,211 61,116 90,327
General, administrative and other................. 132,567 149,345 19,852 [3] 301,764
------- ------- ------ -------
538,642 772,378 19,852 1,330,872
------- ------- ------ ---------
OPERATING INCOME BEFORE
INCOME TAXES...................................... 55,540 38,580 (19,852) 74,268
INCOME TAX EXPENSE..................................... 19,021 13,347 (6,948) [3] 25,420
------ ------ ------- ------
NET INCOME............................................. $ 36,519 $ 25,233 $ (12,904) 48,848
======== ======== ==========
PREFERRED STOCK DIVIDENDS.............................. 7,700
---------
INCOME AVAILABLE TO
COMMON SHAREHOLDERS............................... $ 41,148
========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE........................... $ 4.01 $ 2.76
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION............................ $ 4.01 $ 2.48
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING................................ 9,102 14,891
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ASSUMING FULL
DILUTION.......................................... 9,118 19,732
NET OPERATING EARNINGS PER
COMMON SHARE ASSUMING FULL
DILUTION.......................................... $2.34 $1.69
</TABLE>
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
33
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
September 30, 1997 and December 31, 1996
Notes to Pro Forma Financial Statements
1. This pro forma adjustment reflects the issuance and sale of preferred and
common stock and incurrence of debt in connection with the acquisition of
Commonwealth/Transnation by the Company resulting in:
Recorded
Value
a. The issuance of 4,039,473 shares of Common
Stock to RIC at a price of $32.363 per share.
In accordance with EITF 95-19, the assumed
Common Stock issuance price of $32.363 per
share represents the average closing Common
Stock price on the NYSE for the five day
period beginning two days prior through two
days following the Company's execution of the
Amended and Restated Stock Purchase Agreement
on December 11, 1997. $130,728
b. The sale of 1,750,000 shares of Common Stock
at $31.9375 (based upon the closing sales
price of the Common Stock on December 16,
1997) per share concurrently with the closing
of the Acquisition. The recorded proceeds have
been adjusted for estimated offering costs of
$2,795,000. 53,096
c. The issuance of 2,200,000 shares of Series B
Preferred Stock at $79.86 per share. The per
share value was determined by applying the
conversion ratio of 2.19298 to the Common
Stock price of $32.363 per share in a. above
and adding an amount of $8.89 per share which
represents the present value of the future
dividends on the Series B Preferred Stock
and an adjustment for illiquidity. 175,700
d. The incurrence by the Company of $207.5
million of debt from bank financing, which is
assumed paid to RIC in connection with the
Acquisition. 207,500
e. Assumed transaction costs of $5.0 million. 5,000
----------
Total recorded purchase price $572,024
==========
2. This pro forma adjustment reflects adjustment to deferred taxes resulting
from purchase accounting changes and the accrual of
Commonwealth/Transnation's existing OPEB (Other Postretirement Employee
Benefits) transition obligation.
3. This pro forma adjustment reflects (i) interest incurred on debt assumed in
connection with the Acquisition at an assumed interest rate of 6.250%, the
Interbank Offered Rate ("IBOR") at December 16, 1997 plus 0.375%, or
$12,969 for the year ended December 31, 1996 and $9,727 for the nine months
ended September 30, 1997, (ii) amortization of goodwill acquired at the
time of the Acquisition over a period of forty years or $6,883 for the year
ended December 31, 1996 and $5,162 for the nine months ended September 30,
1997 and (iii) income taxes incurred at the federal statutory rate of 35%,
or $6,948 for the year ended December 31, 1996 and $5,211 for the nine
months ended September 30, 1997.
34
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
September 30, 1997 and December 31, 1996
Notes to Pro Forma Financial Statements
4. The Company expects to achieve approximately $40.0 million of recurring
annual pre-tax operating expense savings through reductions in staff,
consolidation of data processing and elimination of certain duplicate or
excess facilities. It is expected to take four quarters to fully realize
these expense savings. In addition, the Company anticipates that in the
quarter in which the Acquisition occurs, it will record a one-time
after-tax charge to earnings ranging from approximately $16.3 million to
$19.5 million (approximately $25.0 million to $30.0 million before tax). No
adjustment has been included in the unaudited pro forma condensed financial
statements for the anticipated cost savings. There can be no assurance that
anticipated operating cost savings will be achieved in the amounts or at
the times anticipated.
5. The significant adjustments comprising the purchase price allocation are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Book value of Commonwealth/Transnation net
assets acquired at September 30, 1997
(including title plants of $50,174)............ $284,116
Adjustments:
Increase in deferred income tax asset......... $ 17,576
Increase in accounts payable and
accrued expenses for OPEB liability.......... (5,000)
--------
Total adjustments............................... 12,576
Goodwill........................................ 275,332
--------
Total purchase price....................... $572,024
========
</TABLE>
For purposes of these Pro Forma Condensed Combined Financial
Statements, the assets and liabilities acquired reflect their recorded book
value except as noted above. The allocation of the purchase price is preliminary
since appraisals of the Commonwealth/Transnation title plants have not been
completed. Once the appraisals are completed the Company expects that the value
assigned to title plants will be increased and the amount of goodwill recorded
will be decreased. Management does not expect that this adjustment will be
material to the Pro Forma Condensed Combined Financial Statements taken as a
whole. In addition, management believes that, with the exception of title
plants, the fair values of the assets and liabilities of
Commonwealth/Transnation will not vary significantly from their recorded book
values.
35
<PAGE>
LAWYERS TITLE CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The historical operating results data, per share data and balance sheet
data set forth below are derived from the consolidated audited financial
statements of the Company for the five-year period ended December 31, 1996. The
historical operating results data, per share data and balance sheet data set
forth below for the nine months ended September 30, 1996 and 1997 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals only, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of results that might be
expected for the entire year ending December 31, 1997.
The historical operating results data, per share data and balance sheet
data set forth below should be read in conjunction with the consolidated
financial statements, related notes and other financial information of the
Company included or incorporated by reference into this Prospectus.
36
<PAGE>
Lawyers Title Corporation
Selected Consolidated Financial and Other Data
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share and other data)
<S> <C> <C> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................ $ 389,279 $ 405,080 $ 413,857 $ 385,871 $ 456,377
Title search, escrow and other fees..... 59,274 78,965 73,200 81,490 101,381
------ ------ ------ ------ -------
Operating revenues...................... 448,553 484,045 487,057 467,361 557,758
Net investment income................... 12,444 11,850 12,478 12,501 13,053
Net realized investment gains........... 10,164 7,986 1,665 2,970 23,371
------ ------ ------ ------ -------
Total revenues...................... 471,161 503,881 501,200 482,832 594,182
Expenses:
Salaries and employee benefits.......... 118,672 137,328 143,817 155,920 184,274
Agents' commissions..................... 199,636 192,454 205,147 167,031 192,590
Provision for policy and contract claims
(1)................................... 59,594 54,139 46,775 24,297 29,211
General, administrative and other....... 81,395 90,995 96,492 111,724 132,567
------ ------ ------ ------ -------
Total expenses...................... 459,297 474,916 492,231 458,972 538,642
Income before income taxes................ 11,864 28,965 8,969 23,860 55,540
Provision for income taxes................ -- -- 2,155 6,809 19,021
------ ------ ------ ------ -------
Net income................................ $ 11,864 $ 28,965 $ 6,814 $ 17,051 $ 36,519
========= ========= ======== ========= =========
Per Share Data:
Earnings per common and common equivalent
share (2)................................ $ 1.85 $ 4.23 $ 0.79 $ 1.89 $ 4.01
Earnings per common share assuming full
dilution (2)............................. 1.84 4.21 0.79 1.87 4.01
Operating earnings per common share
assuming full dilution (3)............... 0.82 3.46 0.67 1.66 2.34
Weighted average number of common and
common equivalent shares outstanding
(000s)................................... 6,424 6,853 8,606 9,039 9,102
Weighted average number of shares assuming
full dilution (000s)..................... 6,437 6,876 8,607 9,099 9,118
Dividends declared per common share....... -- $ 0.06 $ 0.12 $ 0.18 $ 0.20
Other Data:
Title policies issued..................... 812,770 923,065 866,621 670,447 790,829
Title insurance operating revenues:
Percentage direct operations............ 43.0% 47.6% 44.1% 51.7% 53.5%
Percentage agency operations............ 57.0% 52.4% 55.9% 48.3% 46.5%
Employees at period end................... 2,800 3,429 3,453 3,523 3,757
Loss ratio (4)............................ 13.3% 11.2% 9.6% 5.2% 5.2%
Expense ratio (5)......................... 88.9% 86.7% 91.2% 92.5% 91.0%
----- ----- ----- ----- -----
Combined ratio (6)........................ 102.2% 97.9% 100.8% 97.7% 96.2%
====== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1997
---- ----
(Dollars in thousands, except per share and other data)
<S> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................ $ 328,438 $ 353,775
Title search, escrow and other fees..... 74,503 85,769
------ ------
Operating revenues...................... 402,941 439,544
Net investment income................... 10,057 12,299
Net realized investment gains........... 5,381 120
------ ------
Total revenues...................... 418,379 451,963
Expenses:
Salaries and employee benefits.......... 137,127 148,596
Agents' commissions..................... 134,116 149,944
Provision for policy and contract claims
(1)................................... 21,075 23,910
General, administrative and other....... 96,396 102,994
------ ------
Total expenses...................... 388,714 425,444
Income before income taxes................ 29,665 26,519
Provision for income taxes................ 10,046 9,220
------ ------
Net income................................ $ 19,619 $ 17,299
========== =========
Per Share Data:
Earnings per common and common equivalent
share (2)................................ $ 2.16 $ 1.87
Earnings per common share assuming full
dilution (2)............................. 2.14 1.85
Operating earnings per common share
assuming full dilution (3)............... 1.76 1.85
Weighted average number of common and
common equivalent shares outstanding
(000s)................................... 9,097 9,231
Weighted average number of shares assuming
full dilution (000s)..................... 9,158 9,332
Dividends declared per common share....... $ 0.15 $ 0.15
Other Data:
Title policies issued..................... 572,141 594,837
Title insurance operating revenues:
Percentage direct operations............ 54.9% 54.4%
Percentage agency operations............ 45.1% 45.6%
Employees at period end................... 3,785 3,932
Loss ratio (4)............................ 5.2% 5.4%
Expense ratio (5)......................... 90.9% 91.0%
----- -----
Combined ratio (6)........................ 96.1% 96.4%
===== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments...................... $ 233,146 $ 269,370 $ 252,011 $ 285,472 $ 316,052 $ 317,715
Total assets.............................. 363,673 438,140 453,259 475,843 520,968 540,944
Total debt................................ 1,218 1,165 8,872 4,146 4,200 8,216
Reserve for policy and contract claims (1)
(1)..................................... 179,022 187,619 198,906 193,791 196,285 199,865
Shareholders' equity...................... 143,978 201,161 203,323 238,385 262,168 281,330
Book value per share...................... 22.26 23.90 22.89 26.83 29.49 31.51
</TABLE>
37
<PAGE>
- --------------
(1) In the fourth quarter of 1996, the Company made a change from reporting
policy and contract claims on a discounted basis to reporting such claims
on an undiscounted basis. In addition, the Company changed its estimate of
reserves for policy and contract claims to reflect the favorable loss
experience that has emerged over the past few years. These changes had no
material net effect on the provision for policy and contract claims. See
"Lawyers Title Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Index to Financial
Statements."
(2) The increase in price of the Common Stock during the third quarter of 1997
resulted in there being outstanding potentially dilutive securities having
a dilutive effect in excess of 3% on the Company's earnings per share for
the nine months ended September 30, 1997. Prior to September 30, 1997, the
effect of outstanding potentially dilutive securities was immaterial and
accordingly the Company has not previously reported fully diluted and
primary earnings per share. Earnings per share as previously reported (as
shown in the financial statements included herein) were as follows:
At December 31, At September 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
$ 1.88 $ 4.31 $ 0.80 $ 1.92 $ 4.11 $ 2.21
(3) Excludes after tax net realized investment gains.
(4) Provision for policy and contract claims as a percentage of operating
revenues.
(5) Total operating expenses excluding interest expense, amortization of
goodwill and provision for policy and contract claims as a percentage of
operating revenues.
(6) The sum of the loss ratio and the expense ratio.
38
<PAGE>
LAWYERS TITLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Overview
The Company reported improved earnings in 1996 compared to 1995, which
had been a significant improvement over 1994. The Company's primary business is
the insurance of titles to real property, which is greatly influenced by the
real estate economy. Underlying economic factors adversely affected 1994 results
due to upward pressures on mortgage loan interest rates as the Federal Reserve
responded to inflationary fears. During the three year period from 1994 to 1996,
the Company benefited from the execution of three distinct portions of its
business strategy. Operations were expanded through the acquisition of title
insurance agents and underwriters, expenses were tightly monitored and
controlled, and claims experience improved due to quality control efforts and an
improved claims environment.
Revenues
The Company's operating revenues are dependent on overall levels of
real estate activity which are influenced by a number of factors including
interest rates, access to capital, housing starts, housing resales and the
general state of the economy. In addition, the Company's revenues are affected
by the Company's sales and marketing efforts, its acquisition program and its
strategic decisions based on the rate structure and claims environment in
particular markets.
Premiums and related fees are determined both by competition and by
state regulation. Operating revenues from direct title operations are recognized
at the time real estate transactions close, which is generally sixty (60) to
ninety (90) days after the opening of a title order. Operating revenues from
agents are recognized when the issuance of a policy is reported to the Company
by an agent. Although agents generally report the issuance of policies on a
monthly basis, heightened levels of real estate activity may slow this reporting
process. This typically results in delays of thirty (30) to sixty (60) days from
the closing of real estate transactions until the recognition of revenues from
agents. As a result, there can be a significant lag between changes in general
real estate activity and their impact on the Company's revenues.
In addition to the premiums and related fees, the Company earns
investment income from its portfolio of fixed-maturity and equity securities.
Investment income includes dividends and interest as well as realized capital
gains or losses on the portfolio. The Company regularly reexamines its portfolio
strategies in light of changing earnings or tax situations. In the fourth
quarter of 1996 the Company shifted its investment strategy, eliminating its
investment in equity securities and beginning to move all of its investment
portfolio into fixed-maturity securities. The repositioning of the portfolio
eliminated the exposure of the regulated surplus of the Company's insurance
subsidiaries to market fluctuations inherent in equity portfolios. Additionally,
the commensurate increase in fixed-maturity securities increased the level of
more stable, predictable interest income earned.
Factors Affecting Profit Margins and Pre-Tax Profits
The Company's profit margins are affected by several factors, including
the volume of real estate activity, policy amount and the nature of real estate
transactions. Volume is an important determinant of profitability because the
Company, like any other title insurance company, has a significant level of
fixed costs arising from personnel, occupancy costs and maintenance of title
plants. Because premiums are based on the face amount of the policy, larger
policies generate higher premiums although expenses of issuance do not
necessarily increase in proportion to policy size. Profit margins are lower on
refinancings than on sales due to premium discounts and higher cancellation
rates generally experienced on refinancings. Cancellations affect profitability
because costs incurred both in opening and in processing orders typically are
not offset by fees.
39
<PAGE>
The Company's principal variable expense is commissions paid to
independent agents. The Company regularly reviews the profitability of its
agency revenues, adjusting commission levels or cancelling certain agents where
profitability objectives are not being met and expanding operations where
acceptable levels of profitability are available. The Company continually
monitors its expense ratio, which is the sum of salaries and employee benefits,
agency commissions and other expenses expressed as a percentage of operating
revenues.
Claims
Generally, title insurance claim rates are lower than for other types
of insurance because title insurance policies insure against prior events
affecting the quality of real estate titles, rather than against unforeseen, and
therefore less predictable, future events. A provision is made for estimated
future claim payments at the time revenue is recognized. Both the Company's
experience and industry data indicate that claims activity continues through 20
years after the policy is issued. Management uses actuarial techniques to
estimate future claims by analyzing past claim payment patterns. Management has
continued to emphasize and strengthen claims prevention and product quality
programs.
In the fourth quarter of 1996 the Company made a change from reporting
policy and contract claims on a discounted to an undiscounted basis. This change
was made to conform with industry practice and because it is considered
preferable by rating agencies and investment analysts. The effect of the change
for 1996 was to increase the provision for policy and contract claims by $76
million and decrease net income by $49 million and net income per share by
$5.51.
In addition, during the fourth quarter of 1996, the Company determined
that the trend of favorable loss experience that has emerged over the past few
years could be relied upon, and the Company changed its estimate of the ultimate
net cost of all reported and unreported losses incurred through September 30,
1996 to reflect this favorable experience. The effect of the change in estimate
was to decrease the provision for policy and contract claims by $78 million and
to increase net income by $50.7 million and net income per share by $5.70.
Because the change in accounting principle to no longer discount policy
and contract claims is inseparable from the change in estimate, both have been
accounted for as a change in estimate. Accordingly, the net effect of the two
changes, a decrease of $2 million in the provision for policy and contract
claims, has been included in operations for the fourth quarter. The above
changes were both made to conform with general industry practice. The changes
are included in the provision for policy and contract claims and no prior
amounts have been restated.
Other Expenses
The most significant components of other expenses are rent for office
space, outside costs of title production, travel, communications and taxes
levied by states on premiums.
Seasonality
Historically, real estate activity has been generally slower in the
winter months with volumes showing significant improvements in the spring and
summer months. The percentage of title orders closed to title orders opened is
typically lower in the first six months than at year end because of this
seasonal variance. See "Business -- Seasonality, Backlog and Cyclicality." In
recent years low levels of mortgage interest rates have caused fluctuations in
real estate activity levels outside of the usual, seasonal pattern. The Company
cannot predict whether or when the historical seasonal pattern of real estate
activity will resume.
Contingencies
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or of which any of their property is subject.
40
<PAGE>
Results of Operations
Comparison of Three and Nine Months Ended September 30, 1997
and Three and Nine Months Ended September 30, 1996
Net Income
Net income for the three and nine months ended September 30, 1997, was
$8.4 million and $17.3 million, respectively, compared to $6.1 and $19.6 million
for the same periods in 1996. The 1996 results included after tax capital gains
of $0.6 million and $3.5 million, respectively, for the three and nine month
periods while there were no significant gains in 1997. Excluding realized gains,
net operating income grew 54.8% to $8.4 million and 6.8% to $17.2 million for
the three and nine months ended September 30, 1997, respectively, when compared
to the same periods in 1996.
The Company's results for the three and nine months ended September 30,
1997 compare favorably to those for the corresponding period in 1996
notwithstanding the fact that the Company experienced an unusually high level of
refinancing in the first quarter of 1996 which bolstered the results for that
period. This favorable comparison results from strong revenue growth, tight
expense management and continued favorable loss experience.
Operating Revenues
Operating revenues, which include premiums, title search, escrow and
other fees, increased 13.2% to $160.4 million and 9.1% to $439.5 million for the
three and nine months ended September 30, 1997, respectively, compared to the
same periods in 1996.
Premium revenue increased 11.6% to $128.6 million and 7.7% to $353.8
million for the three and nine months ended September 30, 1997, respectively.
These increases reflect a favorable interest rate and general economic
environment which resulted in an increased number of new home sales and mortgage
refinancings.
Title search, escrow and other fee revenue increased 20.0% to $31.7
million and 15.1% to $85.8 million for the three and nine months ended September
30, 1997, respectively, compared to the same periods in 1996. This increase can
be attributed to increased title order activity in the Company's direct
operations. Additionally, the increase in other fee revenue has been favorably
affected by increased revenues in the Company's real estate-related services
such as relocation services.
Orders opened in the Company's direct operations grew 12.6% to
approximately 109,600 for the three months ended September 30, 1997, compared to
approximately 97,300 for the same period in 1996. While there is no assurance
that opened orders will close, management believes that the current order level
is a favorable indication for fourth quarter 1997 operating revenues.
Investment Income
Investment income excluding realized gains increased to $4.0 million
and $12.3 million for the three and nine month periods ended September 30, 1997,
respectively, from $3.7 million and $10.1 for the same periods in 1996. The
increase was due to an overall increase in the size of the portfolio as well as
the higher component of fixed income investments resulting from the Company's
sale of its equity investments in the fourth quarter of 1996.
41
<PAGE>
Expenses
Salaries and Employee Benefits. The Company's expense ratio (total
expenses less the provision for policy and contract claims as a percentage of
operating revenues, and excluding goodwill) for the three and nine months ended
September 30, 1997 was 88.7% and 91.0%, respectively, compared to 91.2% and
90.9% for the comparable periods in 1996. The decrease in the expense ratio in
the third quarter of 1997 reflects increased operating leverage resulting from
the Company's growth in revenues. The Company's expense ratios reflect its
continuing focus on expense management.
Salaries and employee benefits for the three and nine months ended
September 30, 1997 increased 9.3% to $51.8 million and 8.4% to $148.6 million,
respectively, primarily as a result of higher business volumes.
Operating revenue net of agents' commissions on a per employee basis
was $76,000 for the nine months ended September 30, 1997, compared to $73,000
for the comparable period in 1996.
Agents' Commissions. Agents' commissions for the three and nine months
ended September 30, 1997 increased 13.5% to $54.2 million and 11.8% to $149.9
million, respectively. These increases are largely tied to higher business
volumes.
Provision for Policy and Contract Claims. The loss ratio (the provision
for policy and contract claims as a percentage of operating revenues) was 5.4%
for the three and nine months ended September 30, 1997 compared to 5.3% and 5.2%
for the same periods in 1996. The 1997 ratios reflect a continuation of the
favorable loss trends that the Company has experienced in recent periods. Claims
paid as a percentage of operating revenues were 4.2% and 4.6% for the three and
nine months ended September 30, 1997, respectively, compared to 4.6% and 5.0%
for the comparable periods in 1996.
Income Taxes
Income tax expense was $4.6 million and $9.2 million for the three
month and nine month periods ending September 30, 1997. This represented a 35.3%
and 34.8% effective tax rate, respectively.
Comparison of Years Ended December 31, 1996,
December 31, 1995 and December 31, 1994
Net Income
Net income was $36.5 million in 1996, $17.1 million in 1995, and $6.8
million in 1994. The 1996 net income increase was attributable in part to
capital gains resulting from a shift in the Company's investment portfolio from
equities to fixed income securities, as discussed under "Investment Income"
below. Net operating income (which excludes realized investment gains) was $21.3
million, $15.1 million, and $5.7 million in the fiscal years ending December 31,
1996, 1995, and 1994, respectively. The 1996 and 1995 increases reflected
improved results from operations.
Operating Revenues
Operating revenues improved 19.3% to $557.8 million in 1996 compared to
$467.4 million in 1995. This 1995 level was a 4.0% reduction from the 1994
amount.
The 1996 results benefited from a favorable economic environment.
Average mortgage rates were 7.0% in January 1996 and, although fluctuating,
never exceeded 8.3% for any month in 1996. The favorable economic environment
led to increased levels of housing starts and housing resales in 1996 compared
to 1995. Business volumes for direct and agency business improved approximately
18% from 670,000 transactions in 1995 to 790,000 in 1996.
42
<PAGE>
Conversely, revenue fell for the full year of 1995 compared to 1994 as
a result of interest rate pressures. Average mortgage rates were 9.2% at the
beginning of 1995, fell gradually to 7.6% by the end of the first half of 1995,
averaged 7.5% in the second half of the year and were 7.2% at year end. Due to
the lag between the closing of transactions by agents and income recognition
when such agents report the issuance of policies, increased revenues resulting
from this increased real estate activity in 1995 (relating to the fall in
interest rates) were realized in 1996. Interest rate related business volume
reductions were offset in part by revenue from acquisitions of $68.0 million in
1995.
The volume of orders for title insurance opened in the Company's direct
operations increased 14.2% in 1996 compared to 1995 after improving 16.2%
between 1995 and 1994. Exclusive of acquisitions, orders in 1995 would have
fallen 9.9% compared to 1994.
Investment Income
Investment income increased significantly to $36.4 million in 1996
compared to $15.5 million in 1995 after increasing from $14.1 million in 1994.
The increases were due principally to increased levels of capital gains which
were $23.4 million in 1996, $3.0 million in 1995 and $1.7 million in 1994.
Excluding these gains, the remaining components of investment income (dividends
and interest) amounted to $14.2 million, $14.0 million and $13.2 million in
1996, 1995 and 1994, respectively.
In the fourth quarter of 1996 the Company changed its investment
strategy, selling all of its equity portfolio and beginning to move the proceeds
into fixed-maturity securities. This sale resulted in capital gains of $17.4
million.
Expenses
Salaries and Employee Benefits. Personnel related expenses are a
significant portion of total operating expenses in the title insurance industry.
These expenses require management through the often rapidly changing conditions
in the real estate economy. Salaries and employee benefits increased 18.2% in
1996 compared to 1995. This increase was largely tied to higher business volumes
which necessitated increased staffing levels to meet customer service demands,
incentive increases and normal merit raises. Accordingly, the expense ratio
improved in 1996 to 91.3% from 93.0% in 1995. Salaries and employee benefits
increased 8.4% in 1995 over 1994, and the 1995 expense ratio increased to 93.0%
from 91.5% in 1994. In the fourth quarter of 1994, in response to a severe fall
in order counts, a special staff and salary reduction program was implemented
that lasted through the second quarter of 1995. On a same store basis, the
Company reduced its overall headcount by about 25% from its peak level.
Additionally, the Company effected salary reductions of up to 10% for a period
of approximately six months. As an offset to these reductions, staffing levels
increased between 1995 and 1994 due to the Company's acquisition program.
Operating revenue net of agents' commissions improved on a per employee basis to
$99,000 in 1996 from $87,000 in 1995 and $85,000 in 1994.
Agents' Commissions. Commissions paid to title insurance agents are the
largest single expense incurred by the Company. The commission rate varies by
geographic area in which the commission was earned. Commissions as a percentage
of agency revenue were 74.2%, 73.9% and 75.4% in 1996, 1995 and 1994,
respectively.
General, Administrative and Other Expenses. The most significant
components of other expenses are rent for office space, outside costs of title
production, travel, communications and taxes levied by states on premiums.
Portions of these expenses vary with the volume of business transacted by the
Company.
Provision for Policy and Contract Claims. The Company's claims
experience has shown improvement in recent years. The loss ratio was 5.2%, 5.2%
and 9.6% in 1996, 1995 and 1994, respectively. The loss ratio in 1994 was
adversely affected by a $5.0 million agency defalcation, which increased the
loss ratio by 1.0%. As previously discussed, the Company changed its method of
reporting policy and contract claims in the fourth quarter of 1996. Claims paid
as a percentage of operating revenues were 4.8%, 6.5% and 7.6% in 1996, 1995 and
1994, respectively.
43
<PAGE>
Income Taxes
The Company pays U.S. federal and state income taxes based on laws in
the jurisdictions in which it operates. The effective tax rates reflected in the
income statement for 1996, 1995 and 1994 differ from the U.S. federal statutory
rate principally due to non-taxable interest, dividend deductions, travel and
entertainment and company-owned life insurance.
At December 31, 1996 the Company had recorded deferred tax assets of
$32.2 million related primarily to policy and contract claims and employee
benefit plans. Substantially all of this deferred tax asset balance could be
realized in the future through the reversal of existing temporary taxable
differences. Accordingly, it is more likely than not that the income tax
benefits will be realized for all the temporary deductible differences existing
at December 31, 1996.
The Company reassesses the realization of deferred assets quarterly
and, if necessary, adjusts its valuation allowance accordingly.
Liquidity and Capital Resources
Cash provided by operating activities was $8.8 million and $24.3
million for the nine months ended September 30, 1997 and September 30, 1996,
respectively. At September 30, 1997, the Company held cash of $63.0 million and
fixed-maturity securities of $252.6 million. Additionally, the Company had no
long-term debt and had unutilized lines of credit totaling $30.0 million.
Cash provided by operating activities was $33.2 million, $22.0 million
and $6.4 million for the fiscal years ended December 31, 1996, 1995 and 1994. In
addition to $95.6 million of cash and invested cash on hand and $218.2 million
of fixed-maturity securities at December 31, 1996, the Company had no long-term
debt and maintained a $35.0 million working capital line of credit, of which
$34.0 million was unused at December 31, 1996.
Historically, the Company has not maintained significant levels of
debt. Upon closing the Acquisition, the Company expects to incur debt of $207.5
million under the Credit Facility and have 2.2 million shares of Series B
Preferred Stock outstanding. The Company estimates that servicing the debt and
preferred stock will require approximately $20.0 million per year, which
management expects to be funded largely from increased cash flow from operations
resulting from the Acquisition. Additionally, management believes that these
cash requirements will be partially offset by approximately $7.0 million of
federal income tax benefits related to the tax deductibility of interest expense
and goodwill amortization. In view of the historic ability of the Company and
Commonwealth/Transnation to generate strong, positive cash flows, and the
projected strong cash position and relatively conservative capitalization
structure of the Combined Company following consummation of the Acquisition, the
Company believes that the Combined Company will have sufficient liquidity and
adequate capital resources to meet both its short- and long-term capital needs.
Further, the Company expects to maintain approximately $30.0 million in unused
credit facilities.
Emerging Issues
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or in the
year 2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000 issue") will depend on a number of factors, including
their software and hardware and the nature of their industries. Companies must
also coordinate with other entities with which they electronically interact,
both domestically and globally, including suppliers, customers, creditors,
borrowers and financial service organizations.
44
<PAGE>
The Company has closely examined the Year 2000 issue and the potential
costs and consequences to the Company in addressing this issue. As part of its
business and growth strategy, the Company is currently investing in new
information technology, including the replacement of multiple independent
personal computer systems throughout its direct operations with an upgraded
centralized system, that is "Year 2000" compliant. See "The Combined Company --
Business and Growth Strategies." The Company is also communicating with third
parties with which it does business to coordinate further action with respect to
the Year 2000 issue. As a result, management believes that, with the replacement
of certain computer systems as described above, the Year 2000 issue is not
expected to have a material impact on the Company's operations and that the cost
of the Company's addressing the Year 2000 issue is not a material event or
uncertainty that would cause its reported financial information not to be
necessarily indicative of future operating results or financial condition.
45
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY
AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED SELECTED FINANCIAL AND OTHER DATA
The historical operating results data and balance sheet data for
Commonwealth and Transnation on a combined basis are derived from the audited
combined financial statements of Commonwealth and Transnation for the five year
period ended December 31, 1996. The historical operating results data, per share
and balance sheet data set forth below for the nine months ended September 30,
1996 and 1997 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which Commonwealth and Transnation consider necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1997.
The historical operating results data and balance sheet data set forth
below should be read in conjunction with the combined financial statements,
related notes and other financial information of Commonwealth/Transnation
included herein.
46
<PAGE>
Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company
Selected Combined Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands, except other data)
<S> <C> <C> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................... $ 704,110 $ 747,202 $ 792,919 $ 582,329 $ 668,807
Title search, escrow and other fees........ 66,409 146,148 63,843 89,607 111,350
-------- -------- -------- ------- --------
Operating revenues......................... 770,519 893,350 856,762 671,936 780,157
Net investment income...................... 15,126 24,224 26,455 27,933 30,455
Net realized investment gains.............. 1,576 4,786 516 1,729 346
-------- -------- -------- ------- --------
Total revenues......................... 787,221 922,360 883,733 701,598 810,958
Expenses:
Salaries and employee benefits............. 185,443 219,904 211,150 188,097 206,083
Agents' commissions........................ 374,419 426,885 432,041 310,729 355,834
Provision for policy and contract claims... 68,210 81,803 75,867 58,486 61,116
General, administrative and other.......... 127,114 133,002 132,871 130,076 149,345
-------- -------- -------- ------- --------
Total expenses......................... 755,186 861,594 851,929 687,388 772,378
Income before income taxes................... 32,035 60,766 31,804 14,210 38,580
Provision for income taxes................... 10,248 20,480 10,809 4,755 13,347
Income from continuing operations............ 21,787 40,286 20,995 9,455 25,233
Income from discontinued mortgage insurance
operations, net of taxes.................... 10,649 -- -- -- --
Gain on disposal of discontinued mortgage
insurance operations, net of taxes.......... 7,549 -- -- -- --
Cumulative effect of change in accounting for
income taxes................................ -- 1,316 -- -- --
-------- -------- -------- ------- --------
Net income................................... $ 39,985 $ 41,602 $ 20,995 $ 9,455 $ 25,233
======== ======== ======== ======= ========
Common stock dividends......................... $ 22,700 $ 19,500 $ 19,000 $ 4,000 $ 18,216
Per Share Data (1)
Other Data:
Title policies issued........................ 1,496,960 1,651,806 1,736,134 1,094,467 1,234,655
Title insurance operating revenues:
Percentage direct operations............... 40.0% 40.9% 35.0% 40.2% 41.4%
Percentage agency operations............... 60.0% 59.1% 65.0% 59.8% 58.6%
Employees at end of period................... 3,977 4,623 4,035 3,755 3,934
Loss ratio (2)............................... 9.0% 9.3% 8.9% 8.7% 7.8%
Expense ratio (3)............................ 89.1% 87.3% 90.5% 93.5% 91.1%
----- ----- ----- ----- -----
Combined ratio (4)........................... 98.1% 96.6% 99.4% 102.2% 98.9%
===== ===== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1997
---- ----
(Dollars in thousands, except other data)
<S> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums................... $488,980 $517,922
Title search, escrow and other fees........ 87,000 94,975
--------- --------
Operating revenues......................... 575,980 612,897
Net investment income...................... 22,663 23,236
Net realized investment gains.............. 376 1,187
--------- --------
Total revenues......................... 599,019 637,320
Expenses:
Salaries and employee benefits............. 153,695 173,847
Agents' commissions........................ 263,138 268,960
Provision for policy and contract claims... 47,461 29,470
General, administrative and other.......... 109,880 120,872
--------- --------
Total expenses......................... 574,174 593,149
Income before income taxes................... 24,845 44,171
Provision for income taxes................... 8,520 15,192
Income from continuing operations............ 16,325 28,979
Income from discontinued mortgage insurance
operations, net of taxes.................... -- --
Gain on disposal of discontinued mortgage
insurance operations, net of taxes.......... -- --
Cumulative effect of change in accounting for
income taxes................................ -- --
--------- --------
Net income................................... $ 16,325 $ 28,979
========= ========
Common stock dividends......................... -- $ 21,000
Per Share Data (1)
Other Data:
Title policies issued........................ 925,052 929,690
Title insurance operating revenues:
Percentage direct operations............... 41.3% 43.9%
Percentage agency operations............... 58.7% 56.1%
Employees at end of period................... 3,922 4,143
Loss ratio (2)............................... 8.2% 4.8%
Expense ratio (3)............................ 91.4% 91.8%
----- -----
Combined ratio (4)........................... 99.6% 96.6%
===== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments......................... $371,808 $423,801 $416,533 $440,071 $475,430 $458,425 $463,960
Total assets................................. 483,198 546,968 552,390 573,820 620,754 610,119 626,532
Total debt................................... -- -- -- -- -- -- --
Reserve for policy and contract claims....... 173,327 200,874 228,063 240,777 264,838 262,341 265,593
Shareholders' equity......................... 236,262 260,863 253,466 270,737 273,657 265,833 284,116
</TABLE>
- --------------
(1) Per share data for Commonwealth and Transnation are not meaningful because
all of the outstanding shares of those companies are held by one
shareholder, RIC. Therefore, per share data of Commonwealth and
Transnation have not been provided.
(2) Provision for policy and contract claims as a percentage of operating
revenues.
(3) Total operating expenses excluding interest expense, amortization of
goodwill and provision for policy and contract claims as a percentage of
operating revenues.
(4) The sum of the loss ratio and the expense ratio.
47
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY
AND
TRANSNATION TITLE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Revenues
Commonwealth/Transnation's premiums and fees are dependent on overall
levels of real estate activity which are influenced by a number of factors
including interest rates, access to capital, housing starts, housing resales and
the general state of the economy. In addition, Commonwealth/Transnation's
premiums and fees are affected by its sales and marketing efforts and its
strategic decisions based on the rate and claims environment in particular
markets.
Premiums and fees are determined both by competition and by state
regulation. Operating revenues from direct title operations are recognized at
the time real estate transactions close, which is generally sixty (60) to ninety
(90) days after the opening of a title order. Operating revenues from agents are
recognized upon an agent's reporting of the issuance of a policy to
Commonwealth/Transnation. Although agents generally report the issuance of
policies on a monthly basis, heightened levels of real estate activity may slow
this reporting process. This typically results in delays of sixty (60) to ninety
(90) days from the closing of real estate transactions until the recognition of
revenues from agents. Approximately 60% of Commonwealth/Transnation's title
insurance revenues are generated by agents.
In addition to the premiums and fees, Commonwealth/Transnation earns
investment income from its portfolio of fixed maturity securities.
Commonwealth/Transnation holds no equity securities in its investment portfolio.
Factors Affecting Profit Margins and Pre-Tax Profits
Commonwealth/Transnation's operating results are affected by several
factors, including volume, policy amount and type of real estate activity.
Volume is an important determinant of profitability because
Commonwealth/Transnation, like other title insurance companies, has a
significant level of fixed costs arising from personnel, occupancy costs and
maintenance of title plants. Because a premium is based on the face amount of
the policy, larger policies generate higher premiums although expenses of
issuance do not necessarily increase in proportion to policy size. Profit
margins are lower on refinancings than on sales due to premium discounts and
higher cancellation rates generally experienced on refinancings. Cancellations
affect profitability because costs incurred both in opening and in processing
orders are not necessarily offset by fees.
Commonwealth/Transnation's principal variable expense is commissions
paid to independent agents. Commonwealth/Transnation regularly reviews the
profitability of its agency revenues. Commonwealth/Transnation continually
monitors its operating margin, which is the percentage of operating revenues
less salaries, employee benefits, agency commissions and other similar expenses
to operating revenues.
Claims
Generally, title insurance claim rates are lower than for other types
of insurance because title insurance policies insure against prior events
affecting the quality of real estate title, rather than against unforeseen, and
therefore less predictable, future events. Estimated future claim payments are
provided for at the time revenue is recognized. The reserve for title losses,
which is based on historical and anticipated loss experience, represents the
estimated costs to settle reported claims and estimated future claims relating
to policies issued.
48
<PAGE>
Contingencies
Commonwealth/Transnation is involved in certain litigation arising in
the ordinary course of its business. Although the ultimate outcome of these
matters cannot be ascertained at this time, and the results of legal proceedings
cannot be predicted with certainty, Commonwealth/Transnation is contesting the
allegations of the complaints in each pending action against it and believes,
based on current knowledge and after consultation with counsel, that the
resolution of these matters will not have a material adverse effect on the
combined financial statements of Commonwealth/Transnation.
Seasonality
Historically, real estate activity has been generally slower in the
winter months with volumes showing significant improvements in the spring and
summer months. The percentage of title orders opened is typically lower in the
first six months than at year end because of this seasonal variance. In recent
years low levels of mortgage interest rates have caused fluctuations in real
estate activity levels outside of the historical seasonal pattern.
Commonwealth/Transnation cannot predict whether or when the historical seasonal
pattern of real estate will resume.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 1997
and Three and Nine Months Ended September 30, 1996
Net Income
Net income for the three and nine months ended September 30, 1997, was
$13.4 million and $29.0 million, respectively, compared to $8.9 million and
$16.3 million for the same periods in 1996. The figures include capital gains of
$0.1 million and $1.2 million for the three and nine month periods ended
September 30, 1997, respectively, compared to $0.8 million and $0.4 million for
the three and nine month periods ended September 30, 1996. Excluding realized
gains, net operating income grew 63.9% to $13.3 million, and 74.3% to $27.8
million for the three and nine month periods ended September 30, 1997,
respectively, when compared to the same periods in 1996.
Commonwealth/Transnation's results for the three and nine month periods
ended September 30, 1997, compare favorably to those for the corresponding
periods in 1996 primarily due to premium growth and the decline in provisions
for claims losses due to Commonwealth/Transnation's favorable paid claims
experience in recent years.
Operating Revenues
Premiums and fees from title operations increased 8.7% to $226.2
million and 6.4% to $612.9 million for the three and nine month periods ended
September 30, 1997, respectively, when compared to the same periods in 1996. The
increase in premiums and fees in 1997 reflects the continued strong residential
and commercial real estate markets. Mortgage interest rates remained relatively
stable and low during the first nine months of 1997 and, with the exception of
one month, remained below 8%.
Orders opened in Commonwealth/Transnation's direct operations grew
23.2% to approximately 113,400 and 6.6% to approximately 320,300 for the three
and nine month periods ended September 30, 1997, when compared to the same
periods in 1996. While there is no assurance that opened orders will close,
management believes that the current order level is a favorable indication for
fourth quarter 1997 operating revenues.
Net investment income (excluding realized gains and losses) decreased
slightly to $7.5 million for the three month period ended September 30, 1997,
from $7.8 million for the same period in 1996, due to a decrease in the size of
the portfolio in 1997 resulting from a $21.0 million dividend payment in June
1997. Net investment income
49
<PAGE>
increased 2.5% to $23.2 million for the nine month period ended September 30,
1997 when compared to the same period in 1996, reflecting growth in the average
size of Commonwealth/Transnation's investment portfolio.
Expenses
Commonwealth/Transnation's expense ratio for the three and nine month
periods ended September 30, 1997, was 89.5% and 91.8%, respectively, compared to
90.0% and 91.4% for the comparable periods in 1996. Agency commissions, the
largest component of operating expenses, were relatively flat for the three and
nine month periods ended September 30, 1997, at $98.5 million and $269.0
million, respectively, compared to $98.7 million and $263.1 million for the
comparable 1996 periods. Other expenses, such as employee compensation,
increased as a result of higher levels of business activity.
The loss ratio (the provision for policy and contract claims as a
percentage of operating revenues) for the three and nine month periods ended
September 30, 1997, was 4.7% and 4.8%, respectively, compared to 7.5% and 8.2%
for the same periods in 1996. These decreases reflect favorable loss trends that
the Company has experienced in recent periods.
Claims paid as a percentage of operating revenues were 3.1% and 4.7%
for the three and nine months ended September 30, 1997, respectively, compared
to 2.4% and 4.5% for the comparable periods in 1996. The 1997 ratios reflect a
continuation of the favorable loss trends that Commonwealth/Transnation has
experienced in recent periods.
Income tax expense was $6.7 million and $15.2 million for the three and
nine month periods ended September 30, 1997. This represented a 33.4% and 34.4%
effective tax rate, respectively.
Comparison of Years Ended December 31, 1996,
December 31, 1995 and December 31, 1994
Net Income
Net income for the years ended December 31, 1996, 1995 and 1994 was
$25.2 million, $9.5 million and $21.0 million, respectively. The increase in net
income in 1996 compared to 1995 resulted from an increase in residential resale
and new home sale activity, reflecting a strong economy and favorable mortgage
interest rates. In addition, Commonwealth/Transnation achieved a record level of
commercial title insurance premiums in 1996. The decline in net income in 1995,
when compared to 1994, resulted primarily from decreased agency revenues due to
the weak real estate markets that existed in late 1994 and early 1995. Such
market weakness was tied to the level of mortgage interest rates, which rates
were 9.2% at the beginning of 1995.
The net income figures above include investment gains of $0.3 million,
$1.7 million and $0.5 million, for the years ended December 31, 1996, 1995 and
1994, respectively. Excluding investment gains, Commonwealth/Transnation
reported net operating income of $38.2 million, $12.5 million and $31.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Operating Revenues
Operating revenues, consisting of title insurance premiums and search
and other fees, grew 16.1% to $780.2 million for the year ended December 31,
1996. This growth from 1995 resulted from the above-described increase in
residential resale and new home sale activity. Average mortgage rates were 7% in
January 1996 and, although fluctuating, never exceeded 8.4% for any month in
1996. Also, such growth was aided by the record level of commercial title
insurance premiums achieved by Commonwealth/Transnation in 1996. The decline in
operating revenues in 1995, when compared to 1994, was due primarily to
decreased agency revenues, discussed above.
50
<PAGE>
Net Investment Income
Net investment income (excluding realized gains and losses) increased
9.0% to $30.5 million in 1996, and 5.6% to $27.9 million in 1995 from the $26.5
million reported in 1994. These increases reflect growth in the size of the
fixed maturity investment portfolio.
Expenses
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are
Commonwealth/Transnation's single largest expense. Agency commissions were
$355.8 million in 1996, $310.7 million in 1995 and $432.0 million in 1994, and
as a percentage of agency revenue have remained relatively constant during the
past three years at 77.8% in 1996, 77.3% in 1995 and 77.6% in 1994.
Remaining expenses, other than agency commissions and the provision for
policy claims, include personnel costs relating to marketing activities, title
searches, information gathering on specific properties and preparation of
insurance policies, as well as costs associated with the maintenance of title
plants. Such expenses were $355.4 million in 1996, compared to $318.2 million in
1995 and $344.0 million in 1994, and the expense ratio of
Commonwealth/Transnation (which includes agency commissions) was 91.1% in 1996
compared to 93.5% in 1995 and 90.5% in 1994. The decline in the expense ratio in
1996, when compared to 1995, resulted from an increase in direct title insurance
premiums and effective cost control measures. The expense ratio increase in 1995
was the result of a reduction in revenues in 1995.
The loss ratio was 7.8%, 8.7% and 8.9% for 1996, 1995 and 1994,
respectively. Claims paid as a percentage of operating revenues were 4.7%, 7.3%,
and 5.7% for 1996, 1995 and 1994, respectively. Commonwealth/Transnation has
benefited from favorable paid claims experience in recent years, a trend which
is expected to continue. This favorable trend reflects several factors,
including the strong 1993 refinance market, enhanced underwriting policies and
procedures and technology advancements in the title production process.
Income Taxes
Commonwealth/Transnation pays U.S. federal and state income taxes based
on laws in the jurisdictions in which it operates. The effective tax rates
reflected in the income statement for 1996, 1995 and 1994 differ from the U.S.
federal statutory rate principally due to non-taxable interest, dividend
deductions, travel and entertainment and goodwill.
At December 31, 1996, Commonwealth/Transnation had recorded deferred
tax assets of $27.2 million related primarily to policy and contract claims and
employee benefit plans. Substantially all of this deferred tax asset balance
could be realized in the future through the reversal of existing temporary
taxable differences. Accordingly, it is more likely than not that deferred tax
benefits will be realized for all the temporary deductible differences existing
at December 31, 1996.
Commonwealth/Transnation reassesses the realization of deferred assets
quarterly and, if necessary, adjusts its valuation allowance accordingly.
Liquidity and Capital Resources
Cash provided by operating activities was $13.0 million and $34.7
million for the nine month periods ended September 30, 1997 and 1996,
respectively. At September 30, 1997, Commonwealth/Transnation held cash of $11.7
million and fixed-maturity securities of $406.6 million, and had no long term
debt.
Cash provided by operating activities was $67.3 million for fiscal
1996, $16.0 million for 1995 and $39.9 million for 1994.
Commonwealth/Transnation had $14.3 million of cash and $429.8 million of fixed
maturity securities and no long term debt at December 31, 1996.
51
<PAGE>
Based on these sources and Commonwealth/Transnation's historic cash
flows, management believes that Commonwealth/Transnation will have sufficient
liquidity and adequate capital resources to meet both its short-and long-term
capital needs.
52
<PAGE>
BUSINESS
The Company
The Company is a holding company organized under the laws of the
Commonwealth of Virginia on June 24, 1991. The Company's principal subsidiary,
Lawyers Title, has been engaged since 1925 primarily in the title insurance
business through its network of branches, service offices, subsidiaries and
agencies. As a holding company, the Company has greater flexibility in
conducting certain operations, especially with regard to capital transactions,
while the operating title insurance subsidiaries remain subject to regulation by
the various states. See "-- Regulation."
The Title Insurance Industry
Title insurance policies are insured statements of the condition of
title to real property, showing ownership as indicated by public records, as
well as outstanding liens, encumbrances and other matters of record, and certain
other matters not of public record. Many of the principal customers of title
insurance companies buy insurance for the accuracy and reliability of the title
search as well as for the indemnity features of the policy. The beneficiaries of
title insurance policies are generally owners or buyers of real property or
parties who make loans on the security of real property. An owner's policy
protects the named insured against title defects, liens and encumbrances
existing as of the date of the policy and not specifically excluded or excepted
from its provisions, while a lender's policy, in addition to the foregoing,
insures against the invalidity of the lien of the insured mortgage and insures
the priority of the lien as stated in the title policy.
The premium for title insurance is due in full when the title
transaction is closed, and the policy amount is usually based upon the purchase
price of the property or the amount of the loan secured by the property. While
most other forms of insurance provide for the assumption of risk of loss arising
out of unforeseen future events, title insurance serves to protect the
policyholder from the risk of loss from events that predate the issuance of the
policy. This distinction underlies the low claims loss experience of title
insurers as compared to other insurance underwriters. Losses generally result
either from judgment errors or mistakes made in the title search and examination
process or the escrow process or from hidden defects such as fraud, forgery,
incapacity or missing heirs. Operating expenses, on the other hand, are higher
for title insurance companies than for other companies in the insurance
industry. Most title insurers incur considerable costs related to maintaining
local marketing offices and production centers and the personnel required to
process forms, search titles, collect information on specific properties and
prepare title insurance commitments and policies. To facilitate the preparation
of title reports, copies of public records, maps and documents may be compiled
and indexed to specific properties in an area. This compilation is called a
"title plant." Title insurers incur ongoing costs associated with the
establishment, operation and maintenance of title plants.
Direct and Agency Operations
A title policy can be issued directly by a title insurer or indirectly
on behalf of a title insurer through agents that are not themselves licensed as
insurers. Where the policy is issued by a title insurer, the search is performed
by or at the direction of the title insurer, and the premium is collected and
retained by the title insurer. Where the policy is issued through an agent, the
agent generally performs the search (in some areas searches are performed by
approved attorneys), examines the title, collects the premium and retains a
portion of the premium. The remainder of the premium is remitted to the title
insurer as compensation for bearing the risk of loss in the event a claim is
made under the policy. The percentage of the premium retained by an agent varies
from region to region and is sometimes regulated by the states. The agent's
commission generally ranges between 60% and 90% of the premium. A title insurer
is obligated to pay title claims in accordance with the terms of its policies,
regardless of whether it issued its policy directly or indirectly through an
agent.
The title insurance business is very competitive. Competition is based
primarily on price, service and expertise. The size and financial strength of
the insurer are also important factors, particularly for large commercial
customers. Title insurance underwriters also compete for agents on the basis of
service and commission levels.
53
<PAGE>
The Title Policy Process
A brief description of the process of issuing a title insurance policy
is as follows:
(i) The customer, typically a real estate salesperson or
broker, escrow agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and
place a request with the title department for a preliminary report.
(iii) After the relevant historical data on the property is
compiled, the title officer prepares a preliminary report that
documents (a) the current status of title to the property, (b) any
exclusions, exceptions and/or limitations that the Company might
include in the policy and (c) specific issues that need to be addressed
and resolved by the parties to the transaction before the title policy
will be issued. The preliminary report is circulated to all the parties
for satisfaction of any specific issues.
(iv) After the specific issues identified in the preliminary
report are satisfied an escrow agent closes the transaction in
accordance with the instructions of the parties and the Company's
conditions.
(v) Once the transaction is closed and all monies have been
released, the Company issues the policies (a) to the owner and the
lender, on a resale transaction, or (b) to the lender only, on a
refinancing transaction.
The title insurance industry is subject to regulation by state
regulatory authorities who possess broad powers relating to the granting and
revoking of licenses, the type and amount of investments which title insurers
may make, insurance rates, forms of policies and the form and content of
required annual statements, as well as the power to audit and examine financial
records of those companies. Under state laws, certain levels of capital and
surplus must be maintained and certain amounts of portfolio securities must be
segregated or deposited with appropriate state officials. State regulatory
policies also restrict the amount of dividends which insurance companies may pay
without prior regulatory approval.
Lawyers Title
General. Lawyers Title is engaged in the business of providing title
insurance and other real estate-related services for both residential and
commercial real estate transactions. In addition to writing title insurance, in
some states Lawyers Title furnishes certificates of title and abstracts of
title. Incidental to the issuance of title insurance, Lawyers Title also offers
a closing protection letter to lenders and owners who purchase title insurance,
and in some areas it serves as an escrow agent in closing real estate
transactions. Lawyers Title also acts as nominee for some national companies in
the acquisition of title to employees' residences and the subsequent sale of
such residences when employees are transferred.
Most title insurance policies sold by Lawyers Title and its
subsidiaries are underwritten by Lawyers Title. However, one subsidiary, Land
Title Insurance Company ("Land Title") also reissues policies it has previously
issued, principally in California. The Company also issues policies through
Oregon Title Insurance Company ("Oregon Title") (in Oregon) and through Title
Insurance Company of America ("TICA").
Lawyers Title's business is conducted in 49 states (Iowa does not
authorize title insurance) and in the District of Columbia, the territories of
Puerto Rico and the U.S. Virgin Islands, the Bahamas and a number of Canadian
provinces. Geographical coverage is provided by a nationwide network of 14
National Division offices and approximately 260 branch and closing/escrow
offices, and through approximately 3,800 independent agents and 36,000 approved
attorneys.
54
<PAGE>
Sales and Marketing. Because Lawyers Title's strategy is to provide
title insurance services in accordance with local practices, title insurance
policies are written through and issued by branch offices of Lawyers Title and
its underwriting subsidiaries or by title insurance agents or by some
combination thereof. Agencies may be either independently owned or subsidiaries
of Lawyers Title. In the western states, Lawyers Title operates primarily
through independent agents and subsidiaries (Lawyers Title Company, American
Title Group, Inc., Lawyers Title of Arizona, Inc. and Oregon Title), while its
eastern operations are conducted primarily through branch offices, agents and
approved attorneys. In the fiscal year ended December 31, 1996, approximately
53.5% of total title insurance revenues were derived from direct operations
(company branches and wholly owned subsidiary agencies) and 46.5% came from
independent agents.
As of September 30, 1997, no single independent agent was responsible
for more than 5% of Lawyers Title's title insurance revenues. In addition,
Lawyers Title is not dependent upon any single customer or any single group of
customers. The loss of any one customer would not have a material adverse effect
on Lawyers Title.
Although Lawyers Title enhances its business development through
general advertising, it believes its primary source of business is from the real
estate community, including lenders, developers, real estate agents, attorneys
and other real estate professionals who influence the placement of title
insurance. Lawyers Title's business results from construction and sale of new
housing, resales and refinancings of residential real estate and from commercial
real estate activity. In the 1990s Lawyers Title has placed a renewed emphasis
on residential real estate activity while maintaining a leadership position in
insuring commercial real estate transactions. Although precise data are not
available to compare the percentage of total premium revenues of Lawyers Title
derived from commercial versus residential real estate activities, 83% of such
revenues in 1996 resulted from policies providing coverage of $1 million or less
(which tend to be residential) and 17% of such revenues resulted from policies
providing coverage in excess of $1 million.
Regional differences exist in Lawyers Title's sales and marketing
emphasis. These differences occur in part due to regional variations in the
dynamics of the business. In the eastern United States, Lawyers Title has
developed a strong presence with title insurance agents and real estate
attorneys. In western markets, it has a greater presence through its direct
operations, which call on realtors and lenders to develop business from resales
and refinancings of residential real estate.
To increase profits and improve margins, Lawyers Title is expanding its
direct operations in markets with projected growth, attractive title insurance
rates and favorable claims experience. Since 1992, Lawyers Title has acquired
title operations in Texas, North Carolina, Oregon, Florida, Virginia, Maryland,
the District of Columbia, Ohio, Maine, Michigan, New Mexico, New Jersey,
Pennsylvania and Wisconsin. See "-- Recent Acquisitions." In addition, within
the last three years Lawyers Title has added closing/escrow offices and sales
representatives in many markets.
Lawyers Title has gained a favorable reputation for its National
Division offices, which specialize in the sale and servicing of title insurance
for complex commercial and multi-property transactions. Lawyers Title has 14
such offices located in strategic metropolitan areas throughout the country.
Each of these National Division offices markets title insurance products and
services to large commercial customers in its area and serves the customer's
title insurance needs throughout the country.
LTSC also services national lenders which seek to obtain title
insurance products and services as well as a variety of other real estate
related products and services such as appraisals, tax services, flood
certifications, surveys and document preparation through a single source. LTSC
is able to offer lenders one stop shopping for such products and services based
on the internal capabilities of Lawyers Title and strategic alliances with other
providers.
Underwriting. Lawyers Title issues policies on the basis of a title
report, which is prepared pursuant to underwriting guidelines prescribed in
manuals published by Lawyers Title, after a search of the public records, maps
and documents to ascertain the existence of easements, restrictions, rights of
way, conditions, encumbrances, liens or other matters affecting the title to, or
use of, real property. In certain instances, a visual inspection of the property
is also made. Title examinations may be made by branch employees, agency
personnel or approved
55
<PAGE>
attorneys, whose reports are utilized by or rendered to a branch or agent and
are the basis for the issuance of policies by such branch or agent.
In the case of difficult or unusual legal or underwriting issues
involving potential title risks, the branch office or agent is instructed to
consult with a supervising Lawyers Title office. Contracts with agencies require
that the agent seek prior approval of Lawyers Title in order to commit the
Company to assume a risk over a stated dollar limit. The agents may be either
direct subsidiaries of Lawyers Title or independently owned. Pursuant to agency
agreements, Lawyers Title assumes all of the risks to the insured, in the
absence of certain types of misconduct by the agent, in return for a portion of
the premium received.
Lawyers Title owns a number of title plants and in some areas leases or
participates with other title insurance companies or agents in the cooperative
operating of such plants. In many of the larger markets, the title plants and
search procedures have been automated. To maintain the value of the title
plants, Lawyers Title continually updates its records by regularly adding
current information from the public records and other sources. In this way,
Lawyers Title maintains the ability to produce quickly and at minimum expense a
statement of the legal documents that constitute the chain of title to a
particular property.
Other Products and Services. Lawyers Title and its subsidiaries also
provide escrow services to customers in various areas of the country. Primarily
in the western states, it is a general practice, incident to the issuance of
title insurance policies, to hold funds and documents in escrow for delivery in
real estate transactions upon fulfillment of the conditions to such delivery. In
the mid-western states, Florida and some eastern cities, it is customary for the
title company to close the transaction and disburse the sale or loan proceeds.
Fees for such escrow services are generally separate and distinct from the title
insurance premiums.
Lawyers Title has two wholly owned subsidiaries devoted to computer
automation of various aspects of the title insurance business, including on-line
title plants, policy issuance and closing documentation and support functions.
Datatrace Information Services Company, Inc. provides computerized access to
public record information such as deeds, mortgages, liens and judgments for the
cities of Cleveland, Detroit, Fort Lauderdale, Miami and Tampa and their
metropolitan areas and surrounding counties. Elliptus develops production and
automation software for the title insurance industry and software solutions for
transactions through EDI. Another subsidiary, Lawyers Title Exchange Company,
facilitates tax-free property exchanges pursuant to Section 1031 of the Internal
Revenue Code by holding the sale proceeds from one transaction until a second
acquisition occurs, thereby assisting customers in deferring the recognition of
taxable income.
In 1996, Lawyers Title formed a new subsidiary, LTSC, to coordinate
residential real estate transactions for national lenders and to provide other
real estate related products and services (such as appraisals, tax services,
flood certification, surveys, and document preparation) through a single source.
LTSC is currently qualified in 22 states. Early in 1996, the Company purchased a
minority interest in Palma Lazar & Ulsh, a provider of flood certification
services. Also in 1996, Lawyers Title, through a newly formed subsidiary, Global
Corporate Services, Inc. acquired a 50% ownership interest in Argonaut
Relocation Services, LLC ("Argonaut"), a Michigan limited liability company.
Argonaut, which employs approximately 120 individuals, offers a full line of
employee relocation services to companies moving employees anywhere in the
world. General Motors Corporation holds the remaining 50% ownership interest in
Argonaut.
Title Insurance Premium Revenues
In the years ended December 31, 1996, 1995 and 1994, premiums from the
issuance of title policies represented 76.8%, 79.9% and 82.6%, respectively, of
the Company's consolidated revenues.
The table below sets forth, for the years ended December 31, 1994, 1995
and 1996, the approximate dollars and percentages of the Company's title
insurance premium revenues for the ten states representing the largest
percentages of such revenues and for all other states combined:
56
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands)
1994 1995 1996
---- ---- ----
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Texas $ 63,487 15.3 $ 82,604 21.4 $ 98,762 21.6
Florida 29,173 7.1 26,852 7.0 33,340 7.3
California 33,984 8.2 28,530 7.4 32,148 7.0
Pennsylvania 28,929 7.0 29,468 7.6 30,223 6.6
New York 23,268 5.6 17,396 4.5 24,318 5.3
Michigan 24,304 5.9 20,625 5.3 23,067 5.1
Virginia 21,958 5.3 19,968 5.2 20,613 4.5
Ohio 20,001 4.8 14,503 3.8 18,130 4.0
New Jersey 18,364 4.5 14,123 3.7 15,391 3.4
Massachusetts 13,716 3.3 11,187 2.9 13,356 2.9
All Others 136,673 33.0 120,615 31.2 147,029 32.3
------- ----- ------- ----- ------- -----
Totals $413,857 100.0% $385,871 100.0% $456,377 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Investment Policies
Lawyers Title earns investment income from its portfolio of securities.
Historically, as a general policy, Lawyers Title limited its investments in
equity securities to approximately 50% of its statutory surplus. In 1996, the
Company changed its strategy for insurance company portfolios by shifting away
from investments in equity securities and into fixed-maturity securities.
Lawyers Title believes that the effect on future operations will be to replace
the lower dividend yields and variable capital gains experience of the equity
securities with the more steady and predictable stream of interest income from
fixed-maturity securities. The fixed-maturity portfolio consists of investment
grade securities and is designed to comply with the various state regulatory
requirements while maximizing yield. Historically, Lawyers Title has not
committed any portion of its investment portfolio to mortgages, and it has not
sought to enhance the return on its portfolio with derivative securities.
Lawyers Title regularly re-examines its portfolio strategies in light of
changing earnings or tax situations. See Note 3 to the Company's Consolidated
Financial Statements for the major categories of investments, contractual
maturities and income received.
Insured Risk on Policies in Force
The amount of the insured risk or "face amount" of insurance under a
title insurance policy is generally equal to either the purchase price of the
property or the amount of the loan secured by the property. The insurer is also
responsible for the cost of defending the insured title against covered claims.
The insurer's actual exposure at any time is significantly less than the total
face amount of policies in force because the risk on an owner's policy is often
reduced over time as a result of subsequent transfers of the property and the
reissuance of title insurance by other title insurance underwriters, and the
coverage of a lender's policy is reduced and eventually terminated as a result
of payment of the mortgage loan. Because of these factors, the total contingent
liability of a title underwriter on outstanding policies cannot be precisely
ascertained.
In the ordinary course of business, Lawyers Title and its underwriting
subsidiaries represent and defend the interests of their insureds, and provide
on their books for estimated losses and loss adjustment expenses. Title insurers
are sometimes subject to unusual claims (such as claims of Indian tribes to land
formerly inhabited by them) and to claims arising outside the insurance
contract, such as for alleged negligence in search, examination or closing,
alleged improper claims handling and alleged bad faith. The damages alleged in
such claims arising outside the insurance contract may often exceed the stated
liability limits of the policies involved. While Lawyers Title in the ordinary
course of its business has been subject from time to time to these types of
claims, Lawyers Title's losses to date on such claims have not been significant
in number or material in dollar amount relative to its financial condition.
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Liabilities for estimated losses and loss adjustment expenses represent
the estimated ultimate net cost of all reported and unreported losses incurred
through December 31, 1996. The reserves for unpaid losses and loss adjustment
expenses are estimated using individual case-basis valuations and statistical
analyses. Those estimates are subject to the effects of trends in loss severity
and frequency. Although considerable variability is inherent in such estimates,
management believes that the reserves for losses and loss adjustment expenses
are adequate. The estimates are continually reviewed and adjusted as necessary
as experience develops or new information becomes known; such adjustments are
included in current operations. The provision for policy and contract claims as
a percentage of operating revenues for 1996 was 5.2%, for 1995 was 5.2%, and for
1994 was 9.6%. See "Lawyers Title Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
Lawyers Title generally pays losses in cash; however, it sometimes
settles claims by purchasing the interest of the insured in the real property or
the interest of the claimant adverse to the insured. Assets acquired in this
manner are carried at the lower of cost or estimated realizable value, net of
any indebtedness thereon.
Lawyers Title places a high priority on maintaining effective quality
assurance and claims administration programs. Lawyers Title's quality assurance
program focuses on quality control, claims prevention and product risk
assessment in its branches, subsidiaries and independent agencies. The claims
administration program focuses on improving liability analysis, prompt, fair and
effective handling of claims, prompt evaluation of settlement or litigation with
first- and third-party claimants and appropriate use of ADR (Alternative Dispute
Resolution) in claims processing. In addition, to reduce the incidence of agency
defalcations, Lawyers Title has strengthened its procedures for renewing
existing agents, has expanded its due diligence requirements in acquiring new
agents and has intensified its Agency Audit Program. Lawyers Title continues to
refine its systems for maintaining effective quality assurance and claims
administration programs.
Reinsurance and Coinsurance
Lawyers Title distributes large title insurance risks through the
mechanisms of reinsurance and coinsurance. In reinsurance agreements, the
reinsurer accepts that part of the risk which the primary insurer (the "ceding
company" or "ceder") decides not to retain, in consideration for a portion of
the premium. A number of factors may enter into a company's decision to
reinsure, including retention limits imposed by state law, customer demands and
the risk retention philosophy of the company. The ceder, however, remains liable
to the insured for the total risk, whether or not the reinsurer meets its
obligation. As a general rule, when Lawyers Title purchases reinsurance on a
particular risk it will retain a primary risk of 5% of the total risk with a
minimum primary risk of $5 million and may participate with reinsurers on
liability amounts above the primary level on a secondary level. In the absence
of specific approval by management, reinsurance generally is purchased if the
risk is greater than $35 million.
Lawyers Title also assumes reinsurance from other title insurance
underwriters pursuant to a standard reinsurance agreement concerning specific
title insurance risks for properties on which it assumes a portion of the
liability. Lawyers Title has entered into numerous reinsurance agreements with
other title insurance underwriters on specific transactions. Lawyers Title's
exposure on all reinsurance assumed is reduced due to retention by the ceding
company of a substantial primary risk level. In addition, exposure under these
agreements generally ceases upon a transfer of the insured properties and, with
respect to insured loans, is decreased by reductions in mortgage loan balances.
Because of this, the actual exposure is much less than the total reinsurance
which Lawyers Title has assumed. Lawyers Title provides loss reserves on assumed
reinsurance business on a basis consistent with reserves for direct business.
Lawyers Title also utilizes coinsurance to enable it to provide
coverage in amounts greater than it would be willing or able to undertake on its
own. Under coinsurance transactions, each individual underwriting company issues
its individual policy and assumes a fraction of the overall total risk. There is
liability for each participating company for the particular fraction of the risk
it assumes.
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Lawyers Title enters into reinsurance and coinsurance arrangements with
most of the larger participants in the title insurance market and such
arrangements are not materially concentrated with any single title insurance
company. Revenues and claims from reinsurance are not material to Lawyers
Title's business as a whole.
Regulation
The title insurance business is regulated by state regulatory
authorities who possess broad powers relating to the granting and revoking of
licenses and to the type and amount of investments which Lawyers Title and its
insurance subsidiaries may make. These state authorities also regulate insurance
rates, forms of policies and the form and content of required annual statements,
and have the power to audit and examine the financial records of these
companies. Under state laws, certain levels of capital and surplus must be
maintained and certain amounts of portfolio securities must be segregated or
deposited with appropriate state officials. State regulatory policies also
restrict the amount of dividends which insurance companies may pay without prior
regulatory approval. See "Price Range of Common Stock and Dividends."
The NAIC has adopted model legislation which if enacted would regulate
title insurers and agents nationally and change certain statutory reporting
requirements. The proposed legislation also would require title insurers to
audit agents periodically and require licensed agents to maintain professional
liability insurance. Lawyers Title cannot predict whether the proposed
legislation or any provision thereof will be adopted in Virginia (the state of
domicile of Lawyers Title), or any other state. In 1996, Virginia enacted
legislation requiring an annual certification of reserve adequacy by a qualified
actuary.
A substantial portion of the assets of Lawyers Title and its
underwriting subsidiaries consists of their portfolios of investment securities.
As a title insurance company domiciled in Virginia, Lawyers Title is required by
state statute to maintain assets of a statutorily defined quality in an amount
equal to its total liabilities, determined on a statutory basis, plus 50% of
statutory equity. For statutory purposes, the insurer's total liabilities
include a statutory premium reserve, reserves established for losses in the
course of settlement ("case reserves") and other liabilities related to
operations.
The statutorily required assets are maintained by Lawyers Title in
investment-grade corporate securities and United States, state and local
obligations. In addition to these investments, Lawyers Title maintains
portfolios of cash and cash-equivalents. The investment portfolios are managed
by professional investment advisors whose work is reviewed by the Pension and
Portfolio Committee of the Company's Board of Directors.
Land Title, TICA and Oregon Title, domiciled in California, Tennessee
and Oregon, respectively, are similarly required to maintain certain levels and
qualities of assets.
Many state insurance regulatory laws intended primarily for the
protection of policyholders contain provisions that require advance approval by
state agencies of any change in control of an insurance company or insurance
holding company that is domiciled (or, in some cases, doing business) in that
state. Under such current laws, any future transaction that would constitute a
change in control of the Company would generally require approval by the state
insurance departments of Virginia, California, Tennessee, Texas, Ohio and
Oregon. Such requirement may have the effect of delaying or preventing certain
transactions affecting the control of the Company or the ownership of Common
Stock, including transactions that could be advantageous to the shareholders of
the Company.
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Seasonality, Backlog and Cyclicality
The title insurance business is closely related to overall levels of
real estate activity. Historically, real estate activity has been generally
slower in the winter months with volumes showing significant improvements in the
spring and summer months. The percentage of title orders closed to title orders
opened is typically lower in the first six months than at year end because of
this seasonal variance. In addition, the title insurance business is cyclical
due to the effect of interest rate fluctuations on the level of real estate
activity. Periods of high interest rates adversely affect real estate activity
and therefore premium revenues.
Employees
As of September 30, 1997, the Company had 3,932 employees. The
Company's relationship with its employees is good. No employees are currently
covered by any collective bargaining agreements, and the Company is not aware of
any union organizing activity relating to its employees.
Recent Acquisitions
A strategic focus of the Company is on growth through carefully
selected acquisitions. Primarily, this focus is centered on the acquisition of
small- to medium-sized title insurance agencies and underwriters. Although the
Company generally does not expect any single acquisition, other than the
Acquisition, to be material, it believes that such acquisitions in the aggregate
over time will enhance profitability. The Company continually assesses the
growth potential for its business in its existing markets as well as those
markets in which it is not currently participating. Through acquisitions of
independent agencies with a track record of profitability and the prospect of
growth in the future, the Company can expand revenues while increasing its
profit margins and control over the acquired agencies. In assessing the
acquisition of an underwriter, the Company reviews, among other factors, the
underwriter's profitability, location, growth potential in its existing market,
claims experience and adequacy of its reserves.
Since 1992, the Company has made several acquisitions in furtherance of
its acquisition strategy. In 1992, it acquired an agency in Medina, Ohio. In
1993, the Company acquired agencies in Houston, Texas; El Paso, Texas; Madison,
Wisconsin; and Jackson, Michigan; and an agency with five branch offices located
in Charlotte, Winston-Salem, Raleigh, Greensboro and Wilmington, North Carolina.
In 1994, the Company acquired an agency in Rio Rancho, New Mexico; a full
service title agency operation with approximately 17 offices (including closing
offices) in the Orlando, Florida area; an underwriter headquartered in Portland,
Oregon with approximately 15 offices (including escrow offices); and a full
service title agency operation in Texas with offices in Dallas, Fort Worth,
Austin and San Antonio, along with numerous closing offices. In 1995, the
Company acquired a full service title agency operation with offices in Maryland,
the District of Columbia and northern Virginia; an agency in Grand Blanc,
Michigan; and agency operations in Maryland, Pennsylvania and New Jersey which
have been converted to branch offices. In 1996, the Company acquired full
service title agency operations in Cuyahoga Falls, Ohio and in Portland, Maine;
entered into joint venture arrangements which resulted in the Company acquiring
controlling interests in two title agencies, one located in Columbus, Ohio and
the other in Nashville, Tennessee; acquired an interest in Argonaut, a
relocation company, in a joint venture with General Motors Corporation; and
acquired an interest in a flood certification company located in Bristol,
Pennsylvania. In most of these instances, the existing management of the
acquired company has remained in place to supervise the day-to-day operations of
the business.
On August 20, 1997, the Company and Lawyers Title entered into the
Stock Purchase Agreement to acquire Commonwealth/Transnation; the Stock Purchase
Agreement was amended and restated on December 11, 1997. Upon the consummation
of such Acquisition, the Company will become the largest title insurer in the
United States based on pro forma 1996 title operating revenues of over $1.3
billion. See "The Acquisition." While the Company actively considers strategic
acquisitions, it does not have any current or pending plans, negotiations,
arrangements, or understandings, with respect to any material acquisitions
(excluding the Acquisition) other than preliminary discussions. The Company has
not entered into any agreements (excluding the Stock Purchase Agreement) with
respect to any material acquisitions.
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Environmental Matters
Recent title insurance policies specifically exclude any liability for
environmental risks or contamination. Older policies, while not specifically
addressing environmental risks, are not considered to provide any coverage for
such matters, and the Company does not expect any significant expenses related
to environmental claims.
Lawyers Title sometimes acts as a temporary title holder to real estate
under a nominee holding agreement and Lawyers Title, through its subsidiaries,
sometimes participates in holding agreements involving tax-deferred exchanges.
Lawyers Title's customers in such situations generally are financially strong
entities from whom it secures indemnification for potential environmental and
other claims. In other situations where Lawyers Title might acquire title to
real estate, it will generally require that an appropriate environmental
assessment be made to evaluate and avoid any potential liability.
Properties
The Company conducts its business operations primarily in leased office
space. Lawyers Title leases approximately 83,300 square feet of office space for
its corporate headquarters in Richmond, Virginia. This lease expires on
September 30, 2000. Lawyers Title has numerous other leases for its branch
offices and subsidiaries throughout the states in which it operates. In
addition, it owns several properties which in aggregate are not material to its
business taken as a whole.
Lawyers Title's title plants constitute a principal asset. Such plants
comprise copies of public records, maps, documents, previous reports and
policies which are indexed to specific properties in an area. The plants are
generally located at the office that serves a particular locality. They enable
title personnel to examine title matters relating to a specific parcel of real
property as reflected in the title plant, and eliminate or reduce the need for a
separate search of the public records. They contain material dating back a
number of years and are kept current on a daily or other frequent basis by the
addition of copies of documents filed of record that affect real property.
Lawyers Title maintains title plants covering many of the areas in which it
operates, although certain offices utilize jointly owned and maintained plants.
Lawyers Title capitalizes only the initial cost of title plants. The cost of
maintaining such plants is charged to expense as incurred.
The title plants and title examination procedures have been automated
and computerized to a large extent in many areas. To protect against casualty
loss, Lawyers Title's offices maintain duplicate files and backups of all title
plants.
The Company believes that its properties are maintained in good
operating condition and are suitable and adequate for its purposes at current
sales levels.
Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or of which any of their property is subject.
Competition
The title insurance business is very competitive. Competition is based
primarily on price, service and expertise. The size and financial strength of
the insurer are also important factors, particularly for larger commercial
customers. Title insurance underwriters also compete for agents on the basis of
service and commission levels.
Lawyers Title is one of the largest title insurance underwriters in the
United States based on gross title revenues. Its principal competitors are other
major title insurance underwriters and their agency networks. These include
Chicago Title Insurance Company, First American Title Insurance Company,
Commonwealth Land Title Insurance Company (which the Company is to acquire in
the Acquisition), Stewart Title Guaranty Company, Old Republic National Title
Insurance Company and Fidelity National Title Insurance Company. Of the more
than 100
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title insurance underwriting companies licensed in the United States, according
to the American Land Title Association, the top seven companies account for
approximately 90% of the title insurance market.
Lawyers Title and its title insurance subsidiaries are subject to
regulation by the insurance authorities of the states in which they do business.
See "-- Regulation." Within this regulatory framework, Lawyers Title competes
with respect to premium rates, coverage, risk evaluation, service and business
development.
State regulatory authorities impose underwriting limits on title
insurers based primarily on levels of available capital and surplus. While such
limits may theoretically hinder Lawyers Title's assumption of a particular large
underwriting liability, in practice Lawyers Title has established its own
internal risk limits at levels substantially lower than those allowed by state
law. Therefore, statutory capital-based risk limits are not considered by
Lawyers Title to be a significant factor in the amount or size of underwriting
that it may undertake. However, some of Lawyers Title's competitors have
available much greater capital resources and are able to assume greater levels
of individual policy risk without distributing such risk through reinsurance.
Therefore, such companies may have a certain competitive advantage in bidding
for larger policies over Lawyers Title, which has to arrange reinsurance or
coinsurance coverage. The Company expects that any such disadvantage should be
substantially eliminated upon consummation of the Acquisition and the
accompanying significant increase in the Company's capital resources.
Commonwealth/Transnation
General. Commonwealth was founded as a title insurance company in 1876
and was incorporated in the Commonwealth of Pennsylvania on April 1, 1944.
Commonwealth is licensed by the insurance departments of 49 states, the District
of Columbia, Puerto Rico and the U.S. Virgin Islands. Transnation was
incorporated as an insurance company in the State of Arizona on September 15,
1992. Transnation is the successor by merger to Transamerica Title Insurance
Company, a California corporation incorporated on March 26, 1910
("Transamerica"). The current name of the corporation was adopted on September
20, 1995. Transnation is licensed by the insurance departments of 40 states and
the District of Columbia.
Commonwealth and Transnation, and their respective subsidiaries and
divisions, provide a complete range of title and closing services through an
extensive network of more than 4,000 policy-issuing locations nationwide,
including branch offices, independent agents, and approved attorneys.
Commonwealth/Transnation operates as a single organization under a unified
management team and comprises the third largest title insurance operation in the
United States, in terms of total premiums and fees in 1996.
Commonwealth/Transnation had premiums and fees of $780.2 million, $671.9 million
and $856.8 million for the years 1996, 1995 and 1994, respectively.
Commonwealth/Transnation is organized into five regions with
approximately 340 offices in 49 states, the District of Columbia, Puerto Rico
and the U.S. Virgin Islands. In 1996, California, Texas, Florida, New York,
Pennsylvania, Washington and Michigan accounted for approximately 11.0%, 10.5%,
9.6%, 7.7%, 6.4%, 6.0% and 5.7%, respectively, of revenues for premiums and
services related to title insurance. No other state accounted for more than 5%
of such revenues.
The table below sets forth, for the years ending December 31, 1994,
1995 and 1996, the approximate dollars and percentages of
Commonwealth/Transnation's title insurance premium revenues for the seven states
representing the largest percentages of such revenues and for all other states
combined:
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<TABLE>
<CAPTION>
Years Ended December 31,
(Amounts in thousands)
1994 1995 1996
---- ---- ----
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
California $ 89,221 10.4 $ 75,996 11.3 $ 85,530 11.0
Texas 90,615 10.6 72,517 10.8 82,160 10.5
Florida 88,624 10.3 66,651 9.9 74,732 9.6
New York 57,294 6.7 48,630 7.2 59,722 7.7
Pennsylvania 69,127 8.1 44,578 6.6 49,601 6.4
Washington 52,567 6.1 41,620 6.2 46,521 6.0
Michigan 46,781 5.5 39,646 5.9 44,580 5.7
All Others 362,533 42.3 282,298 42.1 337,311 43.1
------- ---- ------- ---- ------- ----
Totals $ 856,762 100.0% $ 671,936 100.0% $ 780,157 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
The principal executive offices of Commonwealth and Transnation are
located at 1700 Market Street, Philadelphia, Pennsylvania 19103, and the
telephone number is (215) 241-6000.
Commonwealth and Transnation are wholly owned subsidiaries of RIC. RIC
is a wholly owned subsidiary of Reliance Financial Services Corporation, a
Delaware corporation, which is a wholly owned subsidiary of Reliance. Reliance
is a publicly held Delaware corporation whose principal business is the
ownership of property and casualty and title insurance companies and an
information technology consulting company. The common stock of Reliance is
traded on the NYSE under the symbol "REL."
Title Insurance and Other Services. Through various divisions,
Commonwealth/Transnation writes title insurance for residential and commercial
real estate nationwide and provides escrow and settlement services in connection
with real estate closings. The National Title Services division of
Commonwealth/Transnation provides specialized title services for large and
multi-state commercial transactions. In addition to its nationwide title
insurance operations, Commonwealth/Transnation offers a full range of
residential real estate services to the national mortgage lending community
through its Commonwealth OneStop(R) network. Commonwealth OneStop(R) provides
(i) appraisal management services through the CLT Appraisal Services, Inc.
subsidiary, (ii) title insurance services through the National Residential Title
Services division, (iii) employee relocation and property disposition services
through Commonwealth Relocation Services, Inc., (iv) appraisal information
systems through the Day One, Inc. subsidiary and (v) additional services through
independent service providers.
National Title Services Division. The National Title Services division
of Commonwealth/Transnation, with thirteen (13) offices located in major
metropolitan areas nationwide, delivers complete customized title insurance
packages for large commercial, multi-site and interstate real estate
transactions. The division consists of numerous title insurance and real estate
professionals that comprise an entire network of national branch offices and
agents. Expertise on the local level provides the division with a full
understanding of varying real estate customs and requirements.
Commonwealth OneStop(R). Through the Commonwealth OneStop(R) operation,
based in Wayne, Pennsylvania, Commonwealth/Transnation provides national and
regional lenders with a full range of residential closing services. Lenders can
obtain all of the services necessary to complete residential real estate
transactions through a single point of contact. Such services are easily
accessible through EDI, by facsimile or through COSMOS -
Commonwealth/Transnation's electronic mail ordering system. COSMOS offers
lenders that have not yet converted to the EDI standard an opportunity to place
their orders electronically. The key services on the Commonwealth OneStop(R)
network are appraisal management services through CLT Appraisal Services, Inc.
and title insurance services through the National Residential Title Services
division.
CLT Appraisal Services, Inc. CLT Appraisal Services, Inc. provides the
mortgage lending industry with appraisal services through state-of-the-art
technology. A nationwide network of independent licensed or certified
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fee appraisers provides unbiased, third-party opinions from experienced
professionals with knowledge of their local markets. Through a customized
computer interface, telephone or facsimile, branch offices can communicate with
the national processing center in Wayne, Pennsylvania, which handles all aspects
of the process from order placement to status reporting and delivery. Appraisers
are screened before being admitted to the network, and they must meet certain
standards in education, training, licensing and experience.
National Residential Title Services Division. In connection with
technological advancements that allow real estate transactions to close quickly,
the National Residential Title Services division provides lenders with a single
point of contact for a full range of residential title services. The service of
this division extends to Commonwealth/Transnation's entire network of more than
4,000 policy-issuing locations nationwide, including branch offices, independent
agents and approved attorneys. National Residential Title Services provides
lenders with the convenience of one-stop shopping and the flexibility of setting
up procedures that meet with their individual requirements.
The National 1031 Exchange Corporation. The National 1031 Exchange
Corporation serves as an independent, third party advisor to facilitate
tax-deferred real property exchanges under Section 1031 of the Code.
Commonwealth Relocation Services, Inc. Commonwealth Relocation
Services, Inc. ("CRS") is a full-service national relocation management company.
CRS provides complete, diversified services that seek to keep relocation
activities and costs under control. Founded in 1967, CRS is one of the oldest
firms in the relocation business.
Day One, Inc. Day One, Inc. is a supplier of software for the appraisal
and property inspection industry.
Claims-Paying Ability. Standard & Poors Corporation ("S&P") has
assigned an "A-" rating to the claims-paying ability of
Commonwealth/Transnation. As a result, Commonwealth/Transnation falls under the
major rating category of "A." According to S&P, an "A" category rating is
assigned to those companies which have good financial security, but capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions. The addition of plus (+) or minus (-) to a major rating
category (in this case, "A") is considered a modifier to show the relative
standing of the insurer within the major rating category. There is no separate
definition for an "A-" rating. Duff & Phelps has assigned an "A+" rating to the
claims-paying ability of Commonwealth/Transnation. Duff & Phelps ratings are
based on a quantitative and qualitative analysis, with particular emphasis on
fundamental factors, recent operating results, reserves, capitalization and
invested assets. According to Duff & Phelps, an "A+" rating is assigned to those
companies which have a high claims-paying ability, protection factors are
average and there is an expectation of variability in risk over time due to
economic and/or underwriting conditions. The S&P and Duff & Phelps ratings are
not designed for the protection of investors and do not constitute
recommendations to buy, sell or hold any security.
THE ACQUISITION
Description of the Acquisition
On August 20, 1997, the Company and its subsidiary, Lawyers Title,
entered into the original Stock Purchase Agreement with Reliance and RIC. The
parties subsequently amended and restated the original Stock Purchase Agreement
in an Amended and Restated Stock Purchase Agreement dated as of December 11,
1997. The Stock Purchase Agreement provides that the Company will acquire from
RIC all of the issued and outstanding shares of capital stock of Commonwealth
and Transnation, both of which will become wholly owned subsidiaries of the
Company. The purchase price to be paid by the Company for the acquisition of
Commonwealth and Transnation consists of (i) $207.5 million in cash (subject to
reduction pursuant to the Stock Purchase Agreement) financed through the Credit
Facility, (ii) the issuance to RIC of 4,039,473 shares of Common Stock, (iii)
the issuance to RIC of 2,200,000 shares of Series B Preferred Stock, which as of
the closing of the Acquisition (the "Closing") will be initially convertible
into 4,824,561 shares of Common Stock, and (iv) a cash sum in an amount that is
the greater of (a) $31,587,500 or (b) the net proceeds from the public or
private offering of 1,750,000 shares of Common Stock after payment of applicable
underwriting discounts and commissions or placement agents'
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commissions and the fees and expenses of the offering. The Company has entered
into the Credit Agreement with Bank of America, individually and as
Administrative Agent for a syndicate of eleven (11) other banks, pursuant to
which the Credit Facility is available to fund the $207.5 million cash portion
of the purchase price. See "-- Bank Financing." The 4,039,473 shares of Common
Stock, the 2,200,000 shares of Series B Preferred Stock and the 4,824,561 shares
of Common Stock issuable upon conversion of the Series B Preferred Stock
(subject to adjustment as provided in the designation of the Series B Preferred
Stock) to be issued by the Company to RIC in connection with the Acquisition
(collectively, the "Acquisition Shares") will be registered for resale under the
Securities Act, pursuant to the terms of a Registration Rights Agreement to be
executed by the Company and RIC at the Closing. See "-- Certain Related
Agreements."
The Stock Purchase Agreement provides that the $207.5 million cash
portion of the purchase price payable by the Company to RIC at the Closing will
be reduced by the greater of (i) the amount, if any, by which the stockholders'
equity of Commonwealth/Transnation, as set forth on the unaudited combined
balance sheet of Commonwealth/Transnation at September 30, 1997, is less than
$270 million, and (ii) the amount, if any, by which the unused dividend paying
capacity of Commonwealth/Transnation, determined on a statutory basis, as of the
Closing Date is less than (x) $9.0 million for calendar year 1997 if the Closing
takes place on or before December 31, 1997, (y) $9.0 million immediately
available for dividends if the Closing takes place between January 1, 1998 and
February 28, 1998, or (z) $4.5 million immediately available for dividends if
the Closing takes place on or after March 1, 1998. The Company presently expects
the Closing to occur in February 1998 and, as of the date hereof, has no reason
to believe that Commonwealth/Transnation will not have $9.0 million available
for dividends as of the expected Closing Date. To the extent, however, that the
unused dividend capacity of Commonwealth/Transnation is less than $9.0 million
at Closing, the $207.5 million cash purchase price would be reduced accordingly.
The provisions of the Stock Purchase Agreement relating to reduction of the cash
portion of the purchase price if the stockholders' equity of
Commonwealth/Transnation is less than $270 million at September 30, 1997 will
not result in a reduction based upon a stockholders' equity of approximately
$284 million as reflected in Commonwealth/Transnation's balance sheet as of that
date.
In connection with the transactions contemplated by the Stock Purchase
Agreement, the Company, Reliance and RIC have agreed to enter into the Voting
and Standstill Agreement, which will be executed at Closing and which provides
for, among other things, the designation by RIC of three directors to be
nominated and recommended for election to the Board of Directors of the Company
(the "RIC Directors") and certain prohibitions on and requirements of Reliance
and RIC and their affiliates with respect to (i) acquiring additional shares of
Common Stock or Series B Preferred Stock, (ii) voting their shares of Common
Stock, (iii) selling or transferring shares of Common Stock, shares of Series B
Preferred Stock and shares of Common Stock issuable upon conversion of the
Series B Preferred Stock, and (iv) converting shares of Series B Preferred
Stock. See "-- Certain Related Agreements."
Subject to the conditions set forth in the Stock Purchase Agreement,
the Closing Date will be such date as is mutually agreed by the parties,
provided that all conditions to Closing have been satisfied or waived and the
Closing Date is no earlier than the date of delivery to the Company of
Commonwealth/Transnation's financial statements for the quarter ended September
30, 1997 nor later than March 31, 1998. The financial statements of
Commonwealth/Transnation for the quarter ended September 30, 1997 were delivered
to the Company in November 1997. It is expected that the Acquisition will be
consummated in February 1998, subject to the receipt of shareholder and
regulatory approval. See "-- Regulatory Approvals." In addition, the approval of
the shareholders of the Company will be required to consummate the Acquisition.
The Board of Directors of the Company approved the original Stock Purchase
Agreement and the transactions contemplated thereby at a meeting held on August
20, 1997, approved certain amendments thereto and a restatement thereof at a
meeting held December 5, 1997, and have recommended the proposed Acquisition to
the shareholders of the Company. The Shareholders will consider the Acquisition
at a Special Meeting to be held in February 1998.
The consummation of the Acquisition is a condition to the consummation
of the Offering. As described above, the Acquisition is conditioned upon the
sale by the Company of 1,750,000 shares of Common Stock in a private offering or
a public offering such as the Offering hereunder.
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Bank Financing
Generally. On November 7, 1997, the Company entered into the Credit
Agreement with Bank of America, individually and as Administrative Agent (the
"Agent") for a syndicate of eleven (11) other banks (together with Bank of
America, the "Banks"), pursuant to which the Credit Facility, in an aggregate
principal amount of up to $237.5 million, is available, subject to satisfaction
of certain conditions described below, to (i) finance the $207.5 million payment
to RIC in connection with the Acquisition, and (ii) provide up to $30 million
for general corporate purposes. A copy of the Credit Agreement has been filed
with the Commission on Form 8-K and is incorporated by reference into this
Prospectus. The following summary of the material provisions of the Credit
Agreement is qualified in its entirety by reference to the complete text of the
actual agreement.
Conditions. Each extension of credit under the Credit Facility (a
"Loan") is conditioned upon (i) the receipt by the Agent of a Notice of
Borrowing, (ii) the continuing validity of the representations and warranties
made by the Company in the Credit Agreement as if made on and as of the date of
each Loan (except to extent such representations and warranties expressly refer
to an earlier date); and (iii) the absence of any Default or Event of Default
(as such terms are defined in the Credit Agreement) as of, or resulting from,
such Loan. As of December 31, 1997, the Company had an aggregate amount of $4.0
million in Loans outstanding under the Credit Facility, representing amounts
that were outstanding under prior credit facilities.
The initial Loan that causes the aggregate principal amount of
outstanding Loans under the Credit Agreement to exceed $30 million is
conditioned upon, among other things, (i) substantially contemporaneous
consummation of the Acquisition; (ii) there being no Default or Event of Default
at such time or arising therefrom; and (iii) satisfaction of certain additional
conditions customary to financing transactions of the kind contemplated by the
Credit Facility.
Term. The Credit Facility is a five-year senior unsecured revolving
credit facility which will terminate with all outstanding amounts being due and
payable November 7, 2002 (the "Termination Date"), unless extended as provided
in the Credit Agreement. On November 7, 1998 and November 7, 1999, the first and
second anniversaries of the closing date of the Credit Facility, the Termination
Date may be extended at the request of the Company for one additional year if
unanimously approved by the Banks in their discretion.
Interest Rate. Prior to an Event of Default, interest shall accrue on
the outstanding principal balance of the Loans, at the Company's option, based
upon (i) the IBOR (reserve adjusted) for one, two, three or six months, or (ii)
Bank of America's Base Rate as defined in the Credit Agreement. During the
pendency of any Event of Default, interest on the outstanding principal balance
of the Loans will accrue at a rate equal to Bank of America's Base Rate plus two
percent (2.0%) per annum.
Dividend Restrictions. The Credit Agreement contains certain covenants
which restrict, or may have the effect of restricting, the payment of dividends
or distributions, and the purchase or redemption by the Company of its capital
stock. The Credit Agreement generally limits the aggregate amount of all cash
dividends and stock repurchases by the Company to 25% of its cumulative
consolidated net income arising after December 31, 1996. However, the Company
may declare and make dividend payments or other distributions payable solely in
its Common Stock, and is also permitted to repurchase shares of its Common Stock
with the proceeds from a substantially concurrent issue of new shares of its
Common Stock.
The Credit Agreement also sets forth certain financial covenants that
may indirectly restrict the payment of cash dividends by the Company. The Credit
Agreement requires the Company's insurance subsidiary, Lawyers Title, to
maintain a statutory surplus of approximately $120.5 million and, following
consummation of the Acquisition, Commonwealth is required to maintain a
statutory surplus of approximately $108.4 million. As of September 30, 1997, the
statutory surplus of Lawyers Title was approximately $150.6 million, and the
statutory surplus of Commonwealth was approximately $135.4 million. The Company
is required to maintain a debt to total capitalization ratio of 40%, 37.5%, 35%,
32% and 30%, for the fiscal years ending December 31, 1998, 1999, 2000, 2001 and
after 2001, respectively. The Company also must maintain a debt service coverage
ratio greater than or equal to 2.25 to 1.0.
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Management does not believe that the restrictions contained in the
Credit Agreement will, in the foreseeable future, adversely affect the Company's
ability to pay cash dividends at the current dividend rate.
Covenants, Warranties and Events of Default. The Credit Agreement
contains customary affirmative covenants including covenants pertaining to
compliance with laws, delivery of financial statements, maintenance of corporate
existence, maintenance of property, maintenance of appropriate insurance, and
maintenance of books and records. In addition to the restrictions on dividends
described above, the Credit Agreement also includes various negative covenants,
including restrictions on certain additional indebtedness, guarantees, liens,
and share repurchases, and restrictions on certain asset dispositions, certain
loans and investments, transactions with affiliates and acquisitions.
The aggregate Credit Facility commitment shall be reduced by 100% of
the net cash proceeds from the issuance of debt or 75% of the net cash proceeds
from the issuance of any equity (excluding any equity issuances related to the
Acquisition). In addition, the Credit Agreement contains (i) customary
provisions protecting the Banks in the event of the unavailability of funding,
illegality, increased costs, change of circumstance, capital adequacy charges
and funding losses and indemnities; (ii) representations and warranties
customary to credit agreements for similar transactions; (iii) events of default
customary for financings of a similar kind, including defaults arising from
non-payment of principal and interest and fees, failure to meet covenants,
inaccurate or false representations and warranties, bankruptcy or insolvency,
default under other indebtedness and change of control.
Indemnification. The Credit Agreement requires the Company to indemnify
and hold harmless each of the Agent, BancAmerica Robertson Stephens (as Arranger
of the Credit Facility), the Banks and their respective directors, officers,
employees and affiliates from and against any and all losses, claims, damages,
liabilities (or actions or other proceedings commenced or threatened in respect
thereof) and expenses that arise out of, result from or in any way relate to the
Credit Agreement, and to reimburse each indemnified person, upon its demand, for
any legal or other expenses reasonably incurred in connection with
investigating, defending or participating in any such loss, claim, damage,
liability or action or other proceeding, except to the extent incurred by any
indemnified person by reason of the gross negligence or willful misconduct of
such person.
Amendment to Articles of Incorporation of the Company
Upon the consummation of the Acquisition, the Company's Charter will be
amended to (i) establish a series of the Preferred Stock to be designated as "7%
Series B Cumulative Convertible Preferred Stock," (ii) change the name of the
Company from "Lawyers Title Corporation" to "LandAmerica Financial Group, Inc."
and (iii) increase the number of authorized shares of Series A Junior
Participating Preferred Stock to 200,000 in order to reserve a sufficient number
of shares for issuance in connection with the Rights (as defined below) under
the Amended and Restated Rights Agreement (as defined below). See "-- Certain
Related Agreements."
Stock Exchange Listing
The Common Stock is listed and trades on the NYSE under the symbol
"LTI." It is a condition to the consummation of the Acquisition that the shares
of the Common Stock to be issued to RIC on the Closing Date and the shares of
Common Stock issuable upon conversion of the Series B Preferred Stock shall have
been approved for listing on the NYSE, subject only to official notice of
issuance.
The Company has reserved the symbol "LFG" on the NYSE for use upon
consummation of the Acquisition and shareholder approval of the proposed change
in the name of the Company to "LandAmerica Financial Group, Inc." This symbol is
expected to be effective on and after the Closing Date.
Resales of the Company's Securities
All of the Acquisition Shares to be issued to RIC pursuant to the Stock
Purchase Agreement will be registered under the Securities Act by the Company
for resale into the public market in accordance with the terms of
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a Registration Rights Agreement (the "Registration Rights Agreement") to be
executed by the Company and RIC on the Closing Date. As a result, the
Acquisition Shares may be sold pursuant to an effective registration statement
as provided by the Registration Rights Agreement or pursuant to Rule 144 or any
other applicable exemption from registration under the Securities Act. See
"Shares Eligible for Future Sale."
The Stock Purchase Agreement
Representations and Warranties and Certain Covenants of the Parties.
The Stock Purchase Agreement contains customary representations and warranties
by each of the Company, Lawyers Title and RIC. In addition, RIC has agreed that,
prior to the Closing Date, RIC will cause Commonwealth and Transnation to carry
on their respective businesses only in the ordinary course of business,
consistent with regular custom and practice, and RIC will use its Best Efforts
(as defined in the Stock Purchase Agreement) to maintain the value of the
Commonwealth and Transnation businesses as going concerns and the relationships
of Commonwealth and Transnation with customers, suppliers, vendors, employees,
agents, referral sources and governmental authorities. The Stock Purchase
Agreement contains covenants that, among other things, (i) restrict the actions
of the parties regarding the solicitation of takeover proposals and the
solicitation of employment of individuals who are employees of Commonwealth or
Transnation, or any of their subsidiaries, by RIC, (ii) prohibit RIC and its
affiliates for a certain period of time from competing with the Company in the
title insurance business following consummation of the Acquisition, (iii)
provide for the public or private sale of 1,750,000 shares of Common Stock by
the Company, and (iv) are customary to transactions similar to the Acquisition.
Closing Conditions. The obligation of the Company and RIC to close the
Acquisition is subject to various conditions, including approval of the Stock
Purchase Agreement and the transactions contemplated thereby by the Company's
shareholders; the receipt of all requisite approvals by the appropriate
regulatory agencies; the absence of any action to delay or enjoin the
consummation of the Acquisition; the absence of any law prohibiting the
Acquisition; the accuracy of each party's representations and warranties as of
the Closing Date and the performance by each party of all obligations required
to be performed by it under the Stock Purchase Agreement at or prior to the
Closing Date; the execution by the parties of each of the closing agreements to
which they are a party and the receipt of opinions of counsel with respect to
certain legal matters; and the delivery by each party of a written update of its
disclosure letter delivered upon execution of the Stock Purchase Agreement. In
addition to the foregoing, the Company's obligation to close is conditioned upon
the absence of any "affiliate debt" (as defined in the Stock Purchase Agreement)
or other debt or advances owed to Commonwealth, Transnation or any of their
subsidiaries by RIC or its affiliates or by any present or former employee,
officer, shareholder or director of RIC. The obligation of RIC to close is also
subject to additional conditions, including the delivery by the Company of the
purchase price for the Acquisition; the listing on the NYSE of the Common Stock
to be issued to RIC and the shares of Common Stock issuable upon conversion of
the Series B Preferred Stock; the continued effectiveness of the Company's
Amended and Restated Rights Agreement; and the election of the directors
designated by RIC to the Company's Board of Directors as required by the Voting
and Standstill Agreement. Any of the foregoing conditions to Closing (other than
conditions relating to approval by the Company's shareholders and the receipt of
all necessary regulatory approvals) may be waived by the parties.
No assurances can be provided as to when or if all of the conditions
precedent to the Acquisition can or will be satisfied or waived by the
appropriate party. As of the date of this Prospectus, the Company has no reason
to believe that any of the conditions set forth in the Stock Purchase Agreement
will not be satisfied.
Amendment, Waiver and Termination. The Company and RIC may amend the
Stock Purchase Agreement by written agreement at any time before or after
approval by the shareholders of the Company. The Stock Purchase Agreement also
permits a party to waive compliance by another party with any of the provisions
thereof. The Stock Purchase Agreement may be terminated at any time prior to the
Closing Date (i) by mutual written consent of the Company and RIC or (ii) by
written notice by either the Company or RIC in the event of certain breaches or
failures to satisfy the conditions to Closing.
If either the Company or RIC terminates the Stock Purchase Agreement
pursuant to the exercise of its fiduciary duties, then the terminating party is
required to pay the non-terminating party the sum of $14.0 million in
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cash in immediately available funds contemporaneously with the delivery of its
written notice of termination. In addition, the Company is obligated to pay RIC
the sum of $14.0 million in cash if the Company's shareholders fail to approve
the transaction following certain public announcements.
Certain Related Agreements
Voting and Standstill Agreement. The Company, Reliance and RIC have
agreed to enter into the Voting and Standstill Agreement to be executed at
Closing that, among other things, (i) provides for the designation by RIC of
three (3) directors to be nominated and recommended for election to the Board of
Directors of the Company, (ii) prohibits Reliance and RIC and their affiliates
from acquiring any additional shares of Common Stock or Series B Preferred Stock
(except as permitted under the Voting and Standstill Agreement), (iii) requires
that Reliance and RIC and their affiliates vote their shares of Common Stock in
a certain manner depending upon the matter that is subject to a vote of the
Company's shareholders, (iv) requires the sale of all 4,039,473 shares of Common
Stock received by RIC from the Company pursuant to the Stock Purchase Agreement
within 6 1/2 years after the effective date of the resale registration statement
for such shares (subject to extension as provided in the Voting and Standstill
Agreement), (v) requires RIC, with respect to the Series B Preferred Stock
received by RIC from the Company on the Closing Date and any shares of Common
Stock received upon conversion of such shares of Series B Preferred Stock, to
sell so many of the shares of Series B Preferred Stock or shares of Common Stock
received upon conversion thereof held by it or its affiliates as is necessary to
reduce the RIC Ownership Percentage (as defined below) to less than 20% of the
Adjusted Outstanding Shares (as defined below) by not later than 8 1/2 years
after the effective date of the registration statement for such shares (subject
to extension as provided in the Voting and Standstill Agreement), (vi) restricts
the ability of RIC and its affiliates to convert the shares of Series B
Preferred Stock then held by them until all of the 4,039,473 shares of Common
Stock (and certain additional shares that may be issued with respect to such
shares) have been sold to persons that are not, at the time of the sale,
conveyance or transfer, an affiliate of RIC, provided that such restriction
shall not apply upon the occurrence of certain specified events set forth in the
Voting and Standstill Agreement, and (vii) prohibits the knowing transfer of the
Acquisition Shares to any person or group if, as a result of such transfer, such
person or group would have beneficial ownership of Common Stock representing in
the aggregate more than 9.9% of the issued and outstanding shares of Common
Stock (subject to exceptions set forth in the Voting and Standstill Agreement).
"RIC Ownership Percentage" means, at any time, the percentage of the
Adjusted Outstanding Shares that is beneficially owned in the aggregate by RIC
and its affiliates. "Adjusted Outstanding Shares" means, at any time and with
respect to the determination of the RIC Ownership Percentage as it relates to
RIC and its affiliates, the total number of shares of Common Stock then issued
and outstanding together with the total number of shares of Common Stock not
then issued and outstanding that would be outstanding if (x) all then existing
shares of Series B Preferred Stock had been converted and (y) all then existing
warrants and options exercisable into shares of Common Stock had been exercised
(other than underwriters' over-allotment options and stock options granted under
benefit plans of the Company or any of its affiliates), but excluding any rights
that may be exercisable under the Company's Amended and Restated Rights
Agreement.
Covenants Regarding Non-Performance Remedies. The provisions of the
Series B Preferred Stock will contain covenants that will entitle RIC to certain
rights in specific default situations. Upon the occurrence of certain events,
RIC will be entitled to additional seats on the Company's Board of Directors,
and Reliance, RIC and their affiliates will no longer be subject to certain
restrictions under the Voting and Standstill Agreement. Such events include the
following: (i) the Company's combined ratio exceeds the weighted average of the
combined ratios of certain predetermined comparable title insurance companies by
more than five percentage points for any twelve month period and the Company's
claims-paying ability rating is downgraded by two ratings agencies to or below a
rating of "BBB -"; (ii) the Company fails to pay a dividend on the Series B
Preferred Stock on one occasion, on two occasions, whether or not consecutive,
and on three occasions, whether or not consecutive, and (iii) the Company
defaults on any of its material debt obligations in excess of $15 million
(individually or at any one time in the aggregate). See "Description of Capital
Stock -- Acquisition Covenants Regarding Non-Performance Remedies."
Amended and Restated Rights Agreement. Pursuant to the Rights
Agreement, dated as of October 1, 1991, between the Company and Sovran Bank,
N.A., as Rights Agent, one preferred share purchase right (a "Right") was
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issued for each share of Common Stock then outstanding. The Rights Agreement was
amended on June 22, 1992 to appoint Wachovia Bank of North Carolina, N.A., as
the successor to the Rights Agent. In connection with the execution of the
original Stock Purchase Agreement on August 20, 1997 and the Amended and
Restated Stock Purchase Agreement on December 11, 1997, the Company executed an
Amended and Restated Rights Agreement, dated August 20, 1997, and a First
Amendment to Amended and Restated Rights Agreement, dated December 11, 1997,
with Wachovia Bank, N.A., as Rights Agent (together, the "Amended and Restated
Rights Agreement"), copies of which have been filed with the Commission on
Current Reports on Form 8-K and are incorporated by reference into this
Prospectus. See "Available Information" and "Incorporation of Certain Documents
by Reference."
The Amended and Restated Rights Agreement provides, among other things,
that (i) the approval, execution, delivery and performance of the original Stock
Purchase Agreement, the Amended and Restated Stock Purchase Agreement or the
Voting and Standstill Agreement, and any acquisition of the Acquisition Shares
by RIC or its affiliates as contemplated by the original Stock Purchase
Agreement, the Amended and Restated Stock Purchase Agreement or the Voting and
Standstill Agreement, will not cause the Rights to become exercisable, (ii) the
exercise price of the Rights shall be $85 per Right, an increase from $65 per
Right to reflect current conditions, and (iii) the Rights shall not be
exercisable after August 20, 2007, thereby extending the termination date of the
Rights from October 1, 2001. See "Description of Capital Stock -- Preferred
Share Purchase Rights."
Registration Rights Agreement. On the Closing Date, the Company and RIC
will enter into the Registration Rights Agreement. In accordance with the
procedures set forth in the Registration Rights Agreement, the Company will file
one or more Registration Statements with the Commission to register the resale
of the Acquisition Shares under the Securities Act and, after such Registration
Statement(s) become effective, use its best efforts to maintain the
effectiveness of any such Registration Statement(s) for specified time periods.
Regulatory Approvals
Antitrust. Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") and the rules and regulations promulgated thereunder by the
Federal Trade Commission (the "FTC"), the Acquisition may not be consummated
until notifications have been given and certain information has been furnished
to the FTC and the Antitrust Division of the Department of Justice and specified
waiting period requirements have been satisfied. The Company and Reliance filed
notification and report forms under the HSR Act with the FTC and the Department
of Justice on September 5, 1997. On October 3, 1997, prior to the expiration of
the required thirty (30) day waiting period under the HSR Act, the Company and
Reliance received a request for additional information from the FTC. The request
for additional information has the effect of extending the thirty (30) day
waiting period until twenty (20) days after the Company and Reliance have each
"substantially complied" (as such term is defined under the HSR Act) with such
request, unless the FTC or the Department of Justice voluntarily terminates the
waiting period prior to substantial compliance. On October 31, 1997 and November
25, 1997, the Company and Reliance filed responses to the FTC's request that
provided additional information. On December 16, 1997, the Company and Reliance
notified the FTC of the amendment and restatement of the original Stock Purchase
Agreement. As of the date hereof, the additional twenty (20) day waiting period
has not commenced and the FTC has not voluntarily terminated the waiting period.
At any time before or after the consummation of the Acquisition, the FTC or the
Department of Justice could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
the consummation of the Acquisition or seeking divestiture of certain assets of
the Company or Commonwealth/Transnation. At any time before or after the
consummation of the Acquisition, and notwithstanding that the HSR Act waiting
period has expired, any state could take such action under the antitrust laws as
it deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Acquisition or seeking
divestiture of certain assets of the Company or Commonwealth/Transnation.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
Based upon available information, the Company believes that the
Acquisition can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Acquisition on antitrust grounds will not be made or that, if such a challenge
is made, the
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Company would prevail or would not be required to accept certain conditions in
order to consummate the Acquisition.
Insurance. The Acquisition is also subject to the receipt of necessary
approvals from various state insurance departments. In September 1997, the
Company and Reliance (and certain of its affiliates) filed an Application for
Approval of Acquisition of Control of or Merger with a Domestic Insurer (Form A)
in a total of thirteen (13) states where such filings were required. On December
15, 1997, the Company and Reliance notified state insurance departments, where
required to do so, of the amendment and restatement of the original Stock
Purchase Agreement. The insurance laws and regulations of certain of the states
wherein such Form A filings were made require hearings by the state insurance
departments before deciding whether to grant approval of an acquisition
described in a Form A filing. As of December 9, 1997, all such required hearings
had been completed. In certain of the states that do not require a hearing prior
to approval, the Company and Reliance would be entitled to a hearing in the
event the state insurance department proposed not to grant the approval. As of
the date hereof, approvals have been obtained in six (6) states and are pending
in the remaining seven (7) states. The Company has no reason to believe that the
remaining approvals will not be obtained.
In addition to the Form A filings, on October 24, 1997, the Company and
Reliance filed Pre-Acquisition Notification Forms Regarding the Potential
Competitive Impact of a Proposed Merger or Acquisition by a Non-Domiciliary
Insurer Doing Business in this State or by a Domestic Insurer (Form E) in
seventeen (17) states where such filings were required. The Form E filings are
generally reviewed within thirty (30) days after filing with the state insurance
departments, which may request additional information on the competitive impact
of a proposed acquisition. The thirty (30) day time period expired on November
24, 1997. As of that date, the Company and Reliance had received requests for
supplemental information from four (4) states. Although the Company and Reliance
have responded to such requests, the applicable state insurance department
generally may take up to an additional thirty (30) days from the date it
receives the response containing the requested supplemental information to
approve an acquisition. In three (3) of those four (4) states, approvals are
pending. The Company and Reliance have received the approval of the remaining
fourteen (14) states where the Form E's were filed.
Accounting Treatment
The Acquisition will be accounted for by the Company using the
"purchase" method of accounting in accordance with Accounting Principles Board
Opinion No. 16. Under purchase accounting, the fair market value of the
consideration given, and the market value of the liabilities assumed, by the
Company in the Acquisition will be used as the basis of the purchase price. The
assets and liabilities of Commonwealth/Transnation will be revalued to their
respective fair market values. The financial statements of the Company will
reflect the combined operations of the Company and Commonwealth/Transnation from
the Closing Date of the Acquisition.
Certain Federal Income Tax Consequences
The consummation of the Acquisition will not be a taxable event for
federal income tax purposes for the Company or the shareholders of the Company.
Pursuant to the Stock Purchase Agreement, RIC agreed to (i) sell all of
the capital stock of Commonwealth and Transnation to the Company and (ii) join
with the Company in the filing of an election under Section 338(h)(10) of the
Internal Revenue Code of 1986, as amended (the "Code"), and any comparable
election under state, local or foreign tax law. These elections should result in
the Acquisition being deemed to be a sale of Commonwealth's assets and
Transnation's assets for federal income tax purposes with Commonwealth and
Transnation being deemed to have sold their assets while still a member of RIC's
"affiliated group" (as defined in the Code). Accordingly, the economic burden of
taxation resulting from the deemed asset sale by Commonwealth and Transnation
will be borne by RIC.
The discussion set forth above as to the material federal income tax
consequences of the Acquisition is based upon the provisions of the Code,
applicable Treasury Regulations thereunder, judicial decisions and current
administrative rulings, any of which may be changed at any time with retroactive
effect. The discussion does not
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address any aspect of state, local or foreign taxation. No rulings have been or
will be requested from the IRS with respect to any of the matters discussed
herein. There can be no assurance that future legislation, regulations,
administrative rulings or court decisions would not alter the tax consequences
set forth above.
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MANAGEMENT AND OWNERSHIP OF THE COMBINED COMPANY
Board of Directors
Upon the consummation of the Acquisition, the Company will increase the
size of its Board of Directors from ten (10) to fourteen (14) directors. At that
time, the Company will appoint Herbert Wender, the Chief Executive Officer of
Commonwealth and Transnation, as a director to fill one of the newly created
vacancies on the Board of Directors. In addition, the Company will appoint
Robert M. Steinberg, George E. Bello and Lowell C. Freiberg as initial RIC
Directors to fill the remaining vacancies on the Board of Directors. See "The
Acquisition -- Description of the Acquisition" and "-- Certain Related
Agreements." Similar to its current structure, the post-Acquisition Board of
Directors will be divided into three classes, two of which will consist of five
directors each and one of which will consist of four directors. Mr. Wender will
be placed in Class I, and one RIC Director will be placed in each of the three
classes.
The current members of the Board of Directors will continue to serve in
their respective classes and will serve staggered three-year terms expiring in
1998, 1999 and 2000, respectively. Mr. Wender and the RIC Directors will serve
as directors until the 1998 annual meeting of shareholders of the Company. At
that meeting, the Board of Directors will present for election such directors to
serve for the remaining terms of their respective classes, expiring in 1999 and
2000 (for Classes II and III) and for a three-year term expiring in 2001 (for
Class I).
The following table sets forth the composition of the Board of
Directors following the consummation of the Acquisition.
<TABLE>
<CAPTION>
<S> <C> <C>
Class I Class II Class III
(Term Expiring in 1998) (Term Expiring in 1999) (Term Expiring in 2000)
Charles H. Foster, Jr. J. Garnett Nelson Janet A. Alpert
Herbert Wender* Robert F. Norfleet, Jr. Michael Dinkins
George E. Bello** Robert M. Steinberg** James Ermer
Theodore L. Chandler, Jr. Eugene P. Trani Lowell C. Freiberg**
Marshall B. Wishnack John P. McCann
</TABLE>
- --------------
* Chief Executive Officer of Commonwealth and Transnation.
** RIC Director.
Charles H. Foster, Jr. will continue to serve as Chairman of the Board,
and Herbert Wender will become Vice-Chairman of the Board.
The following paragraphs set forth certain information, as of December
5, 1997, for each of the persons who are expected to serve as directors of the
Company following the consummation of the Acquisition. Unless otherwise
indicated, each director has held his or her current position for more than five
years.
Class I (Term Expiring in 1998)
George E. Bello, 62, has been Executive Vice President and Controller
and a director of Reliance since 1982. Mr. Bello is a director of Zenith
National Insurance Corp., United Dental Care, Inc. and Horizon Mental Health
Management, Inc.
Theodore L. Chandler, Jr., 45, has been a director of the Company since
1991 and is a member of Williams Mullen Christian & Dobbins, a law firm in
Richmond, Virginia. Mr. Chandler is a director of Hilb, Rogal and Hamilton
Company and Open Plan Systems, Inc. Williams Mullen Christian & Dobbins acts as
counsel to the Company. See "Legal Matters."
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Charles H. Foster, Jr., 53, has been a director of the Company since
1991 and is Chairman of the Board and Chief Executive Officer of the Company and
of Lawyers Title Corporation. Mr. Foster is a director of Universal Corporation.
Herbert Wender, 60, has been Chairman and Chief Executive Officer of
Commonwealth since 1983 and Chairman and Chief Executive Officer of Transnation
since 1990. Mr. Wender has also been Chairman of the Board of CMAC Investment
Corporation, a private mortgage insurance company, since 1992.
Marshall B. Wishnack, 50, has been a director of the Company since 1991
and has been Chairman and Chief Executive Officer of Wheat First Butcher Singer,
Inc. ("Wheat"), an investment banking and securities brokerage company, since
April 1, 1997. Prior to April 1, 1997, he was President and Chief Executive
Officer of Wheat, a position that he held for more than five years. Mr. Wishnack
is a director of Best Products, Inc. and S&K Famous Brands. Wheat provides
investment management and securities brokerage services to the Company. See
"Underwriting."
Class II (Term Expiring in 1999)
J. Garnett Nelson, 57, has been a director of the Company since 1991
and has been President of Mid-Atlantic Holdings, L.L.C., a consulting and
business acquisitions company. Prior to February 1995, he was Senior Vice
President - Investments of The Life Insurance Company of Virginia, and Senior
Executive Director of Aon Advisors, Inc., an investment advisor, positions that
he held for more than five years. Mr. Nelson is a director of Mentor Income
Fund, Inc., Aon Asset Management Fund, Inc. and Life of Virginia Series Fund,
Inc.
Robert F. Norfleet, Jr., 56, has been a director of the Company since
1991 and has been a consultant in the capacity of director of Client Relations
for the Trust and Investment Management Group of Crestar Bank since March 1996.
Prior to March 1996, he was Corporate Executive Vice President and Senior Credit
Officer of Crestar Bank. Prior to 1994, Mr. Norfleet was President - Capital
Region and Executive Vice President - Corporate Banking of Crestar Bank,
positions that he held for more than five years.
Robert M. Steinberg, 55, has been President and Chief Operating Officer
of Reliance since 1982 and a director of Reliance since 1981. Mr. Steinberg has
also been Chairman of the Board and Chief Executive Officer of RIC since 1984.
Mr. Steinberg is a director of Zenith National Insurance Corp.
Eugene P. Trani, 57, has been a director of the Company since 1993 and
is President of Virginia Commonwealth University, an urban, public research
university. Mr. Trani is a director of Crestar Financial Corporation and
Heilig-Meyers Company.
Class III (Term Expiring in 2000)
Janet A. Alpert, 50, has been a director of the Company since 1994 and
has been President and Chief Operating Officer of the Company and of Lawyers
Title since 1992. From October 1991 to December 1992, Ms. Alpert was Executive
Vice President of the Company, and, from January 1989 to December 1992, she was
Executive Vice President - Western Operations of Lawyers Title.
Michael Dinkins, 43, has been a director of the Company since 1997 and
has been Senior Vice President of Finance and Administration and Chief Financial
Officer of CulturalAccessWorldwide, Inc., an outsourced marketing services
company, since 1997. Prior to joining CulturalAccessWorldwide, Inc., Mr. Dinkins
was President of the Graphic Communications Group of Cadmus Communications
Corporation ("Cadmus"), a printing, marketing and publishing company. From
September 1993 to May 1995, he was Vice President and Chief Financial Officer of
Cadmus, and, from 1992 to 1993, he was Manager Finance (for Marketing in 1993
and for Sales in 1992) for GE Appliances, a division of General Electric Co.
James Ermer, 54, has been a director of the Company since 1991 and is
retired. From April 1995 to December 1996, he was Executive Vice President -
Strategic Planning and Corporate Development of CSX
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Corporation ("CSX"), a railroad and transportation company. Prior to April 1995,
he was Senior Vice President - Finance and Chief Financial Officer of CSX, a
position that he held for more than five years. Mr. Ermer is a Director and
trustee of Nations Fund Group of Mutual Funds.
Lowell C. Freiberg, 58, has been Chief Financial Officer of Reliance
since 1985 and Senior Vice President and a director of Reliance since 1982. Mr.
Freiberg also served as Treasurer of Reliance from 1982 to March 1994. Mr.
Freiberg is a director of Symbol Technologies, Inc.
John P. McCann, 52, has been a director of the Company since 1997 and
is Chairman, President and Chief Executive Officer and a director of United
Dominion Realty Trust, Inc., an apartment Real Estate Investment Trust. Mr.
McCann is also a director of Storage USA, Inc.
Continuing Board Representation of RIC
The continuing representation of RIC on the Board of Directors is
provided for in the Voting and Standstill Agreement. The Board of Directors is
required, during the term of the Voting and Standstill Agreement, to nominate
and recommend for election the three RIC Directors that RIC is entitled to have
thereunder. However, as a condition to his or her appointment to the Board of
Directors, each RIC Director will execute a resignation agreement and provide
the same to the Company and RIC. Such agreement will require the RIC Director to
resign from the Board of Directors as RIC reduces its holdings of Common Stock
and Series B Preferred Stock, as described below. As long as RIC owns, on a
fully-diluted basis, 20% or more of the issued and outstanding shares of Common
Stock, RIC will be entitled to three members of the Board of Directors. At the
time when such ownership percentage is less than 20%, but more than 15%, the two
RIC Directors with the shortest remaining terms of office (i.e., those RIC
Directors that are scheduled to stand for election as directors at the next two
annual meetings of the Company's shareholders at that time) shall resign
immediately from the Board of Directors. The third RIC Director may complete the
remainder of his unexpired term at that time, but such director shall resign
upon the earlier of (i) the date that RIC's ownership percentage is less than
15% or (ii) the expiration of the period in which RIC is required to dispose of
its shares of Series B Preferred Stock. If RIC's fully diluted ownership
percentage shall be reduced from more than 20% to less than 15% at the same
time, all three RIC Directors then in office shall resign immediately. See "The
Acquisition -- Description of the Acquisition" and "-- Certain Related
Agreements."
Nominating Committee
To facilitate the Company's compliance with its obligations under the
Voting and Standstill Agreement, the Board of Directors will establish a
Nominating Committee effective as of the Closing Date of the Acquisition. It is
expected that the Nominating Committee will consist of at least three directors,
one of whom will be a RIC Director.
Committee Representation of RIC
The representation of the RIC Directors on the committees of the Board
of Directors is subject to the provisions of the Voting and Standstill
Agreement. See "The Acquisition -- Description of the Acquisition" and "--
Certain Related Agreements." RIC will be entitled to have one RIC Director
represented on each committee of the Board of Directors until the earlier of (i)
the date that RIC's ownership percentage is less than 20% or (ii) the expiration
of the period in which RIC is required to dispose of its shares of Series B
Preferred Stock. Once the number of RIC Directors has been reduced to one, the
remaining RIC Director may maintain his membership on any committee on which he
may then be serving until the earliest of (i) the expiration of his term as a
director, (ii) the date that RIC's ownership percentage is less than 15%, or
(iii) the expiration of the period in which RIC is required to dispose of its
shares of Series B Preferred Stock.
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Executive Officers
Following the consummation of the Acquisition, the following
individuals are expected to serve initially as the principal executive officers
of the Company.
<TABLE>
<CAPTION>
Name Current Position Expected Position
<S> <C> <C>
Charles H. Foster, Jr. Chairman and Chief Executive Officer of Chairman and Chief Executive Officer
the Company
Herbert Wender Chairman and Chief Executive Officer of Vice-Chairman and Chief Operating
Commonwealth and Transnation Officer
Janet A. Alpert President and Chief Operating Officer of President
the Company
Jeffrey A. Tischler Executive Vice President and Chief Executive Vice President
Financial and Administrative Officer of and Chief Financial Officer
Commonwealth and Transnation
G. William Evans Vice President and Treasurer of the Company Executive Vice President -
Information Technology
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company
is qualified in its entirety by reference to applicable provisions of Virginia
law and the Company's Charter and Bylaws, the complete text of which are on file
with the Commission.
Authorized and Outstanding Capital Stock
The Company's authorized capital stock consists of 45,000,000 shares of
Common Stock, without par value, and 5,000,000 shares of preferred stock,
without par value (the "Preferred Stock"). At January 7, 1998, there were
8,968,370 shares of Common Stock issued and outstanding, No shares of Preferred
Stock have been issued.
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
Board of Directors with respect to any series of Preferred Stock, the holders of
such shares exclusively possess all voting power. The Company's Charter does not
provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of Preferred Stock created by the
Board of Directors from time to time, the holders of Common Stock are entitled
to such dividends as may be declared from time to time by the Board of Directors
from funds available therefor, and upon liquidation are entitled to receive pro
rata all assets of the Company available for distribution to such holders.
Preferred Stock
Under the Company's Charter, the Board of Directors, without
shareholder approval, is authorized to issue shares of Preferred Stock in one or
more series and to designate, with respect to each such series of Preferred
Stock, the number of shares in each such series, the dividend rates, preferences
and date of payment, voluntary and involuntary liquidation preferences, the
availability of redemption and the prices at which it may occur, whether or not
dividends shall be cumulative and, if cumulative, the date or dates from which
the same shall be cumulative, the sinking fund provisions, if any, for
redemption or purchase of shares, the rights, if any, and the terms and
conditions on which shares can be converted into or exchanged for shares of any
other class or series, and the voting rights, if any. Any Preferred Stock issued
may be senior to the Common Stock as to dividends and as to distribution in the
event of liquidation, dissolution or winding up of the Company. The ability of
the Board of Directors to issue Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of holders of Common Stock.
The Board of Directors has authorized and reserved 200,000 shares of
Series A Junior Participating Preferred Stock, without par value (the "Series A
Preferred Stock"), for issuance upon the exercise of the preferred share
purchase rights (the "Rights") described below. See "-- Preferred Share Purchase
Rights." Upon the approval of the Acquisition by the Company's shareholders, the
Board of Directors will have further authorized and reserved 2,200,000 shares of
Series B Preferred Stock for issuance to RIC upon the consummation of the
Acquisition. See "-- Series B Preferred Stock." The reservation of both the
Series A Preferred Stock and Series B Preferred Stock as described above will
become effective upon amendment of the Company's Charter with the Virginia State
Corporation Commission in conjunction with the consummation of the Acquisition.
The creation and issuance of any other series of Preferred Stock, and
the relative rights and preferences of such series, if and when established,
will depend upon, among other things, the future capital needs of the Company,
then-existing market conditions and other factors that, in the judgment of the
Board of Directors, might warrant the issuance of Preferred Stock.
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Preemptive Rights
No holder of any share of Common Stock or Preferred Stock has any
preemptive right to subscribe to any securities of the Company of any kind or
class.
Series B Preferred Stock
General. The following summary is a brief description of the terms of
the Series B Preferred Stock to be issued to RIC upon consummation of the
Acquisition. The description of the Series B Preferred Stock is qualified in its
entirety by reference to the exhibit to the Articles of Amendment to the
Company's Charter that contain the designation of the Series B Preferred Stock,
the complete text of which is on file with the Commission (the "Preferred Stock
Designation"). See "Incorporation of Certain Documents by Reference."
Dividend Rights. The holders of Series B Preferred Stock will be
entitled to receive when and as declared by the Board of Directors, out of funds
legally available therefor, quarterly cumulative cash dividends at an annual
rate of seven percent (7%) of the stated value of $50.00 per share, or $3.50 per
share. Such dividends will be payable on the last day of March, June, September
and December of each year, commencing on the date on which shares of the Series
B Preferred Stock are initially issued by the Company (the "Initial Issuance
Date").
Dividends on the Series B Preferred Stock will be cumulative. As a
result, if the Board of Directors chooses not to declare a dividend on the
Series B Preferred Stock for a particular dividend period, holders of the Series
B Preferred Stock will retain the right to receive that dividend in the future.
The Board of Directors may declare dividends that are in arrears at any time.
The Series B Preferred Stock will be senior to the Common Stock and the
Series A Preferred Stock. Accordingly, no dividends may be declared, paid or set
aside, on the Common Stock and the Series A Preferred Stock unless all dividends
on the Series B Preferred Stock, including all unpaid dividends for past
periods, have been paid in cash or cash sums sufficient therefor have been set
aside.
Each dividend on the Series B Preferred Stock will be payable to
holders of record as of the 15th day of the month in which the dividend is
payable or such other date as may be fixed by the Board of Directors, which date
shall not be less than 10 days or more than 30 days prior to the date of
payment.
Holders of the Series B Preferred Stock will not be entitled to receive
any dividends in excess of the dividends described above and, except as provided
in the provisions of the Series B Preferred Stock, will not be entitled to
participate in the earnings or assets of the Company.
Conversion Rights. Shares of the Series B Preferred Stock will be
convertible at any time at the option of the holder into fully-paid and
nonassessable shares of Common Stock at a conversion price of $22.80 per share
of Common Stock (equivalent to a Conversion Ratio of approximately 2.193 shares
of Common Stock for each share of Series B Preferred Stock), subject to
adjustment as described below (the "Conversion Price").
To protect against dilution, the Conversion Price will be subject to
adjustment from time to time upon certain events, including the issuance of
Common Stock as a dividend or distribution on shares of Common Stock, splits or
combinations of outstanding shares of Common Stock, the issuance to holders of
Common Stock generally of options, rights or warrants to subscribe for Common
Stock or other securities of the Company at less than the current market price
of the Common Stock, or the issuance of Common Stock upon the exercise of the
Rights.
If the Company (i) consolidates with or merges into any other person
and is not the continuing or surviving corporation of such consolidation or
merger, (ii) permits any other person to consolidate with or merge into the
Company and the Company is the continuing or surviving person but, in connection
with such consolidation or merger, the Common Stock is changed into or exchanged
for stock or other securities of any other person or cash or any other property,
(iii) transfers all or substantially all of the assets or property of the
Company to any other person, or (iv) effects a capital reorganization or
reclassification of the Common Stock (other than a capital
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reorganization or reclassification resulting in the issue of additional shares
of Common Stock for which adjustment in the Conversion Price is required to be
made), then there will be no adjustment of the Conversion Price, but each holder
of Series B Preferred Stock, upon the conversion thereof at any time after the
consummation of such consolidation, merger, exchange, sale, transfer,
reorganization or reclassification, shall be entitled to receive (at the
Conversion Price in effect at the time of such consummation) the kind and amount
of shares of stock and other securities, cash and property that the holder would
have owned or been entitled to receive immediately after such consolidation,
merger, exchange, sale, transfer, reorganization or reclassification if such
share had been converted immediately before such event.
Upon conversion of any shares of Series B Preferred Stock, the holder
thereof shall remain entitled to receive any unpaid dividends in respect of the
shares so converted, provided that such holder held such shares on the date for
determination of holders of the Series B Preferred Stock entitled to receive
payment of such dividends.
Fractional shares of Common Stock will not be delivered upon
conversion. Instead, a cash adjustment will be paid in respect of such
fractional interest, in an amount equal to the Conversion Price as of the date
of conversion multiplied by such fractional interest.
Limitation on RIC's Conversion Rights. The right of RIC and its
affiliates to convert shares of Series B Preferred Stock into shares of Common
Stock will be subject to additional restrictions. The Series B Preferred Stock
held by RIC and its affiliates shall not be convertible into shares of Common
Stock until such time as RIC and its affiliates have sold, conveyed or
transferred all of the 4,039,473 shares of Common Stock received by RIC from the
Company in connection with the Acquisition and such additional shares of Common
Stock that the Company may issue with respect to such shares pursuant to any
stock splits, stock dividends, recapitalizations, restructurings,
reclassifications or similar transactions or pursuant to the exercise of any
Rights. RIC and its affiliates shall not be subject to such restriction in the
event that (i) the Company calls for the redemption of the Series B Preferred
Stock held by RIC or (ii) either the Company declares a regular quarterly
dividend on the Common Stock of $.40 or more during any calendar year, or the
Company declares one or more non-regular dividends on the Common Stock during
any calendar year in an aggregate amount of $.50 or more, or the Company
declares dividends on the Common Stock, whether regular or non-regular, in an
aggregate amount of $1.60 or more during any calendar year. If the Company calls
for redemption less than all of the Series B Preferred Stock held by RIC and its
affiliates, then RIC and its affiliates shall be entitled to convert into shares
of Common Stock only that number of the Series B Preferred Stock that have been
so called for redemption.
Furthermore, in the event that the Board of Directors has approved any
negotiated tender or exchange offer with a third party or approved any merger,
consolidation, share exchange, business combination, restructuring,
recapitalization or similar transaction involving the Company in which the
holders of Common Stock are entitled to tender or exchange their holdings of
Common Stock for, or to otherwise receive for their holdings of Common Stock,
other consideration (whether cash, non-cash or some combination thereof), the
Company will either (i) permit RIC and its affiliates to convert all of the
Series B Preferred Stock then held by them contingent upon, and effective as of,
the closing of such transaction and without the right of RIC or any of its
affiliates to vote the shares of Common Stock received upon any such conversion
on any matter in connection with such transaction, or (ii) make appropriate
provision to provide to RIC and any of its affiliates holding Series B Preferred
Stock as of the closing date of such transaction the same kind and amount of
consideration receivable by the holders of the Common Stock in such transaction.
If the Company elects to make such appropriate provision, RIC and its affiliates
shall not be entitled thereafter to receive any shares of stock, other
securities, cash or property with respect to such of the Series B Preferred
Stock as has received full payment of the consideration.
Redemption. At any time on or after the fifth anniversary of the
Initial Issuance Date, the Company, at the option of the Board of Directors, may
redeem all or part of the outstanding shares of the Series B Preferred Stock
upon the specified notice. If less than all of the outstanding shares of Series
B Preferred Stock are to be redeemed, the Company shall redeem a pro rata
portion from each holder of Series B Preferred Stock.
If the Company elects to redeem the Series B Preferred Stock on or
after the fifth anniversary of the Initial Issuance Date, the Company shall pay
the stated value of $50.00 per share plus a premium over such $50.00, which
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premium shall be 4% on the fifth anniversary of the Initial Issuance Date and
decline by 1% per year over the next five years. At that time and thereafter,
the Series B Preferred Stock may be redeemed at $50.00 per share. The Company
shall also pay upon redemption all accrued and unpaid dividends to and including
the dated fixed for redemption. The Series B Preferred Stock places no limits on
the source of funds to be used for any redemption of the Series B Preferred
Stock.
No shares of Series B Preferred Stock may be redeemed, unless all
dividends on the Series B Preferred Stock have been declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all prior dividend periods and the current dividend period; provided, however,
that the foregoing shall not prevent the purchase or acquisition of shares of
Series B Preferred Stock by the Company pursuant to a purchase or acquisition
made on the same terms to holders of all outstanding shares of Series B
Preferred Stock.
Liquidation. In the event of any voluntary or involuntary dissolution,
liquidation, or winding up of the Company, the holders of shares of Series B
Preferred Stock shall be entitled to be paid, out of the assets of the Company
available for distribution to its shareholders, before any payment shall be made
in respect of the Common Stock or any other class of stock of the Company
ranking junior to the Series B Preferred Stock, a liquidation preference equal
to $50.00 plus accrued and unpaid dividends to the date of such payment. If,
upon such dissolution, liquidation or winding up, the amounts payable as the
liquidation preference to holders of Series B Preferred Stock and any other
shares of stock ranking as to such distribution on a parity with the Series B
Preferred Stock are not paid in full, the holders of Series B Preferred Stock
and of such other shares will share ratably in any such distribution of assets
in proportion to the liquidation preference that each holder is entitled to
receive.
Voting. The holders of Series B Preferred Stock will not be entitled to
vote at any meeting of the Company's shareholders, except as required by the
Virginia Stock Corporation Act (the "Virginia Act") and as described below.
Whenever dividends on any shares of Series B Preferred Stock shall be
in arrears for six or more quarterly periods, whether or not consecutive, the
holders of such shares, voting separately as a class, will be entitled to vote
for the election of two additional directors of the Company at a special meeting
called by the holders of record of at least 10% of the Series B Preferred Stock
so in arrears or at the next annual meeting of shareholders, if such request is
received less than 60 days before the date fixed for the next annual meeting of
the shareholders. Such holders will continue to be entitled to vote for the
election of two additional directors at each subsequent annual meeting until all
dividends accumulated on such shares of Series B Preferred Stock for past
dividend periods and the then current dividend period shall have been fully paid
in cash. Each such director elected as described above shall be elected by the
affirmative vote of the holders of record of a majority of the shares of Series
B Preferred Stock present and voting at such meeting, at a meeting called, held
and conducted in accordance with the terms of the Series B Preferred Stock. Each
such director shall serve as a director until all dividends accumulated on such
shares of Series B Preferred Stock for past dividend periods and the then
current dividend period shall have been fully paid in cash, at which time the
term of each such director shall terminate and the number of directors shall be
reduced accordingly.
The holders of Series B Preferred Stock will be entitled to one vote
per share on matters subject to a vote by such holders.
Preferred Share Purchase Rights
Pursuant to the Amended and Restated Rights Agreement, each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Preferred Stock at a price of $85 per one one-hundredth of a
share of Series A Preferred Stock (the "Purchase Price"), subject to adjustment.
The Rights will become exercisable only if a person or group of
affiliated or associated persons has acquired beneficial ownership of, or has
announced a tender offer for, 20% or more of the outstanding shares of Common
Stock. Under certain circumstances, the Board of Directors may reduce this
threshold percentage to 10%. If a person or group of affiliated or associated
persons has acquired beneficial ownership of, or has announced a
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tender offer for, the threshold percentage, each Right will entitle the
registered holder, other than such person or group, to buy shares of Common
Stock or Series A Preferred Stock having a market value equal to twice the
exercise price. If the Company is acquired in a merger or other business
combination, each Right will entitle the registered holder, other than such
person or group, to purchase securities of the surviving company having a market
value equal to twice the Purchase Price. The Rights will expire on August 20,
2007, and may be redeemed or exchanged by the Company at any time before they
become exercisable.
Until the Rights become exercisable, they are evidenced by the Common
Stock certificates and are transferred with and only with such certificates.
Pursuant to the Amended and Restated Rights Agreement, the Rights are
not, and will not become, exercisable by virtue of the approval, execution,
delivery or performance of the original Stock Purchase Agreement, the Amended
and Restated Stock Purchase Agreement or the Voting and Standstill Agreement, or
by the acquisition of shares of Common Stock or Series B Preferred Stock by RIC
or any affiliate of RIC as contemplated by the original Stock Purchase
Agreement, the Amended and Restated Stock Purchase Agreement or the Voting and
Standstill Agreement. See "The Acquisition -- Certain Related Agreements."
The foregoing summary of certain terms of the Rights is qualified in
its entirety by reference to the Amended and Restated Rights Agreement, which
has been filed with the Commission and is incorporated by reference into this
Prospectus. See "Incorporation of Certain Documents by Reference."
Certain Provisions of the Company's Charter and Bylaws
The Company's Charter and Bylaws contain provisions which may have the
effect of delaying or preventing a change in control of the Company. The
Company's Charter and Bylaws provide (i) for division of the Board of Directors
into three classes, with one class elected each year to serve a three-year term;
(ii) that directors may be removed only for cause and only upon the affirmative
vote of the holders of at least 80% of the outstanding shares entitled to vote;
(iii) that a vacancy on the Board of Directors shall be filled by the remaining
directors; and (iv) that the affirmative vote of the holders of at least 80% of
the outstanding shares entitled to vote is required to alter, amend or repeal
the foregoing provisions. The Company's Bylaws require advance notification for
a shareholder to bring business before a shareholders' meeting or to nominate a
person for election as a director. The Company's Charter and Bylaws provide
that, subject to the rights of holders of any series of Preferred Stock, special
meetings of shareholders may be called only by the Chairman of the Board or a
majority of the total number of directors which the Board of Directors would
have if there were no vacancies, and may not be called by the shareholders. The
business permitted to be conducted at any special meeting of shareholders is
limited to the business brought before the meeting by or at the direction of the
Board of Directors.
The Company's Charter also contains an "affiliated transaction
provision" that provides that, in the event that holders of Common Stock are
entitled to vote on certain transactions, a supermajority of at least 80% of all
the votes that the holders of Common Stock are entitled to cast thereon shall be
required for the approval of such transactions. Such supermajority approval
would be required for (i) a merger or consolidation involving any person or
entity who directly or indirectly owns or controls 10% or more of the voting
power of the Company (an "Interested Shareholder") at the record date for
determining shareholders entitled to vote and (ii) a sale, lease or exchange of
substantially all of the Company's assets or property to or with an Interested
Shareholder, or for the approval of a sale, lease or exchange of substantially
all of the assets or property of an Interested Shareholder to or with the
Company. In addition, the Company's Charter provides that the same 80% vote
shall be required for the approval of certain transactions including a
reclassification of securities, recapitalization or other transaction designed
to decrease the number of holders of Common Stock after any person or entity has
become an Interested Shareholder. Notwithstanding the foregoing, the
supermajority approval requirement does not apply to any transaction that is
approved by the Board of Directors prior to the time that the Interested
Shareholder becomes an Interested Shareholder. Upon consummation of the
Acquisition, RIC and its affiliates will become Interested Shareholders within
the meaning of these provisions. However, the supermajority approval requirement
does not apply to the Acquisition because of its prior approval by the Board of
Directors.
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The shares of Common Stock and Preferred Stock authorized by the
Company's Charter provide the Board of Directors with as much flexibility as
possible in using such shares for corporate purposes. However, these additional
shares may also be used by the Board of Directors to deter future attempts to
gain control of the Company. The Board of Directors has sole authority to
determine the terms of any series of the Preferred Stock, including voting
rights, conversion rates and liquidation preferences. As a result of the ability
to fix voting rights for a series of Preferred Stock, the Board of Directors has
the power to issue a series of Preferred Stock to persons friendly to management
in order to attempt to block a post-tender offer merger or other transaction by
which a third party seeks a change in control of the Company.
The foregoing provisions of the Company's Charter and Bylaws are
intended to prevent inequitable shareholder treatment in a two-tier takeover and
to reduce the possibility that a third party could effect a sudden or surprise
change in majority control of the Board of Directors without the support of the
incumbent Board of Directors, even if such a change were desired by, or would be
beneficial to, a majority of the Company's shareholders. Such provisions
therefore may have the effect of discouraging certain unsolicited offers for the
Company's capital stock.
Liability and Indemnification of Directors and Officers
As permitted by the Virginia Act, the Company's Charter contains
provisions that indemnify directors and officers of the Company to the full
extent permitted by Virginia law and seek to eliminate the personal liability of
directors and officers for monetary damages to the Company or its shareholders
for breach of their fiduciary duties, except to the extent such indemnification
or elimination of liability is prohibited by the Virginia Act. These provisions
do not limit or eliminate the rights of the Company or any shareholder to seek
an injunction or any other non-monetary relief in the event of a breach of a
director's or officer's fiduciary duty. In addition, these provisions apply only
to claims against a director or officer arising out of his role as a director or
officer and do not relieve a director or officer from liability for violations
of statutory law, such as certain liabilities imposed on a director or officer
under the federal securities laws.
In addition, the Company's Charter provides for the indemnification of
both directors and officers for expenses incurred by them in connection with the
defense or settlement of claims asserted against them in their capacities as
directors and officers. In certain cases, this right of indemnification extends
to judgments or penalties assessed against them. The Company has limited its
exposure to liability for indemnification of directors and officers by
purchasing directors and officers liability insurance coverage.
The purpose of these provisions is to assist the Company in retaining
qualified individuals to serve as directors by limiting their exposure to
personal liability for serving as such.
The Company is not aware of any pending or threatened action, suit or
proceeding involving any of its directors, officers, employees or agents for
which indemnification from the Company may be sought. Insofar as indemnification
for liabilities arising under the Securities Act, may be permitted to directors,
officers and controlling persons of the Company, or of an affiliate of the
Company pursuant to the Company's Charter or otherwise, the Board of Directors
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Affiliated Transactions
The Virginia Act contains provisions governing "Affiliated
Transactions." Affiliated Transactions include certain mergers and share
exchanges, material dispositions of corporate assets not in the ordinary course
of business, any dissolution of the corporation proposed by or on behalf of an
Interested Shareholder (as defined below), or reclassifications, including
reverse stock splits, recapitalizations or mergers of the corporation with its
subsidiaries which have the effect of increasing the percentage of voting shares
beneficially owned by an Interested Shareholder by more than 5%. For purposes of
the Virginia Act, an Interested Shareholder is defined as any beneficial owner
of more than 10% of any class of the voting securities of a Virginia
corporation.
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<PAGE>
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, a Virginia corporation
cannot engage in an Affiliated Transaction with such Interested Shareholder
unless approved by the affirmative vote of the holders of two-thirds of the
outstanding shares of the corporation entitled to vote, other than the shares
beneficially owned by the Interested Shareholder, and by a majority (but not
less than two) of the "Disinterested Directors." A Disinterested Director means,
with respect to a particular Interested Shareholder, a member of a corporation's
board of directors who (i) was a member before the later of January 1, 1988 and
the date on which an Interested Shareholder became an Interested Shareholder and
(ii) was recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested Directors then
on the corporation's board of directors. At the expiration of the three year
period, these provisions require approval of Affiliated Transactions by the
affirmative vote of the holders of two-thirds of the outstanding shares of the
corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three-year period has expired and
require either that the transaction be approved by a majority of the
Disinterested Directors or that the transaction satisfy certain fair price
requirements of the statute. In general, the fair price requirements provide
that the shareholders must receive the highest per share price for their shares
as was paid by the Interested Shareholder for his shares or the fair market
value of their shares, whichever is higher. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the Interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements
applies to an Affiliated Transaction with an Interested Shareholder whose
acquisition of shares making such a person an Interested Shareholder was
approved by a majority of the corporation's Disinterested Directors. Upon
consummation of the Acquisition, RIC and its affiliates will become Interested
Shareholders whose acquisition of the Acquisition Shares has been approved by a
majority of the Board of Directors, each of whom is a Disinterested Director.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. The
Company has not adopted such an amendment.
Control Share Acquisitions
The Virginia Act also contains provisions regulating certain "control
share acquisitions," which are transactions causing the voting strength of any
person acquiring beneficial ownership of shares of a public corporation in
Virginia to meet or exceed certain threshold percentages (20%, 33% or 50%) of
the total votes entitled to be cast for the election of directors. Shares
acquired in a control share acquisition have no voting rights unless: (i) the
voting rights are granted by a majority vote of all outstanding shares other
than those held by the acquiring person or any officer or employee director of
the corporation, or (ii) the articles of incorporation or bylaws of the
corporation provide that these Virginia law provisions do not apply to
acquisitions of its shares. The acquiring person may require that a special
meeting of the shareholders be held to consider the grant of voting rights to
the shares acquired in the control share acquisition. The Company's Charter make
these provisions inapplicable to acquisitions of shares of the Company.
Acquisition Covenants Regarding Non-Performance Remedies
On or before the Closing Date, the Company will file Articles of
Amendment to its Charter that contain the designation for the Series B Preferred
Stock. The provisions of the Series B Preferred Stock will contain covenants
that will entitle RIC to certain rights in specific default situations. These
covenants may affect the rights of Reliance, RIC and their affiliates in a
manner that could be adverse to the rights of holders of Common Stock. As
described below, upon the occurrence of certain events, RIC will be entitled to
additional seats on the Company's
83
<PAGE>
Board of Directors, and Reliance, RIC and their affiliates will no longer be
subject to certain restrictions under the Voting and Standstill Agreement. See
"The Acquisition -- Certain Related Agreements."
Such rights are cumulative and are available only until the earlier of
(i) the date that the RIC Ownership Percentage is less than twenty percent (20%)
or (ii) the expiration of the time in which RIC is required to dispose of all
shares of Series B Preferred Stock pursuant to the Voting and Standstill
Agreement. In addition, such rights are exercisable solely and exclusively by
RIC, whether RIC holds all shares of the Series B Preferred Stock or RIC and any
of its affiliates hold any shares of Series B Preferred Stock. The rights are
not transferable or assignable to subsequent holders of the Series B Preferred
Stock. Any sale, conveyance or transfer of shares of the Series B Preferred
Stock by RIC to any person who is not an affiliate of RIC at the time of such
sale, conveyance or transfer shall render these rights null and void as to the
shares of Series B Preferred Stock so sold, conveyed or transferred.
Industry-Related Defaults. In the event that (i) the Company's combined
ratio exceeds the weighted average of the combined ratios of certain
predetermined comparable title insurance companies by more than five percentage
points for any twelve month period (beginning with the twelve month period
commencing January 1, 1998), with such calculation to be determined as of March
31, June 30, September 30 and December 31 of each year for the previous twelve
months, and (ii) any two of S&P, Duff & Phelps or A.M. Best have downgraded the
Company's claims-paying ability rating to or below a rating of "BBB -" (or its
equivalent), the Company will take such action as may be necessary to increase
the size of the Board of Directors by three directors, fill the three vacancies
created thereby with additional RIC Directors and recommend such additional RIC
Directors for election as directors at the next annual meeting of the Company's
shareholders. Furthermore, in the event of the defaults described in this
paragraph, RIC and its affiliates will no longer be required to (i) sell the
shares of Common Stock that RIC acquired in the Acquisition within the time
period set forth in the Voting and Standstill Agreement, (ii) sell the shares of
Series B Preferred Stock that RIC acquired in the Acquisition within the time
period set forth in the Voting and Standstill Agreement, (iii) refrain from
taking certain actions prohibited by the standstill provisions of the Voting and
Standstill Agreement (other than the prohibition on acquiring additional shares
of Common Stock), (iv) vote the shares of Common Stock held by them in the
manner required by the Voting and Standstill Agreement or (v) sell the shares of
Common Stock held by them before converting shares of Series B Preferred Stock
into additional shares of Common Stock ((i) through (v) collectively, the
"Restriction Releases").
The title insurance companies to be included in the combined ratio
analysis described above are Chicago Title Insurance Company, First American
Title Insurance Company, Fidelity National Title Insurance Company and Old
Republic Title Insurance Company. As of December 22, 1997, the Company's
claims-paying ability rating was "A-" as determined by Duff & Phelps. For
additional information on claims-paying ability ratings, see "Business --
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company -- Claims-Paying Ability."
Dividend Payment Defaults. In the event that RIC or any affiliate of
RIC beneficially owns shares of the Series B Preferred Stock and the Company
fails to pay in cash the full amount of the dividend on the Series B Preferred
Stock on one occasion within five days of the applicable dividend payment date,
the Company will take such action as may be necessary to increase the size of
the Board of Directors of the Company by three directors and fill the three
vacancies created thereby with additional RIC Directors and recommend such
additional RIC Directors for election as directors at the next annual meeting of
the Company's shareholders. Furthermore, in the event of the default described
in this paragraph, RIC and its affiliates will be entitled to the Restriction
Releases.
In the event that RIC or any affiliate of RIC beneficially owns shares
of the Series B Preferred Stock and the Company fails to pay in cash the full
amount of the dividend on the Series B Preferred Stock on two occasions, whether
or not consecutive, within five days of the applicable dividend payment dates,
RIC and its affiliates will no longer be required to (i) refrain from acquiring
additional shares of Common Stock or (ii) refrain from selling shares of Common
Stock or Series B Preferred Stock to any person or group if, as a result of the
sale, such person or group would beneficially own on a fully diluted basis more
than 9.9% of the issued and outstanding shares of Common Stock.
84
<PAGE>
In the event that RIC or any affiliate of RIC beneficially owns shares
of the Series B Preferred Stock and the Company fails to pay in cash the full
amount of the dividend on the Series B Preferred Stock on three occasions,
whether or not consecutive, within five days of the applicable dividend payment
dates, the Company will take such action as may be necessary to increase the
size of the Board of Directors to a number that will permit the addition of a
sufficient number of RIC Directors such that the total number of RIC Directors
will constitute a majority of the Board of Directors, fill the vacancies created
thereby with additional RIC Directors and recommend such additional RIC
Directors for election as directors at the next annual meeting of the Company's
shareholders. Furthermore, in the event of the default described in this
paragraph, RIC and its affiliates will no longer be subject to any of the
restrictions placed on them in the Voting and Standstill Agreement.
Material Obligation Defaults. In the event that the Company defaults on
any of its material debt obligations in excess of $15,000,000 (individually or
at any one time in the aggregate) (a "Material Default"), and the Material
Default is not cured or waived within the time period and manner prescribed by
the applicable agreements or instruments and results in the acceleration of the
amounts due thereunder, the Company will take such action as may be necessary to
increase the size of the Board of Directors to a number that will permit the
addition of a sufficient number of RIC Directors such that the total number of
RIC Directors will constitute a majority of the Board of Directors, fill the
vacancies created thereby with additional RIC Directors and recommend such
additional RIC Directors for election as directors at the next annual meeting of
the Company's shareholders. Furthermore, in the event of the default described
in this paragraph, RIC and its affiliates will no longer be subject to any of
the restrictions placed on them in the Voting and Standstill Agreement.
Rights Plan Amendments
In connection with the execution of the Stock Purchase Agreement, the
Company executed the Amended and Restated Rights Agreement. See "The Acquisition
- -- Certain Related Agreements." The Amended and Restated Rights Agreement
provides, among other things, that (i) the approval, execution, delivery and
performance of the Stock Purchase Agreement or the Voting and Standstill
Agreement, or any acquisition of shares of Common Stock or Series B Preferred
Stock by RIC or its affiliates as contemplated by the Stock Purchase Agreement
or the Voting and Standstill Agreement, will not cause the Rights to become
exercisable, (ii) the exercise price of the Rights shall be $85 per Right, an
increase from $65 per Right to reflect current conditions, and (iii) the Rights
shall not be exercisable after August 20, 2007, thereby extending the
termination date of the Rights from October 1, 2001. See "-- Preferred Share
Purchase Rights."
SHARES ELIGIBLE FOR FUTURE SALE
As of January 7, 1998, the Company had outstanding 8,968,370 shares of
Common Stock, all of which are freely tradable. All of the Shares in the
Offering will be freely transferable and may be resold without further
registration under the Securities Act. As of January 7, 1998, the Company had
outstanding options to purchase 732,897 shares of Common Stock, of which 553,310
were exercisable, at an average exercise price of $13.72 per share.
Approximately 9,433,094 shares of Common Stock (which includes
4,039,473 shares of Common Stock to be issued to RIC in the Acquisition and
4,824,561 shares of Common Stock into which the Series B Preferred Stock is
convertible) and 2,200,000 shares of Series B Preferred Stock are or will be
held by persons who may be deemed to be "affiliates" of the Company under the
Securities Act and may be resold by them only in transactions registered under
the Securities Act or permitted by the provisions of Rule 144. Persons who may
be deemed to be affiliates include individuals or entities that control, are
controlled by, or are under common control with such party and may include
certain officers, directors and principal shareholders of such party. In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned "restricted securities" for at
least one year may, under certain circumstances, resell within any three-month
period such number of shares as does not exceed the greater of 1% of the then
outstanding shares or the average weekly trading volume during the four calendar
weeks prior to such resale. Rule 144 also permits, under certain circumstances,
the resale of shares without any quantity limitation by a person who has
satisfied a two-year holding period and who is not, and has not been for the
preceding three months, an affiliate of the Company. In addition, holding
periods of successive non-affiliate
85
<PAGE>
owners are aggregated for purposes of determining compliance with these one- and
two-year holding period requirements.
Pursuant to the Registration Rights Agreement, at or about the time of
the closing of the Acquisition, the Company will file one or more registration
statements under the Securities Act to register the Acquisition Shares for
resale to the public. Once such registration statements become effective,
4,039,473 shares of Common Stock and 2,200,000 shares of Series B Preferred
Stock, as well as the 4,824,561 shares of Common Stock into which such Series B
Preferred Stock is convertible, will be available for resale in either public or
private offerings and will be freely transferable.
The availability of shares for sale or actual sales under Rule 144,
pursuant to an effective registration statement under the Securities Act or
otherwise may have an adverse effect on the market price of the Common Stock.
Sales pursuant to an effective registration statement or under Rule 144 or
otherwise also could impair the Company's ability to market additional equity
securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Furman Selz LLC, Wheat, First Securities, Inc.
("Wheat First") and Ferris, Baker Watts, Incorporated, which are acting as
representatives (the "Representatives") for the underwriters named below (the
"Underwriters"), the Company has agreed to sell to the Underwriters and each of
the Underwriters has severally agreed to purchase the number of Shares set forth
opposite its name below:
Underwriters Number of Shares
Donaldson, Lufkin & Jenrette Securities Corporation.......
Furman Selz LLC...........................................
Wheat, First Securities, Inc..............................
Ferris, Baker Watts, Incorporated.........................
Total ......................................... ___________
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Shares offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to purchase and accept delivery
of all of the Shares offered hereby (other than those Shares covered by the
over-allotment option described below), if any are purchased.
The Underwriters initially propose to offer the Shares, in part,
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and, in part, to certain dealers (including the
Underwriters) at such price less a concession not in excess of $_______ per
share. The Underwriters may allow, and such dealers may reallow, to certain
other dealers, a concession not in excess of $___ per share. After the initial
Offering, the public offering price and other selling terms may be changed by
the Representatives at any time without notice.
86
<PAGE>
The Company has granted to the Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase from time to time,
in whole or in part, up to an aggregate of 262,500 additional shares of Common
Stock at the initial public offering price, less the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the Offering. To the
extent such option is exercised by the Underwriters, each Underwriter will
become obligated, subject to certain conditions, to purchase its pro rata
portion of such additional shares based on such Underwriter's percentage
underwriting commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company, its executive officers and directors and RIC has
agreed, subject to certain exceptions, not to (i) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 90 days after the date of this Prospectus
without the prior written consent of DLJ. In addition, during such period, the
Company has also agreed not to file any registration statement (other than a
registration statement required pursuant to the Acquisition) with respect to,
and each of its executive officers and directors and RIC has agreed not to make
any demand for, and each of its executive officers and directors has agreed not
to exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock without DLJ's prior written consent.
Other than in the United States, no action has been taken by the
Company or the Underwriters that would permit a public offering of the shares of
Common Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Common Stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock. These activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
In November 1993, Wheat First and Furman Selz LLC served as co-managing
underwriters of an offering by the Company of its Common Stock. DLJ was one of
the underwriters in such offering. In addition, Wheat First serves as a
financial advisor to the Company. Wheat First is also serving as the financial
advisor to the Company, and DLJ is serving as the financial advisor to Reliance
and RIC, in connection with the Acquisition. Marshall B. Wishnack, Chairman and
Chief Executive Officer of Wheat First Butcher Singer, Inc., the parent company
of Wheat First, is a director of the Company.
87
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Williams, Mullen, Christian & Dobbins, P.C.,
Richmond, Virginia. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
New York, New York. Theodore L. Chandler, Jr., a principal in Williams, Mullen,
Christian & Dobbins, is a director of the Company and beneficially owns an
aggregate of 19,000 shares of Common Stock as of December 4, 1997. Other
attorneys of that firm beneficially owned an aggregate of approximately 32,182
shares of Common Stock as of that date.
EXPERTS
The consolidated financial statements (including schedules incorporated
herein by reference) of Lawyers Title Corporation and subsidiaries as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and the Registration Statement,
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their reports thereon appearing and incorporated by reference elsewhere herein,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
The combined financial statements of Commonwealth and Transnation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus and the Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and elsewhere in the Registration Statement, and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
LAWYERS TITLE CORPORATION
<S> <C>
Report of Independent Auditors ........................................................................... F - 2
Consolidated Balance Sheets at December 31, 1996 and 1995................................................. F - 3
Consolidated Statements of Operations for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 5
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 6
Consolidated Statements of Changes in Shareholders' Equity for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 7
Notes to Consolidated Financial Statements................................................................ F - 8
Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 (unaudited)....................... F - 32
Consolidated Statements of Operations and Retained Earnings for the Quarter and
the Nine Months Ended September 30, 1997 and 1996 (unaudited)........................................... F - 34
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997
and 1996 (unaudited) ................................................................................... F - 35
Notes to Consolidated Financial Statements (unaudited).................................................... F - 36
COMMONWEALTH TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
Independent Auditor's Report ............................................................................. F - 37
Combined Statement of Income for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 38
Combined Balance Sheet at December 31, 1996 and 1995...................................................... F - 39
Combined Statement of Changes in Shareholder's Equity for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 40
Combined Statement of Cash Flows for the Three Years Ended
December 31, 1996, 1995 and 1994........................................................................ F - 41
Notes to Combined Financial Statements.................................................................... F - 42
Combined Statement of Income for the Quarter and the Nine Months Ended September 30, 1997
and 1996 (unaudited).................................................................................... F - 53
Combined Balance Sheet at September 30, 1997 and December 31, 1996 (unaudited)............................ F - 54
Combined Statement of Changes in Shareholder's Equity for the Nine Months Ended
September 30, 1997 (unaudited).......................................................................... F - 55
Combined Statement of Cash Flows for the Quarter and the Nine Months Ended September 30, 1997
and 1996 (unaudited) ................................................................................... F - 56
Notes to Combined Financial Statements (unaudited)........................................................ F - 57
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Lawyers Title Corporation
We have audited the accompanying consolidated balance sheets of Lawyers Title
Corporation and subsidiaries as of December 31, 1996, and 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lawyers
Title Corporation and subsidiaries at December 31, 1996, and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1996 the Company changed
its method of accounting for policy and contract claims and in 1994 the Company
changed its method of accounting for certain debt and equity securities.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
February 19, 1997
F-2
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
<TABLE>
<CAPTION>
(In thousands of dollars)
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C>
INVESTMENTS (Notes 2 and 3):
Fixed maturities available-for-sale
- at fair value (amortized cost:
1996 - $214,875; 1995 - $179,182) $218,224 $187,270
Equity securities - at fair value
(cost: 1996 - $930; 1995 - $43,327) 1,725 56,540
Mortgage loans (less allowance for
doubtful accounts: 1996 and
1995 - $150) 480 1,015
Invested cash 71,626 21,805
-------- --------
Total investments 292,055 266,630
CASH 23,997 18,842
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for
doubtful accounts: 1996 - $1,008;
1995 - $365) 6,657 7,565
Premiums (less allowance for
doubtful accounts: 1996 - $2,197;
1995 - $1,898) 16,429 17,242
Income tax benefits - 301
-------- --------
Total notes and accounts receivable 23,086 25,108
PROPERTY AND EQUIPMENT - at cost (less
accumulated depreciation and amortiza-
tion: 1996 - $44,670; 1995 - $36,581) 21,959 20,850
TITLE PLANTS 48,536 648,731
GOODWILL (less accumulated amortiza-
tion: 1996 - $12,393; 1995 - $10,174) 59,669 53,645
DEFERRED INCOME TAXES (Note 8) 23,435 16,127
OTHER ASSETS 28,231 25,910
-------- --------
$520,968 $475,843
======== ========
</TABLE>
F-3
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
<TABLE>
<CAPTION>
(In thousands of dollars)
LIABILITIES 1996 1995
- ----------- ---- ----
<S> <C> <C>
POLICY AND CONTRACT CLAIMS
(Notes 2 and 4) $196,285 $193,791
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 47,211 34,933
FEDERAL INCOME TAXES 5,721 -
OTHER 9,583 8,734
-------- --------
Total liabilities 258,800 237,458
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 10, 11 and 12)
SHAREHOLDERS' EQUITY (Notes 6 and 7)
- --------------------
Preferred stock, no par value,
authorized 5,000,000 shares, none
issued or outstanding - -
Common stock, no par value, authorized
45,000,000 shares, issued and
outstanding, 8,889,791 in 1996
and 8,885,991 in 1995 167,044 167,006
Unrealized investment gains (less
related deferred income tax
expense of $1,450 in 1996 and
$7,456 in 1995) 2,694 13,845
Retained earnings 92,430 57,689
Receivable from employee benefit plan - (155)
-------- --------
Total shareholders' equity 262,168 238,385
-------- --------
$520,968 $475,843
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(In thousands of dollars except per common share amounts)
1996 1995 1994
---- ---- ----
REVENUES
<S> <C> <C> <C>
Premiums (Note 5) $456,377 $385,871 $413,857
Title search and escrow 101,381 81,490 73,200
Investment income - net
(Note 3) 36,424 15,471 14,143
-------- -------- --------
594,182 482,832 501,200
-------- -------- --------
EXPENSES (Notes 4, 9 and 10)
Salaries and employee
benefits 184,274 155,920 143,817
Agents' commissions 192,590 167,031 205,147
Provision for policy and
contract claims 29,211 24,297 46,775
General, administrative and
other 132,567 111,724 96,492
-------- -------- --------
538,642 458,972 492,231
-------- -------- --------
INCOME BEFORE INCOME TAXES 55,540 23,860 8,969
INCOME TAX EXPENSE (BENEFIT)
(Note 8)
Current 20,320 3,628 2,729
Deferred (1,299) 3,181 (574)
-------- -------- --------
19,021 6,809 2,155
-------- -------- --------
NET INCOME $ 36,519 $ 17,051 $ 6,814
======== ======== ========
EARNINGS PER COMMON SHARE $4.11 $1.92 $0.80
===== ===== =====
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,888,310 8,885,191 8,494,067
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 36,519 $17,051 $ 6,814
Depreciation & amortization 9,927 8,108 6,460
Amortization of bond premium 722 1,087 1,610
Realized investment gains (23,430) (2,966) (1,681)
Deferred income tax (1,299) 3,181 (574)
Change in assets & liabilities, net
of businesses acquired:
Premiums receivable 813 (168) 3,833
Income taxes receivable/payable 6,061 3,810 (8,219)
Policy & contract claims 2,494 (5,905) 11,062
Accounts payable and accrued
expenses 5,772 (3,043) (7,925)
Cash surrender value of life
insurance (3,148) (3,231) (3,061)
Other (1,219) 359 (1,901)
-------- ------- -------
Net cash provided by
operating activities 33,212 18,283 6,418
--------- ------- -------
Cash flows from investing activities:
Purchase of property & equipment, net (8,612) (5,369) (5,689)
Purchase of businesses, net of
cash acquired (2,320) (8,026) (20,802)
Cost of investments acquired:
Fixed maturities - available-for-sale (115,731) (76,131) (99,430)
Equity securities (34,815) (40,103) (47,362)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 79,324 75,985 96,758
Equity securities 100,533 45,975 33,492
Other 1,443 206 (157)
-------- -------- -------
Net cash provided by (used in) investing
activities 19,822 (7,463) (43,190)
-------- ------- -------
Cash flows from financing activities:
Proceeds of cash surrender value loan 3,891 3,673 16,023
Dividends paid (1,778) (1,599) (1,025)
Decrease in notes payable (171) (4,236) (1,793)
-------- ------- -------
Net cash provided by (used in)
financing activities 1,942 (2,162) 13,205
-------- ------- -------
Net increase (decrease) in cash and
invested cash 54,976 8,658 (23,567)
Cash & invested cash at beginning of year 40,647 31,989 55,556
-------- ------- -------
Cash & invested cash at end of year $ 95,623 $40,647 $31,989
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(In thousands of dollars) Receivable
Net from Total
Unrealized Retained Employee Share-
Common Stock Gains Earnings Benefit holders'
Shares Amount (Losses) (Deficit) Plan Equity
------ ------ -------- --------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1993 8,418,209 $162,879 $ 3,513 $36,448 $(1,679) $201,161
Net Income - - - 6,814 - 6,814
Issuance of common stock 425,020 3,883 - - - 3,883
Adjustment to beginning balance
for change in accounting method,
net of income taxes of $2,055 - - 3,816 - - 3,816
Exercise of stock options 41,282 229 - - - 229
Repayment from employee benefit plan - - - - 672 672
Net unrealized losses - - (12,227) - - (12,227)
Dividends ($.12/share) - - - (1,025) - (1,025)
--------- -------- ------- ------- ------- --------
BALANCE - December 31, 1994 8,884,511 166,991 (4,898) 42,237 (1,007) 203,323
Net Income - - - 17,051 - 17,051
Exercise of stock options 1,500 15 - - - 15
Repayment from employee benefit plan - - - - 852 852
Net unrealized gains - - 18,743 - - 18,743
Dividends ($.18/share) - - - (1,599) - (1,599)
Other (20) - - - - -
--------- -------- ------- ------- ------- -------
BALANCE - December 31, 1995 8,885,991 167,006 13,845 57,689 (155) 238,385
Net Income - - - 36,519 - 36,519
Exercise of stock options 3,800 38 - - - 38
Repayment from employee benefit plan - - - - 155 155
Net unrealized losses - - (11,151) - - (11,151)
Dividends ($.20/share) - - - (1,778) - (1,778)
--------- -------- ------- ------- ------- --------
BALANCE - December 31, 1996 8,889,791 $167,044 $ 2,694 $92,430 $ - $262,168
========= ======== ======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Lawyers Title
Corporation (the Company) and its wholly owned subsidiaries have been
prepared in conformity with generally accepted accounting principles
("GAAP") which, as to the insurance company subsidiaries, differ from
statutory accounting practices prescribed or permitted by regulatory
authorities.
Organization
The Company is engaged principally in the title insurance business.
Title insurance policies are insured statements of the condition of
title to real property, showing ownership as indicated by public
records, as well as outstanding liens, encumbrances and other matters
of record and certain other matters not of public record. Lawyers
Title's business results from commercial real estate activity, resales
and refinancings of residential real estate and construction and sale
of new housing. The Company conducts its business on a national basis
through a network of branch and agency offices with approximately 46.2%
of consolidated premium revenue generated in the states of Texas,
California, Florida and Pennsylvania.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
and operations, after intercompany eliminations, of Lawyers Title
Corporation, and its wholly owned subsidiaries, principally Lawyers
Title Insurance Corporation.
F-8
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments
The Company adopted the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," as of January
1, 1994.
As required by SFAS No. 115, the Company records its fixed-maturity
investments which are classified as available-for-sale at fair value
and reports the change in the unrealized appreciation and depreciation
as a separate component of shareholders' equity. The amortized cost of
fixed-maturity investments classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts. That
amortization or accretion is included in net investment income.
Realized gains and losses on sales of investments, and declines in
value considered to be other than temporary, are recognized in
operations on the specific identification basis.
Title Plants
Title plants consist of title records relating to a particular region
and are generally stated at cost. Expenses associated with current
maintenance such as salaries and supplies are charged to expense in the
year incurred. The costs of acquired title plants and the building of
new title plants, prior to the time that a plant is put into operation,
are capitalized. Properly maintained title plants are not amortized
because there is no indication of diminution in their value.
Goodwill
The excess of cost over fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over 40 years.
Depreciation
Property and equipment is depreciated principally on the straight-line
method over the useful lives of the various assets, which range from
three to 40 years.
F-9
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Premiums on title insurance written by the Company's employees are
recognized as revenue when the Company is legally or contractually
entitled to collect the premium. Premiums on insurance written by
agents are generally recognized when reported by the agent and recorded
on a "gross" versus "net" basis. Title search and escrow fees are
recorded as revenue when an order is closed.
Policy and Contract Claims
Liabilities for estimated losses and loss adjustment expenses represent
the estimated ultimate net cost of all reported and unreported losses
incurred through December 31,1996. The reserves for unpaid losses and
loss adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the
effects of trends in loss severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for losses and loss adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known; such adjustments
are included in current operations.
Income Taxes
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax benefits are recognized to the
extent that realization of such benefits are more likely than not.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust
deposits which amounted to approximately $444,000 at December 31, 1996,
representing undisbursed amounts received for settlements of mortgage
loans and indemnities against specific title risks. These funds are not
considered assets of the Company and, therefore, are excluded from the
accompanying consolidated balance sheets.
F-10
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Land Exchanges
Through several non-insurance subsidiaries the Company facilitates
tax-free property exchanges for customers pursuant to Section 1031 of
the Internal Revenue Code. Acting as a qualified intermediary, the
Company holds the sale proceeds from sales transactions until a
qualifying acquisition occurs, thereby assisting its customers in
deferring the recognition of taxable income. At December 31, 1996 and
1995, the Company was holding $261,000 and $234,000, respectively, of
such proceeds which are not considered assets of the Company and are,
therefore, excluded from the accompanying consolidated balance sheets.
Statement of Cash Flows
For purposes of the statement of cash flows, invested cash is
considered a cash equivalent. Invested cash includes all highly liquid
investments with a maturity of three months or less when purchased.
Earnings per Common Share
Earnings per common share is based on the weighted average number of
common shares outstanding during each year. Potential dilution that
could result from the exercise of stock options is not material.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for invested cash
and short-term investments approximate those assets' fair values. Fair
values for investment securities are based on quoted market prices. The
Company has no other material financial instruments.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and accordingly, recognizes no compensation expense for the
stock option grants.
F-11
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
2. ACCOUNTING CHANGE
In the fourth quarter of 1996 the Company made a change from reporting
policy and contract claims on a discounted to an undiscounted basis.
This change was made to conform with industry practice and because it
is considered preferable by rating agencies and analysts. The effect of
the change for 1996 was to increase the provision for policy and
contract claims by $76 million and decrease net income by $49 million
and net income per share by $5.51.
In addition, during the fourth quarter of 1996 the Company determined
that the trend of favorable loss experience which has emerged over the
past few years could be relied upon and the Company changed its
estimate of the ultimate net cost of all reported and unreported losses
incurred through September 30, 1996 to reflect this favorable
experience. The effect of the change in estimate was to decrease the
provision for policy and contract claims by $78 million and to increase
net income by $50.7 million and net income per share by $5.70.
Because the change in accounting principal to no longer discount policy
and contract claims is inseparable from the change in estimate, both
have been accounted for as a change in estimate. Accordingly, the net
effect of the two changes, a decrease of $2 million in the provision
for policy and contract claims, has been included in operations for the
fourth quarter and no prior amounts have been restated. The above
changes were both made to conform with general industry practice.
In May 1993 the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company adopted the
provisions of the new standard for investments held as of or acquired
after January 1, 1994.
In accordance with SFAS No. 115, prior period financial statements have
not been restated to reflect the change in accounting principle. The
adoption of SFAS No. 115 as of January 1, 1994 had no effect on net
income. The opening
F-12
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACCOUNTING CHANGE (Continued)
balance of shareholders' equity was increased $3,816 (net of $2,055 in
deferred income taxes) to reflect the recognition in shareholders'
equity of unrealized appreciation for the Company's investment in debt
securities determined to be available-for-sale, previously carried at
amortized cost.
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 62,206 $1,709 $547 $ 63,368
securities and
obligations of
U.S. Government
corporations
and agencies
Obligations of 76,203 1,065 143 77,125
states and
political
subdivisions
Fixed maturities 345 38 - 383
issued by foreign
governments
Public utilities 4,550 24 17 4,557
Corporate 61,195 1,364 147 62,412
securities
Mortgage backed 10,376 79 76 10,379
securities ------ -- -- ------
Fixed maturities $214,875 $4,279 $930 $218,224
available-for-sale ======== ====== ==== ========
</TABLE>
F-13
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 51,569 $3,881 $ 8 $ 55,442
securities and
obligations of
U.S. Government
corporations
and agencies
Obligations of 57,783 1,286 13 59,056
states and
political
subdivisions
Fixed maturities 344 24 2 366
issued by foreign
governments
Public utilities 1,997 58 - 2,055
Corporate 67,489 2,865 3 70,351
securities ------ ----- - ------
Fixed maturities $179,182 $8,114 $26 $187,270
available-for-sale ======== ====== === ========
</TABLE>
The amortized cost and estimated fair value of fixed-maturity
securities at December 31, 1996 by contractual maturity, are shown
below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
F-14
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 7,797 $ 7,840
Due after one year through 63,499 64,315
five years
Due after five years through 72,090 73,423
ten years
Due after ten years 61,113 62,268
Mortgage backed securities 10,376 10,378
------ ------
$214,875 $218,224
======== ========
</TABLE>
Earnings on investments and net realized gains for the three years
ended December 31, follow:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $12,453 $11,283 $11,052
Equity securities 692 916 809
Invested cash and other 979 1,587 1,235
short-term investments
Mortgage loans 88 170 75
Net realized gains 23,371 2,970 1,665
------ ----- -----
Total investment income 37,583 16,926 14,836
Investment expenses (1,159) (1,455) (693)
------ ------ ----
Net investment income $36,424 $15,471 $14,143
======= ======= =======
</TABLE>
Realized and unrealized gains (losses) representing the change in
difference between fair value and cost (principally amortized cost for
fixed maturities) on fixed maturities and equity securities for the
three years ended December 31, are summarized below:
F-15
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Change in
Realized Unrealized
-------- ----------
<S> <C> <C>
1996
Fixed maturities $ (50) $( 4,739)
Equity securities 23,421 (12,418)
------- --------
$23,371 $(17,157)
======= ========
1995
Fixed maturities $ (120) $16,920
Equity securities 3,090 11,916
------- -------
$ 2,970 $28,836
======= =======
1994
Fixed maturities $(1,063) $(5,741)
Equity securities 2,728 (2,670)
------- --------
$ 1,665 $(8,411)
======= =======
</TABLE>
Gross unrealized gains and (losses) relating to investments in equity
securities were $960 and $(165) at December 31, 1996.
Proceeds from sales of investments in fixed maturities, net of calls or
maturities during 1996, 1995 and 1994 were $67,425, $73,339 and
$93,286, respectively. Gross gains of $502, $422 and $788 in 1996, 1995
and 1994, respectively, and gross losses of $552, $542 and $1,843 in
1996, 1995 and 1994, respectively, were realized on those sales.
4. POLICY AND CONTRACT CLAIMS
The Company's estimate of net costs to settle reported claims and
claims incurred but not reported has not been discounted at December
31, 1996. Such estimates were discounted at a weighted-average rate of
7.5% at December 31, 1995 and 1994. The rates used for discounting loss
reserves on 1995 and 1994 issues were determined at the beginning of
those years. The discount rate established for 1995 issues was 7.5% and
for 1994 issues was 6.5%. If these estimates had not been discounted at
December 31, 1995 and 1994, reserves would have been increased by
$80,000 and $78,000, respectively.
F-16
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. POLICY AND CONTRACT CLAIMS (Continued)
Activity in the liability for unpaid claims and claim adjustment
expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $193,791 $198,906 $187,619
Incurred related to:
Current year 28,930 44,322 56,765
Prior years 281 (20,025) (9,990)
-------- -------- --------
Total incurred 29,211 24,297 46,775
-------- -------- --------
Paid related to:
Current year 1,549 1,797 7,465
Prior years 25,168 28,562 29,761
-------- -------- --------
Total paid 26,717 30,359 37,226
-------- -------- --------
Amounts related to
purchase of
subsidiaries - 947 1,738
-------- -------- --------
Balance at December 31 $196,285 $193,791 $198,906
======== ======== ========
</TABLE>
Balances at January 1, 1996, 1995 and 1994 and balances at December 31,
1995 and 1994 are reported on a discounted basis. The balance at
December 31, 1996 is reported on an undiscounted basis. Losses incurred
in 1996 include the effects of the accounting changes discussed in Note
2.
The favorable development on 1994 and prior year loss reserves during
1995 was attributable to successful recovery efforts, development on
previously reserved large claims and lower than expected payment levels
on the 1992 and 1993 issue years which included a high proportion of
refinance business.
5. REINSURANCE
The Company cedes and assumes title policy risks to and from other
insurance companies in order to limit and diversify its risk. The
Company cedes insurance on risks in excess of certain underwriting
limits which provides for recovery of a
F-17
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REINSURANCE (Continued)
portion of losses. The Company remains contingently liable to the
extent that reinsuring companies cannot meet their obligations under
reinsurance agreements.
The Company has not paid or recovered any reinsured losses during the
three years ended December 31, 1996. The total amount of premiums for
assumed and ceded risks was less than 1.0% of title premiums in each of
the last three years.
6. SHAREHOLDERS' EQUITY
Rights Agreement
The Company has issued one preferred share purchase right (a "Right")
with each share of Common Stock issued. As adjusted for the
three-for-two split of the Common Stock in May 1993, each Right
entitles the holder to buy two-thirds of one-hundredth of a share of
Series A Junior Participating Preferred Stock ("Junior Preferred
Stock"). The purchase price for each one-hundredth of a share of Junior
Preferred Stock is $60, subject to adjustment. The Rights will become
exercisable only if a person or group acquires or announces a tender
offer for 20.0% or more of the outstanding Common Stock. At any time
before the rights become exercisable, the Board of Directors may reduce
this threshold percentage to not less than 10.0%. If a person or group
acquires the threshold percentage of Common Stock, each Right will
entitle the holder, other than the acquiring person, to buy shares of
Common Stock or Junior Preferred Stock having a market value of twice
the exercise price. If the Company is acquired in a merger or other
business combination, each Right will entitle the holder, other than
the acquiring person, to purchase securities of the surviving company
having a market value equal to twice the purchase price of the Rights.
The Rights will expire on October 1, 2001, and may be redeemed by the
Company at a price of one cent per Right at any time before they become
exercisable. Until the Rights become exercisable, they are evidenced by
the Common Stock certificates and are transferred with and only with
such certificates.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees"
F-18
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHAREHOLDERS' EQUITY (Continued)
("APB 25") and related Interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), requires use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Under the Company's 1991 Stock Incentive Plan, as amended (the
"Incentive Plan"), officers, directors and key employees of the Company
and its subsidiaries may receive grants and/or awards of common stock,
restricted stock, phantom stock, incentive stock options, non-qualified
stock options and stock appreciation rights. As amended in 1995,
commencing January 1, 1996, the maximum number of shares of common
stock available for grants and awards under the Incentive Plan in each
calendar year is equal to 1.5% of the shares of common stock
outstanding as of the first business day of that year, plus the number
of shares available for grants and awards in prior years but not
covered by grants and awards in those years and any shares of common
stock as to which grants and awards have been terminated or forfeited.
Pursuant to the 1992 Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), each non-employee director is granted an option to
purchase 1,500 shares of common stock of the Company on the first
business day following the annual meeting of shareholders. Up to 60,000
shares of the Company's common stock may be issued under the Directors'
Plan.
All options which have been granted under the Incentive Plan and the
Directors' Plan are non-qualified stock options with an exercise price
equal to the fair market value of a share of the Company's common stock
on the date of grant. Options granted in 1992 under the Incentive Plan
and all options granted under the Directors' Plan expire ten years from
the date of grant. All other options which have been granted under the
Incentive Plan expire seven years from the date of grant. Options
generally vest ratably over a four-year period.
F-19
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHAREHOLDERS' EQUITY (Continued)
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value of these options was estimated
at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk-free interest
rate of 7.50%, dividend yield of 1.00%, volatility factor of the
expected market price of the Company's common stock of .34 and a
weighted-average expected life of the options of 5 years. The effects
of applying Statement 123 on a pro forma basis for 1995 and 1996
options are not likely to be representative of the effects on reported
pro forma net income in future years.
The Black-Scholes option valuation method was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for
earnings per share information):
1996 1995
---- ----
Pro forma net income $36,187 $16,922
Pro forma earnings
per share $4.07 $1.90
F-20
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHAREHOLDERS' EQUITY (Continued)
A summary of the Company's stock option activity and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ---------------------------------
Weighted- Weighted-
Average Average
Options Exercise Options Exercise
------- -------- ------- --------
Price Price
----- -----
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 523,576 $11 421,576 $12
Granted 178,000 19 112,000 11
Exercised 3,800 10 1,500 10
Forfeited 6,050 16 8,500 22
----- -----
Outstanding -
end of year 691,726 $13 523,576 $11
======= =======
Available for
future grant 55,856 103,018
Exercisable at
end of year 366,356 $11 278,651 $10
Weighted-average fair
value of options
granted during the year $7.38 $4.77
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $3 to $22. The weighted-average remaining contractual life of
those options is 5 years.
Savings and Stock Ownership Plan
The Company has registered 600,000 shares of common stock for use in
connection with the Lawyers Title Insurance Corporation Savings and
Stock Ownership Plan. Substantially all of the employees of the Company
are eligible to participate in the Plan. On July 1, 1992, the Company
issued 323,400 shares of such stock to the Plan in exchange for a
$2,156 promissory note bearing interest at 8.0%. These shares were used
for matching contributions for plan participants through June of 1996
and were allocated to participants quarterly in the same proportion
that the quarterly principal and interest payments on the note bore to
the total principal and interest payments over the life of the note.
Subsequent to June 1996, the Plan Trustee purchased shares on the open
market to use in matching
F-21
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHAREHOLDERS' EQUITY (Continued)
employee contributions. The level of contributions to the Plan is
discretionary and set by the Board of Directors annually. In 1996, 1995
and 1994, 38,997, 94,096 and 115,990 shares were allocated to
participants at a cost of $143, $631 and $832, respectively, to the
Company. Additionally, 100,502 shares were purchased at a cost of
$1,851 and allocated to employees in 1996.
7. STATUTORY FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP)
which differ in some respects from statutory accounting practices
prescribed or permitted in the preparation of financial statements for
submission to insurance regulatory authorities. Unconsolidated
statutory equity of Lawyers Title was $140,973 and $116,016 at December
31, 1996 and 1995, respectively. The difference between statutory
equity and equity determined on the basis of GAAP is primarily due to
differences between the provision for policy and contract claims
included in the accompanying financial statements and the statutory
unearned premium reserve, which is calculated in accordance with
statutory requirements, and statutory regulations that preclude the
recognition of certain assets including goodwill and deferred income
tax assets. Unconsolidated statutory net income of Lawyers Title was
$38,473, $18,516 and $13,993 for the years ended December 31, 1996,
1995 and 1994, respectively.
In a number of states, Lawyers Title is subject to regulations which
require minimum amounts of statutory equity and which require that the
payment of any extraordinary dividends receive prior approval of the
Insurance Commissioners of these states. An extraordinary dividend is
generally defined as one which, when added to other dividends paid in
the preceding twelve months, would exceed the lesser of 10.0% of
statutory equity accounts as of the preceding year end or statutory net
income excluding realized capital gains for the preceding year. Under
such statutory regulations, net assets of consolidated subsidiaries
aggregating $248,071 were not available for dividends, loans or
advances to the Company at December 31, 1996.
F-22
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. Significant components of the Company's deferred tax
assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Deferred tax assets:
Policy and contract claims $24,430 $23,021
Employee benefit plans 6,235 7,195
Other 1,499 1,382
------- -------
32,164 31,598
------- -------
Deferred tax liabilities:
Pension benefits 530 885
Title plant basis differences 4,961 4,961
Unrealized gains 1,451 7,455
Other 1,787 2,170
------- -------
8,729 15,471
------- -------
Net deferred tax asset $23,435 $16,127
======= =======
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be
realized. In the opinion of management, it is more likely than not that
the Company will realize the benefit of the net deferred tax asset,
and, therefore, no such valuation allowance has been established at
December 31, 1996 and 1995.
The provision for income tax is less than the amount of income tax
determined by applying the applicable U.S. statutory income tax rate
(35%) to pre-tax income as a result of the following differences:
1996 1995 1994
---- ---- ----
Computed expected expense
at statutory rate $19,439 $8,351 $3,139
Non-taxable interest (932) (828) (734)
Dividend deductions (146) (187) (170)
Company-owned life insurance (575) (645) (532)
Travel and entertainment 709 421 357
Other 526 (303) 95
------- ------ ------
Income tax expense $19,021 $6,809 $2,155
======= ====== ======
F-23
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
Taxes (recovered) paid were $14,542 in 1996, $(252) in 1995 and $9,207
in 1994.
9. PENSION PLAN AND POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit retirement plan which
covers substantially all employees. Benefits are based on salary and
years of service. The Company's funding policy is to annually
contribute the statutory required minimum. Plan assets include
marketable equity securities, U.S. government and corporate obligations
and cash equivalents. Prior service costs are amortized equally over
the average remaining service period of employees.
The following table sets forth the plan's funded status as of the
September 30 measurement dates:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 93,545 $ 85,297
Nonvested 6,743 5,728
-------- --------
Total accumulated benefit
obligations $100,288 $ 91,025
======== ========
Plan assets at fair value $112,684 $104,190
Projected benefit obligations 115,606 104,043
-------- --------
Plan assets (less than) in excess
of projected benefit obligations (2,922) 147
Unrecognized net asset from
transition (162) (1,982)
Unrecognized prior service costs 172 245
Unrecognized net gain 6,156 5,621
-------- --------
Prepaid pension asset at
December 31 $ 3,244 $ 4,031
======== ========
</TABLE>
F-24
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.75% in 1996
and 1995. The average rate of increase in future compensation levels
used was 4.3% in 1996 and 1995. The expected long-term rate of return
on plan assets was 8.75% for 1996, 1995 and 1994.
The components of pension cost include the following:
1996 1995 1994
---- ---- ----
Benefits earned during
the year $ 3,124 $ 2,795 $ 3,000
Interest cost on projected
benefit obligations 7,834 6,985 6,676
Actual return on plan assets (13,854) (16,125) (562)
Net amortization and
deferral 3,684 6,337 (9,003)
------- ------- -------
Pension cost $ 788 $ (8) $ 111
======= ======= =======
The Company sponsors defined benefit life and health care plans that
provide postretirement medical, dental and life insurance benefits to
fulltime employees who have attained age 55 and have ten years of
service after age 40. The plans are contributory, with contributions
adjusted annually, and contain other cost-sharing features such as
deductibles and coinsurance. Currently, the Company does not require
contributions from employees who retired prior to 1991. Medical
benefits are funded as claims are incurred. Contributions are made to a
premium deposit fund with a life insurance company for retired
participants upon reaching age 65.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet:
F-25
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Medical/ Medical/
Dental Life Dental Life
------ ---- ------ ----
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $11,878 $5,414 $11,335 $5,280
Fully eligible active
plan participants 2,448 980 2,162 908
Other active plan
participants 3,340 1,079 2,945 1,089
------- ----- ------- ------
17,666 7,473 16,442 7,277
Plan assets invested in
a premium deposit fund,
at fair value - 2,244 - 2,288
------- ----- ------- ------
Accumulated postretirement
benefit obligation in
excess of plan assets 17,666 5,229 16,442 4,989
Unrecognized net (gain)
or loss (5,961) 1,582 (6,353) 1,704
Unrecognized transition
obligation 16,305 2,471 17,324 2,625
------- ----- ------- ------
Accrued postretirement
benefit cost $ 7,322 $1,176 $ 5,471 $ 660
======= ====== ======= ======
</TABLE>
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ------------------ -------------------
Medical/ Medical/ Medical/
Dental Life Dental Life Dental Life
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 532 $170 $ 476 $ 168 $ 520 $ 148
Interest 1,238 548 1,795 535 1,597 375
Actual return on
plan assets - (200) - (183) - (167)
Amortization of net
(gain) loss (256) 52 - - - -
Amortization of
transition obliga-
tion over 20 years 1,019 155 1,019 155 1,019 155
------ ---- ------ ---- ------ -----
Net periodic post-
retirement benefit
cost $2,533 $725 $3,290 $675 $3,136 $ 511
====== ==== ====== ==== ====== =====
</TABLE>
F-26
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
The assumed health care cost trend rate used to measure the expected
cost of benefits covered by the plan is 10.0% for 1997 and 9.5% for
1998, and is assumed to decrease 0.5% per year until 2004 and remain
level at 6.25% thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, a 1.0%
increase in the annual health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1996
and 1995 by $854 and $1,731, respectively, and the aggregate of the
service and interest cost components of net periodic postretirement
benefit cost for 1996 by $67.
The weighted-average discount rate used to estimate the accumulated
postretirement benefit was 7.75% at December 31, 1996 and 1995. The
average rate of increase in future compensation levels used was 4.3% in
1996 and 1995.
10. LEASE COMMITMENTS
The Company conducts a major portion of its operations from leased
office facilities under operating leases that expire over the next 10
years. Additionally, the Company leases data processing and other
equipment under operating leases expiring over the next five years.
Following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1996.
1997 $18,593
1998 15,104
1999 11,521
2000 6,440
2001 2,732
2002 and subsequent 1,365
-------
$55,755
=======
Rent expense was $22,551, $22,649 and $19,124 for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-27
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. CREDIT ARRANGEMENTS
At December 31, 1996, the Company had working capital lines of credit
with three banks totaling $35,000 that may be drawn on as needed, with
interest at LIBOR plus 1.5% or the prime rate at the Company's choice.
At that date $1,000 was drawn against these lines. These credit lines
require a commitment fee of 0.16% and expire May 31,1997, although they
may be extended beyond that date at the sole discretion of the banks.
12. PENDING LEGAL PROCEEDINGS
Lawyers Title, in the ordinary course of its title insurance business,
is sometimes named as a defendant in litigation involving claims
arising outside of the title insurance contract, such as for alleged
negligence in title examination, improper claims administration or bad
faith. While it is the Company's policy to handle all claims promptly,
efficiently, fairly, and in accordance with the provisions of the
policy and all applicable laws, the Company may, nevertheless, be
subjected to plaintiffs' allegations seeking extracontractual or
punitive damages.
13. ACQUISITIONS
During the year ended December 31, 1996 the Company acquired three
title insurance agencies and an ancillary service business at an
aggregate cost of $7,900 of which $3,000 was paid in cash with the
balance payable in future periods. These acquisitions were not material
to the Company's operations.
Effective November 1, 1994, the Company acquired all of the outstanding
stock of Oregon Title Insurance Company (OTIC) in exchange for 425,020
shares of the Company's common stock valued at $3,883. OTIC is engaged
in the title insurance business. The acquisition has been accounted for
under the purchase method of accounting. Goodwill of approximately $500
is being amortized over 40 years.
Effective November 30, 1994, the Company acquired all of the
outstanding stock of American Title Group, Inc. (ATG) for approximately
$19,000 in cash. To provide indemnification to the Company for the
warranties of the sellers, $4,500 of the purchase price was placed with
an escrow agent to be released
F-28
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. ACQUISITIONS (Continued)
over four years as the warranties expire. At December 31, 1996 the
balance remaining in escrow was $2,250. ATG is engaged in the title
insurance business. The acquisition has been accounted for under the
purchase method of accounting. Goodwill of approximately $7,200 is
being amortized over 40 years.
The following unaudited pro forma summary presents information as if
the OTIC and ATG acquisitions had occurred at the beginning of the
fiscal year. The pro forma information is provided for information
purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is
it necessarily indicative of future results of operations of the
combined enterprise.
Unaudited
Year Ended
December 31, 1994
-----------------
Premium and title search
and escrow revenue $545,748
Net income $ 3,857
========
Earnings per common share $ .43
========
In addition, during the year ended December 31, 1994 the Company
acquired two title insurance agencies at an aggregate cost of $5,786
which was paid in cash. These acquisitions were not material to the
Company's operations.
F-29
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly financial information follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Premiums, title
search, escrow
and other $117,469 $143,793 $141,679 $154,817
Net investment
income 5,345 5,500 4,593 20,986
Income before
income taxes 6,717 13,798 9,150 25,875
Net income 4,521 9,044 6,054 16,900
Income per common
share $.51 $1.02 $.68 $1.90
1995
Premiums, title
search, escrow
and other $104,838 $111,742 $118,479 $132,302
Net investment
income 3,301 3,036 4,566 4,568
Income before
income taxes 1,395 4,549 8,565 9,351
Net income 1,015 3,196 6,237 6,603
Income per
common share $.11 $.36 $.70 $.74
</TABLE>
In the fourth quarter of 1996 the Company changed its investment
strategy by selling all of its equity portfolio and began to move the
proceeds into fixed-maturity securities. This sale resulted in capital
gains of $17.4 million in the quarter.
Income per common share is computed using the weighted average number
of shares of common stock outstanding during each quarter.
15. ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than
F-30
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. ACCOUNTING PRONOUNCEMENTS (Continued)
the assets' carrying amount. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The Company
adopted SFAS No. 121 in the first quarter of 1996. The adoption had no
effect on the Company's financial statements for the year ended
December 31, 1996.
F-31
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
INVESTMENTS:
Fixed maturities available-for-sale - at fair
value (amortized cost: 1997 - $245,161;
1996 - $214,875) $ 252,564 $ 218,224
Equity securities - at fair value (cost: 1997 -
$887; 1996 - $930) 1,664 1,725
Mortgage loans (less allowance for doubtful
accounts: 1997 and 1996 - $150) 456 480
Invested cash 26,773 71,626
------------ ------------
Total investments 281,457 292,055
CASH 36,258 23,997
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts:
1997 - $1,083; 1996 - $1,008) 6,050 6,657
Accounts receivable (less allowance for doubtful
accounts: 1997 - $2,571; 1996 - $2,197) 27,456 20,003
------------ ------------
Total notes and accounts receivable 33,506 26,660
PROPERTY AND EQUIPMENT - at cost (less
accumulated depreciation and amortization:
1997 - $50,584; 1996 - $44,670) 21,070 21,959
TITLE PLANTS 48,930 48,536
GOODWILL (less accumulated amortization:
1997 - $13,670; 1996 - $12,393) 58,813 59,669
DEFERRED INCOME TAXES 25,500 23,435
OTHER ASSETS 35,410 24,657
------------ ------------
$ 540,944 $ 520,968
============ ============
</TABLE>
See Accompanying Notes.
F-32
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES 1997 1996
- ----------- ---- ----
<S> <C> <C>
POLICY AND CONTRACT CLAIMS $ 199,865 $ 196,285
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 43,288 47,211
INCOME TAXES PAYABLE 3,982 5,721
OTHER LIABILITIES 12,479 9,583
------------ ------------
Total liabilities 259,614 258,800
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, no par value, authorized
5,000,000 shares, none issued or outstanding - -
Common stock, no par value, authorized 45,000,000
shares, issued and outstanding, 8,928,041 in
1997 and 8,889,791 in 1996 167,621 167,044
Unrealized investment gains (less related
deferred income tax expense of $2,863
in 1997 and $1,450 in 1996) 5,317 2,694
Retained earnings 108,392 92,430
------------ ------------
Total shareholders' equity 281,330 262,168
------------ ------------
$ 540,944 $ 520,968
============ ============
</TABLE>
See Accompanying Notes.
F-33
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 353,775 $ 328,438 $ 128,635 $ 115,251
Title search, escrow and other 85,769 74,503 31,721 26,428
Investment income 12,419 15,438 4,036 4,593
----------- ----------- ----------- -----------
451,963 418,379 164,392 146,272
----------- ----------- ----------- -----------
EXPENSES
Salaries and employee benefits 148,596 137,127 51,778 47,359
Agents' commissions 149,944 134,116 54,178 47,731
Provision for policy and contract claims 23,910 21,075 8,590 7,491
General, administrative and other 102,994 96,396 36,805 34,541
----------- ----------- ----------- -----------
425,444 388,714 151,351 137,122
----------- ----------- ----------- -----------
OPERATING INCOME BEFORE
INCOME TAXES 26,519 29,665 13,041 9,150
INCOME TAX EXPENSE
Current 12,919 12,642 5,259 5,107
Deferred (3,699) (2,596) (659) (2,011)
----------- ----------- ----------- -----------
9,220 10,046 4,600 3,096
----------- ----------- ----------- -----------
NET INCOME 17,299 19,619 8,441 6,054
DIVIDENDS (1,337) (1,333) (446) (444)
RETAINED EARNINGS BEGINNING
OF PERIOD 92,430 57,689 100,397 70,365
----------- ----------- ----------- -----------
RETAINED EARNINGS END OF PERIOD $ 108,392 $ 75,975 $ 108,392 $ 75,975
=========== =========== =========== ===========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 1.87 $ 2.16 $ 0.91 $ 0.66
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION 1.85 2.14 0.90 0.66
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 9,231 9,097 9,260 9,135
AVERAGE NUMBER OF SHARES OUTSTANDING
ASSUMING FULL DILUTION 9,332 9,158 9,340 9,159
</TABLE>
See Accompanying Notes.
F-34
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,299 $ 19,619
Depreciation & amortization 7,736 6,517
Amortization of bond premium 339 568
Realized investment gains (113) (5,399)
Deferred income tax (3,699) (2,596)
Change in assets & liabilities:
Notes receivable 607 800
Premiums receivable (7,453) (51)
Current income taxes (1,739) 4,865
Policy & contract claims 3,580 973
Accounts payable and accrued expenses (3,923) 1,354
Cash surrender value of life insurance (1,081) 3,050
Other (2,740) (5,443)
----------- ----------
Net cash provided by operating activities 8,813 24,257
----------- ----------
Cash flows from investing activities:
Purchase of property & equipment - net (5,090) (6,600)
Purchase of businesses, net of cash acquired - (2,320)
Cost of investments acquired:
Fixed maturities (84,128) (77,093)
Equity securities (6) (27,780)
Mortgage loans - -
Proceeds from investment sales or maturities:
Fixed maturities 53,575 59,938
Equity securities 90 33,961
Mortgage loans 24 341
----------- ----------
Net cash used in investing activities (35,535) (19,553)
----------- ----------
Cash flows from financing activities:
Repayment of cash surrender value loan (7,713) -
Dividends paid (1,337) (1,333)
Change in notes payable 3,180 (48)
----------- ----------
Net cash provided by financing activities (5,870) (1,381)
----------- ----------
Net (decrease) increase in cash and invested cash (32,592) 3,323
Cash & invested cash at beginning of period 95,623 40,647
----------- ----------
Cash & invested cash at end of period $ 63,031 $ 43,970
=========== ==========
</TABLE>
See Accompanying Notes.
F-35
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Information
The unaudited consolidated financial information included in this
report has been prepared in conformity with the accounting principles
and practices reflected in the consolidated financial statements
included in the Form 10-K for the year ended December 31, 1996 filed
with the Commission under the Securities Exchange Act of 1934. This
report should be read in conjunction with the aforementioned Form 10-K.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of this
information have been made. The results of operations for the interim
periods are not necessarily indicative of results for a full year.
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
2. Pending Legal Proceedings
For additional information, see Pending Legal Proceedings on page F-27
of the December 31, 1996 Form 10-K.
3. Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share (Statement 128), which is
required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded and dual presentation is
required regardless of the difference between basic and diluted
earnings per share. The impact of Statement 128 on the calculation of
primary and diluted earnings per share for these quarters is not
expected to be material.
F-36
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholder
Commonwealth Land Title Insurance Company
Transnation Title Insurance Company
Philadelphia, Pennsylvania
We have audited the accompanying combined balance sheets of Commonwealth Land
Title Insurance Company and subsidiaries ("Commonwealth") and Transnation Title
Insurance Company and subsidiaries ("Transnation") (both of which are wholly
owned subsidiaries of Reliance Group Holdings, Inc.) as of December 31, 1996 and
1995, and the related combined statements of income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended December
31, 1996. Commonwealth and Transnation (the "Companies") are under common
ownership and common management. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Commonwealth and
Transnation at December 31, 1996 and 1995, and the combined results of their
operations and their combined cash flows for the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 12, 1997
(August 20, 1997 as to Note 10)
F-37
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums and fees...................................................... $ 780,157,000 $ 671,936,000 $ 856,762,000
Net investment income.................................................. 30,455,000 27,933,000 26,455,000
Gain on sale of investments............................................ 346,000 1,729,000 516,000
--------------- ---------------- ---------------
810,958,000 701,598,000 883,733,000
--------------- ---------------- ---------------
EXPENSES:
Commissions to agents.................................................. 355,834,000 310,729,000 432,041,000
Compensation and employee benefits..................................... 206,083,000 188,097,000 211,150,000
Provision for losses................................................... 61,116,000 58,486,000 75,867,000
Taxes, other than federal income taxes................................. 12,923,000 9,782,000 8,082,000
Other operating expenses............................................... 136,422,000 120,294,000 124,789,000
--------------- ---------------- ---------------
772,378,000 687,388,000 851,929,000
--------------- ---------------- ---------------
Income before income taxes............................................. 38,580,000 14,210,000 31,804,000
Provision for income taxes............................................. 13,347,000 4,755,000 10,809,000
--------------- ---------------- ---------------
NET INCOME............................................................. $ 25,233,000 $ 9,455,000 $ 20,995,000
=============== ================ ===============
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Fixed maturities held for investment -- at amortized
cost (quoted market $140,789,000 and $126,623,000)................................. $ 139,798,000 $ 120,545,000
Fixed maturities available for sale -- at quoted market
(amortized cost $284,381,000 and $248,280,000)..................................... 289,991,000 260,194,000
Short-term investments............................................................... 25,860,000 41,220,000
First mortgage and other secured loans............................................... 5,453,000 2,882,000
Cash ................................................................................... 14,328,000 15,230,000
Accounts receivable, less allowances of
$5,663,000 and $5,006,000............................................................ 23,987,000 26,372,000
Real estate and equipment -- at cost, less accumulated
depreciation of $25,746,000 and $22,685,000.......................................... 15,373,000 14,303,000
Title plants............................................................................ 49,750,000 49,208,000
Deferred federal income tax benefit..................................................... 27,243,000 20,366,000
Goodwill................................................................................ 12,944,000 9,163,000
Other assets............................................................................ 16,027,000 14,337,000
---------------- ---------------
$ 620,754,000 $ 573,820,000
================ ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserve for losses...................................................................... $ 264,838,000 $ 240,777,000
Accounts payable and accrued expenses................................................... 76,168,000 62,306,000
Current federal income taxes............................................................ 6,091,000 -
---------------- ---------------
347,097,000 303,083,000
---------------- ---------------
Commitments (Note 9)
Shareholder's equity:
Common stock......................................................................... 11,649,000 11,649,000
Additional paid-in capital........................................................... 127,551,000 127,551,000
Retained earnings.................................................................... 130,810,000 123,793,000
Net unrealized gain on investments................................................... 3,647,000 7,744,000
---------------- ---------------
273,657,000 270,737,000
---------------- ---------------
$ 620,754,000 $ 573,820,000
================ ===============
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Retained Gain (loss) on Shareholder's
Stock Capital Earnings Investments Equity
----- ------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994..............$ 11,374,000 $ 127,278,000 $ 116,343,000 $ 5,868,000 $ 260,863,000
Net income............................ - - 20,995,000 - 20,995,000
Dividends............................. - - (19,000,000) - (19,000,000)
Depreciation after applicable deferred
income tax benefit of $5,058,000.... - - - (9,392,000) (9,392,000)
--------------- ---------------- --------------- ---------------- ---------------
Balance, December 31, 1994............ 11,374,000 127,278,000 118,338,000 (3,524,000) 253,466,000
Net income............................ - - 9,455,000 - 9,455,000
Increase in par value of
Commonwealth's common stock
from $1.67 to $2.00 per share....... 275,000 (275,000) - - -
Dividends............................. - - (4,000,000) - (4,000,000)
Capital contribution.................. - 548,000 - - 548,000
Appreciation after applicable deferred
income tax provision of $6,068,000.. - - - 11,268,000 11,268,000
--------------- ---------------- --------------- ---------------- ---------------
Balance, December 31, 1995............ 11,649,000 127,551,000 123,793,000 7,744,000 270,737,000
Net income............................ - - 25,233,000 - 25,233,000
Dividends............................. - - (18,216,000) - (18,216,000)
Depreciation after applicable deferred
income tax benefit of $2,207,000.... - - - (4,097,000) (4,097,000)
--------------- ---------------- --------------- ---------------- ---------------
Balance, December 31, 1996.......... $ 11,649,000 $ 127,551,000 $ 130,810,000 $ 3,647,000 $ 273,657,000
=============== ================ =============== ================ ===============
</TABLE>
See notes to combined financial statements.
F-40
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 25,233,000 $ 9,455,000 $ 20,995,000
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in reserve for losses.................................... 24,061,000 12,714,000 27,189,000
Change in accounts receivable..................................... 1,780,000 557,000 1,982,000
Depreciation, bad debts and amortization.......................... 7,797,000 6,838,000 5,145,000
Change in accounts payable, accrued expenses and other............ 8,478,000 (13,539,000) (15,451,000)
--------------- ---------------- ---------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES............................ 67,349,000 16,025,000 39,860,000
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale................................. 88,225,000 29,677,000 12,212,000
Fixed maturities held for investment................................ 3,300,000 4,267,000 4,014,000
Maturities and repayments of:
Fixed maturities available for sale................................. 13,671,000 2,869,000 3,976,000
Fixed maturities held for investment................................ 2,700,000 2,005,000 1,643,000
Purchases of:
Fixed maturities available for sale................................. (138,310,000) (37,922,000) (10,628,000)
Fixed maturities held for investment................................ (24,817,000) (10,982,000) (36,266,000)
Proceeds from sales of short-term investments - net.................... 15,360,000 13,055,000 3,730,000
Purchases of title plants - net........................................ (577,000) (985,000) (378,000)
Purchases of real estate and equipment - net........................... (6,266,000) (4,439,000) (5,563,000)
Cash outlay for acquisitions........................................... (3,000,000) - -
Other - net............................................................ (321,000) (1,730,000) (50,000)
--------------- ---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (50,035,000) (4,185,000) (27,310,000)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany receivables and payables - net............................ - (1,909,000) 2,423,000
Dividends.............................................................. (18,216,000) (4,000,000) (19,000,000)
Cash received from capital contribution................................ - 40,000 -
--------------- ---------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES.................................. (18,216,000) (5,869,000) (16,577,000)
--------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH............................................ (902,000) 5,971,000 (4,027,000)
Cash, beginning of year................................................ 15,230,000 9,259,000 13,286,000
--------------- ---------------- ---------------
Cash, end of year...................................................... $ 14,328,000 $ 15,230,000 $ 9,259,000
=============== ================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Federal income taxes paid.............................................. $ 10,944,000 $ 6,299,000 $ 18,073,000
=============== ================ ===============
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The combined financial statements of Commonwealth Land Title Insurance Company
("Commonwealth") and Transnation Title Insurance Company ("Transnation") include
the accounts of all subsidiaries and have been prepared in conformity with
generally accepted accounting principles. Such statements include informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects cannot be precisely determined.
Actual results may differ from these estimates. All intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
the 1995 and 1994 combined financial statements to conform with current year
presentation.
Commonwealth and Transnation (the "Companies") are wholly owned subsidiaries of
Reliance Insurance Company ("Reliance Insurance"). Reliance Group Holdings, Inc.
("Reliance"), through a subsidiary, owns 100% of the common stock of Reliance
Insurance. Together the Companies comprise the title insurance operations of
Reliance Insurance.
Certain administrative services are provided by Reliance Insurance to the
Companies. The costs for such services, which have been determined based on a
reasonable allocation of actual costs incurred, amounted to $1,096,000,
$919,000, and $1,019,000 for 1996, 1995 and 1994 and are reflected in the
statements of income.
Nature of Operations
The principal operations of the Companies consist of title insurance
underwriting. The Companies write, through direct and agency operations, title
insurance for residential and commercial real estate nationwide and provide
escrow and settlement services in connection with real estate closings.
Investments
Fixed maturity investments include bonds, notes and redeemable preferred stocks.
Fixed maturity investments classified as "available for sale" represent
securities that will be held for an indefinite period of time and are carried at
quoted market value with the net unrealized gain or loss included in
shareholder's equity. Such investments may be sold in response to changes in
interest rates, future general liquidity needs and similar factors. Fixed
maturity investments classified as "held for investment" are carried at
amortized cost since the Companies have the positive intent and ability to hold
these securities to maturity. Short-term investments consist primarily of United
States government securities, certificates of deposit and commercial paper
carried at cost, which approximates market value. First mortgage and other
secured loans are carried at cost, which approximates their fair value. Realized
gains and losses, determined on a specific identification basis, are included in
income.
F-42
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Title Insurance
Direct title insurance premiums and fees are recognized as revenue when policies
become effective. Agency insurance premiums are recognized as revenue when
reported by the agent. Title insurance claims arise principally from unknown
title defects that exist at the time policies become effective.
At the time premiums are recorded as revenue, the Companies establish reserves
for the estimated ultimate amounts that will be paid for reported claims,
incurred but not reported claims and the expenses that will be paid to settle
these claims. The reserves, which are not discounted, are based on historical
and anticipated loss experience including societal and economic factors.
Inflation is inherent in the reserves to the extent that it influenced the past
claims patterns used to produce the reserve estimates. The process of estimating
claims is a complex task and the actual payments may be more or less than such
estimates indicate. Changes in loss estimates, based on subsequent developments,
are included in operations currently.
Title Plants
Title plants are capitalized at the lower of cost or appraised value at date of
acquisition. Title plants are not being depreciated since there has been no
diminution of value; however, impairments of title plant carrying amounts deemed
to be other than temporary are expensed. Costs of maintaining and updating title
plants are expensed as incurred.
Fair Value of Financial Instruments
The estimated fair value of publicly traded financial instruments is determined
by the Companies using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. See Note 2 regarding fair value
information for the Companies' financial instruments.
Income Taxes
The Companies are included in the consolidated federal income tax return of
Reliance. Federal income taxes are computed as if Commonwealth and Transnation
filed separate consolidated tax returns.
Adoption of New Accounting Standard
Effective January 1, 1996, the Companies adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of
this Statement had no material effect on the Companies' combined financial
statements.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishing of
Liabilities". The adoption of this Statement, which is not required until 1997,
is not expected to have a material effect on the Companies' combined financial
statements.
F-43
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
2. INVESTMENTS
Fixed maturities held for investment at December 31, 1996 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
---- ----- ----- ------
<S> <C> <C> <C> <C>
Bonds and notes:
U.S. government and government
agencies and authorities........................ $ 1,053,000 $ 1,069,000 $ 16,000 $ -
Public utilities.................................. 90,421,000 90,610,000 1,107,000 918,000
Corporate bonds and other......................... 36,621,000 37,211,000 1,330,000 740,000
Redeemable preferred stock........................... 11,703,000 11,899,000 196,000 -
---------------- --------------- ---------------- ---------------
$ 139,798,000 $ 140,789,000 $ 2,649,000 $ 1,658,000
================ =============== ================ ===============
</TABLE>
Fixed maturities available for sale at December 31, 1996 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses
----- ---- ----- ------
<S> <C> <C> <C> <C>
Bonds and notes:
U.S. government and government
agencies and authorities........................ $ 95,147,000 $ 95,345,000 $ 660,000 $ 858,000
Public utilities.................................. 72,880,000 73,457,000 348,000 925,000
Corporate bonds and other......................... 63,619,000 62,713,000 1,671,000 765,000
Redeemable preferred stock........................... 58,345,000 52,866,000 5,487,000 8,000
---------------- --------------- ---------------- ---------------
$ 289,991,000 $ 284,381,000 $ 8,166,000 $ 2,556,000
================ =============== ================ ===============
</TABLE>
Fixed maturities held for investment at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
---- ----- ----- ------
<S> <C> <C> <C> <C>
Bonds and notes:
U.S. government and government
agencies and authorities........................ $ 1,057,000 $ 1,109,000 $ 52,000 $ -
Public utilities.................................. 67,175,000 70,069,000 2,896,000 2,000
Corporate bonds and other......................... 38,061,000 40,536,000 2,498,000 23,000
Redeemable preferred stock........................... 14,252,000 14,909,000 657,000 -
---------------- --------------- ---------------- ---------------
$ 120,545,000 $ 126,623,000 $ 6,103,000 $ 25,000
================ =============== ================ ===============
</TABLE>
F-44
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Fixed maturities available for sale at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses
----- ---- ----- ------
<S> <C> <C> <C> <C>
Bonds and notes:
U.S. government and government
agencies and authorities........................ $ 43,875,000 $ 42,929,000 $ 1,003,000 $ 57,000
Public utilities.................................. 88,655,000 85,795,000 2,963,000 103,000
Corporate bonds and other......................... 75,904,000 72,207,000 3,833,000 136,000
Redeemable preferred stock........................... 51,760,000 47,349,000 4,411,000 -
---------------- --------------- ---------------- ---------------
$ 260,194,000 $ 248,280,000 $ 12,210,000 $ 296,000
================ =============== ================ ===============
</TABLE>
The carrying value of financial instruments not publicly traded, recorded at
estimated fair value, was $44,800,000 and $43,800,000 at December 31, 1996 and
1995, respectively.
The contractual maturities of fixed maturity investments at December 31, 1996
were as follows:
<TABLE>
<CAPTION>
Held for Investment Available for Sale
------------------- ------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Fixed maturity investments:
Due within one year............................... $ 1,053,000 $ 1,069,000 $ 2,200,000 $ 2,205,000
Due after one year through five years............. 1,849,000 2,032,000 15,856,000 15,976,000
Due after five years through ten years............ 45,777,000 46,679,000 36,537,000 37,029,000
Due after ten years............................... 79,416,000 79,110,000 96,960,000 96,705,000
---------------- --------------- ---------------- ---------------
128,095,000 128,890,000 151,553,000 151,915,000
Redeemable preferred stock........................... 11,703,000 11,899,000 52,866,000 58,345,000
Mortgage-backed securities........................... - - 79,962,000 79,731,000
---------------- --------------- ---------------- ---------------
$ 139,798,000 $ 140,789,000 $ 284,381,000 $ 289,991,000
================ =============== ================ ===============
</TABLE>
Net investment income consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Fixed maturities.................................................... $ 29,632,000 $ 26,971,000 $ 25,987,000
Short-term investments.............................................. 1,588,000 1,689,000 1,590,000
Other............................................................... 883,000 773,000 669,000
--------------- ---------------- ---------------
32,103,000 29,433,000 28,246,000
Investment expenses.................................................... 1,648,000 1,500,000 1,791,000
--------------- ---------------- ---------------
$ 30,455,000 $ 27,933,000 $ 26,455,000
=============== ================ ===============
</TABLE>
F-45
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities held for investment:
Realized gains...................................................... $ 410,000 $ 128,000 $ 147,000
Realized losses..................................................... (25,000) - (1,000)
------------- ------------- -------------
385,000 128,000 146,000
------------- ------------- -------------
Fixed maturities available for sale:
Realized gains...................................................... 1,308,000 1,626,000 531,000
Realized losses..................................................... (1,347,000) (25,000) (161,000)
-------------- ------------- -------------
(39,000) 1,601,000 370,000
------------- ------------- -------------
$ 346,000 $ 1,729,000 $ 516,000
============= ============= =============
</TABLE>
During 1996, 1995 and 1994, the Companies sold fixed maturities held for
investment with an amortized cost of $2,963,000, $4,221,000 and $3,892,000
respectively, resulting in realized gains of $337,000, $45,000 and $123,000
respectively. These sales were principally in response to a significant
deterioration in the issuers' creditworthiness.
3. PROVISION FOR INCOME TAXES
Income tax provision from operations consisted of:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current................................................................ $ 18,094,000 $ 5,066,000 $ 16,265,000
Deferred............................................................... (4,747,000) (311,000) (5,456,000)
------------- ------------- -------------
$ 13,347,000 $ 4,755,000 $ 10,809,000
============= ============= =============
</TABLE>
F-46
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations before income taxes............................. $ 38,580,000 $ 14,210,000 $ 31,804,000
============= ============= =============
Tax provision at U.S. statutory rate................................... $ 13,503,000 $ 4,974,000 $ 11,131,000
Reconciliation to actual tax rate:
Dividends received deduction........................................ (1,248,000) (1,199,000) (1,148,000)
Goodwill............................................................ 268,000 126,000 88,000
Non-deductible meals and entertainment.............................. 652,000 578,000 644,000
Tax exempt interest income.......................................... (46,000) (67,000) (81,000)
Other............................................................... 218,000 343,000 175,000
--------------- ---------------- ---------------
$ 13,347,000 $ 4,755,000 $ 10,809,000
=============== ================ ===============
</TABLE>
The tax effects of items comprising the Companies net deferred tax asset were as
follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Title loss reserves.................................................................. $ 83,004,000 $ 73,422,000
Tax basis differential for equipment................................................. 6,133,000 4,370,000
Allowance for doubtful accounts...................................................... 2,044,000 1,747,000
Pension reserves..................................................................... 3,318,000 2,829,000
Other deferred tax assets............................................................ 3,211,000 4,055,000
---------------- ---------------
97,710,000 86,423,000
---------------- ---------------
Deferred tax liabilities:
Statutory premium reserve............................................................ 56,095,000 50,887,000
Financing lease arrangement.......................................................... 5,222,000 3,740,000
Unrealized security gains............................................................ 1,963,000 4,170,000
Other deferred tax liabilities....................................................... 7,187,000 7,260,000
---------------- ---------------
70,467,000 66,057,000
---------------- ---------------
Net deferred tax asset.................................................................. $ 27,243,000 $ 20,366,000
================ ===============
</TABLE>
4. RESTRICTED ASSETS AND SHAREHOLDER'S EQUITY
State laws require the Companies to maintain statutory premium reserves, which
are restrictions on shareholder's equity. Qualified investments are maintained
in an amount equal to these reserves, which aggregated $258,729,000 at December
31, 1996 and $239,993,000 at December 31, 1995.
F-47
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The Companies had investments on deposit with insurance departments of various
states as required by law with aggregate carrying values of $12,462,000 at
December 31, 1996 and $14,150,000 at December 31, 1995.
Commonwealth's common stock has a par value of $2 per share and 1,000,000 shares
were authorized and 824,653 shares were issued and outstanding at December 31,
1996 and 1995. Transnation's common stock has a par value of $1 per share and
10,000,000 shares were authorized, issued and outstanding at December 31, 1996
and 1995. Total shareholder's equity of Commonwealth was $184,926,000 and
$180,640,000 at December 31, 1996 and 1995, respectively. Total shareholder's
equity of Transnation was $88,731,000 and $90,097,000 at December 31, 1996 and
1995, respectively.
Future dividend payments by Commonwealth and Transnation are limited by
insurance regulations of the Commonwealth of Pennsylvania and the State of
Arizona, respectively. Under Pennsylvania law, Commonwealth is limited to the
greater of 10% of policyholders' surplus at December 31 of the preceding year or
100% of the prior year's statutory net income. In accordance with these
restrictions, $30,950,000 is available for dividends in 1997.
Under Arizona law, Transnation is limited to the lesser of 10% of policyholders'
surplus at December 31 of the preceding year or 100% of the prior year's
statutory net investment income. In accordance with these restrictions,
$6,303,000 is available for dividends in 1997.
5. POSTRETIREMENT BENEFIT PLANS
Retirement benefits, covering substantially all employees, are provided under a
noncontributory trusteed defined benefit pension plan. Contributions to the
pension plan are based on the minimum funding requirements of the Employee
Retirement Income Security Act of 1974.
Retirement benefits are paid to eligible employees based principally on years of
service and salary. Pension plan assets consist primarily of corporate and
government debt securities and 314,100 shares of Reliance Group Holdings, Inc.
common stock.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period...................... $ 3,945,000 $ 3,076,000 $ 3,832,000
Interest cost on projected benefit obligation.......................... 4,227,000 3,859,000 3,563,000
Actual return on plan assets........................................... (1,552,000) (5,342,000) 2,082,000
Net amortization and deferral.......................................... (3,770,000) 1,047,000 (6,832,000)
--------------- ---------------- ---------------
Net periodic pension cost.............................................. $ 2,850,000 $ 2,640,000 $ 2,645,000
=============== ================ ===============
</TABLE>
F-48
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The reconciliation of the pension plan funded status with the accrued pension
cost included in accounts payable and accrued expenses is as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................................................... $ 43,935,000 $ 43,319,000
Nonvested............................................................................ 3,494,000 3,971,000
---------------- ---------------
Accumulated benefit obligation.......................................................... 47,429,000 47,290,000
Effect of anticipated future compensation levels........................................ 10,911,000 11,736,000
---------------- ---------------
Projected benefit obligation............................................................ 58,340,000 59,026,000
Plan assets at market value............................................................. (49,313,000) (43,087,000)
---------------- ---------------
Projected benefit obligation in excess of plan assets................................... 9,027,000 15,939,000
Unrecognized net assets at date of plan adoption........................................ 2,969,000 3,605,000
Unrecognized net loss................................................................... (4,319,000) (10,732,000)
---------------- ---------------
Accrued pension cost.................................................................... $ 7,677,000 $ 8,812,000
================ ===============
</TABLE>
Contributions to the pension plan were $3,985,000 in 1996 and $1,148,000 in
1994. No contributions were made in 1995.
The assumptions used to measure the projected benefit obligation at December 31,
1996 and 1995 included discount rates of 8.0% and 7.5%, respectively, and
weighted average rates of compensation increase of 4.0% and 4.5%, respectively.
The expected long-term investment rates of return on plan assets for the years
ended December 31, 1996 and 1995 were 10.0% and 9.5%, respectively.
In addition to pension benefits, Commonwealth provides unfunded postretirement
medical and life insurance plans for certain employees who were hired prior to
1990.
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period...................... $ 168,000 $ 167,000 $ 227,000
Interest cost on accumulated postretirement benefit obligation......... 500,000 510,000 468,000
Net amortization and deferral.......................................... 346,000 303,000 342,000
--------------- ---------------- ---------------
Postretirement benefit cost............................................ $ 1,014,000 $ 980,000 $ 1,037,000
=============== ================ ===============
</TABLE>
F-49
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The components of the accumulated postretirement benefit obligation included in
accounts payable and accrued expenses were as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................................. $ 3,462,000 $ 3,234,000
Other active plan participants....................................................... 3,240,000 3,618,000
---------------- ---------------
Accumulated benefit obligation.......................................................... 6,702,000 6,852,000
Unrecognized net gain................................................................... 559,000 371,000
Unrecognized transition obligation...................................................... (5,533,000) (5,879,000)
---------------- ---------------
Accrued postretirement benefit cost..................................................... $ 1,728,000 $ 1,344,000
================ ===============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1996 was 10.0% for 1997,
decreasing until it reaches 6.0% in 2007, after which it remains constant. A
one-percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1996 and the 1996 net postretirement health care cost by
approximately 2.6% and 2.2%, respectively. The assumed discount rates used in
determining the accumulated postretirement benefit obligation at December 31,
1996 and 1995 were 8.0% and 7.5%, respectively.
6. RESERVE FOR LOSSES
The reconciliation of the beginning to ending reserve for losses is as follows:
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses, beginning of year.................................. $ 240,777,000 $ 228,063,000 $ 200,874,000
--------------- ---------------- ---------------
Provision for policy claims and related expenses:
Provision for insured events of the current year.................... 59,771,000 57,900,000 71,060,000
Increase in provision for insured events of prior years............. 1,345,000 586,000 4,807,000
--------------- ---------------- ---------------
Total provision................................................... 61,116,000 58,486,000 75,867,000
--------------- ---------------- ---------------
Payments, net of recoveries, for policy claims and related expenses:
Attributable to insured events of the current year.................. 1,755,000 2,187,000 4,475,000
Attributable to insured events of prior years....................... 35,300,000 43,585,000 44,203,000
--------------- ---------------- ---------------
Total payments.................................................... 37,055,000 45,772,000 48,678,000
--------------- ---------------- ---------------
Reserve for losses, end of year........................................ $ 264,838,000 $ 240,777,000 $ 228,063,000
=============== ================ ===============
</TABLE>
F-50
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
7. ESCROW FUNDS
Customers' funds held in escrow for real estate transactions are not included in
the combined balance sheet. These funds consisted of:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash ................................................................................... $ 263,348,000 $ 215,393,000
Investments held for specific accounts.................................................. 333,658,000 249,830,000
---------------- ---------------
$ 597,006,000 $ 465,223,000
================ ===============
</TABLE>
8. STATUTORY INFORMATION
The Companies had combined policyholders' surplus of $199,587,000 and
$182,167,000 at December 31, 1996 and 1995, respectively, and combined statutory
net income of $40,094,000, $12,439,000 and $32,421,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Commonwealth had policyholders'
surplus of $136,559,000 and $121,826,000 at December 31, 1996 and 1995,
respectively, and statutory net income of $31,806,000, $10,580,000 and
$26,244,0000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Transnation had policyholders' surplus of $63,028,000 and $60,341,000 at
December 31, 1996 and 1995, respectively, and statutory net income of
$8,288,000, $1,859,000 and $6,177,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Commonwealth and Transnation have entered into a credit support arrangement to
which each Company will commit credit support, if necessary, to the other and to
its wholly owned subsidiaries. This agreement provides financial support in
order that each company remains solvent, able to meet its financial obligations
as they come due in the ordinary course of business and protects the interests
of the policyholders.
9. COMMITMENTS
The Companies lease certain office facilities and equipment under lease
agreements that expire at various dates through 2011. Rental expense in 1996,
1995 and 1994 was $31,552,000, $30,956,000 and $29,860,000 respectively. At
December 31, 1996, future minimum rental commitments under noncancelable
operating leases, principally for office space, were:
Year Ended December 31
1997 ................................................ $ 17,651,000
1998 ................................................ 13,340,000
1999 ................................................ 9,643,000
2000 ................................................ 6,694,000
2001 ................................................ 4,377,000
2002 and later....................................... 8,030,000
---------------
$ 59,735,000
===============
F-51
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
10. SUBSEQUENT EVENT
One August 20, 1997, Reliance agreed to sell the Companies to Lawyers Title
Corporation ("LTC") for cash, common stock and convertible preferred stock. The
sale is subject to regulatory approvals as well as approval of LTC's
shareholders.
F-52
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
Premiums and fees.................................... $ 226,194,000 $ 208,173,000 $ 612,897,000 $ 575,980,000
Net investment income................................ 7,464,000 7,831,000 23,236,000 22,663,000
Gain on sale of investments.......................... 86,000 803,000 1,187,000 376,000
--------------- ---------------- --------------- ---------------
233,744,000 216,807,000 637,320,000 599,019,000
--------------- ---------------- --------------- ---------------
EXPENSES:
Commissions to agents................................ 98,487,000 98,665,000 268,960,000 263,138,000
Compensation and employee benefits................... 61,694,000 50,660,000 173,847,000 153,695,000
Provision for losses................................. 10,725,000 15,648,000 29,470,000 47,461,000
Taxes, other than federal income..................... 3,291,000 2,906,000 9,238,000 9,326,000
Other operating expenses............................. 39,393,000 35,283,000 111,634,000 100,554,000
--------------- ---------------- --------------- ---------------
213,590,000 203,162,000 593,149,000 574,174,000
--------------- ------------- --------------- -------------
Income from operations before federal
income taxes...................................... 20,154,000 13,645,000 44,171,000 24,845,000
Income tax provision................................. 6,732,000 4,703,000 15,192,000 8,520,000
--------------- ---------------- --------------- ---------------
NET INCOME........................................... $ 13,422,000 $ 8,942,000 $ 28,979,000 $ 16,325,000
=============== ================ =============== ===============
</TABLE>
F-53
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities held for investment -- at amortized cost
(quoted market $141,685,000 and $140,789,000)............................................ $ 138,381,000 $ 139,798,000
Fixed maturities available for sale -- at quoted market
(amortized cost $258,813,000 and $284,381,000)........................................... 268,240,000 289,991,000
Short-term investments..................................................................... 33,887,000 25,860,000
First mortgage and other secured loans..................................................... 11,706,000 5,453,000
Cash......................................................................................... 11,746,000 14,328,000
Accounts receivable, less allowances of $5,731,000 and $5,663,000............................ 31,664,000 23,987,000
Real estate and equipment -- at cost, less accumulated
depreciation of $17,867,000 and $25,746,000................................................ 23,764,000 15,373,000
Title plants................................................................................. 50,174,000 49,750,000
Deferred federal income tax benefit.......................................................... 26,237,000 27,243,000
Goodwill..................................................................................... 16,209,000 12,944,000
Other assets................................................................................. 14,524,000 16,027,000
--------------- ---------------
$ 626,532,000 $ 620,754,000
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve for losses........................................................................... $ 265,593,000 $ 264,838,000
Accounts payable and accrued expenses........................................................ 76,823,000 76,168,000
Current federal income taxes................................................................. - 6,091,000
--------------- ---------------
342,416,000 347,097,000
--------------- ---------------
Commitments
Shareholder's equity:
Common stock............................................................................... 11,649,000 11,649,000
Additional paid-in capital................................................................. 127,551,000 127,551,000
Retained earnings.......................................................................... 138,789,000 130,810,000
Net unrealized gain on investments......................................................... 6,127,000 3,647,000
--------------- ---------------
284,116,000 273,657,000
--------------- ---------------
$ 626,532,000 $ 620,754,000
=============== ===============
</TABLE>
F-54
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Retained Gain on Shareholder's
Stock Capital Earnings Investments Equity
----- ------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997.............. $ 11,649,000 $127,551,000 $130,810,000 $ 3,647,000 $273,657,000
Net income............................ - - 28,979,000 - 28,979,000
Dividends............................. - - (21,000,000) - (21,000,000)
Appreciation after applicable
deferred income tax provision
of $1,337,000...................... - - - 2,480,000 2,480,000
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997........... $ 11,649,000 $127,551,000 $138,789,000 $ 6,127,000 $284,116,000
============ ============ ============ ============ ============
</TABLE>
F-55
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 28,979,000 $ 16,325,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses............................. 29,470,000 47,461,000
Change in premium and other receivables.......... (8,501,000) (685,000)
Depreciation, bad debts and amortization......... 6,563,000 5,423,000
Claims paid, net of recoveries................... (28,715,000) (25,897,000)
Change in accounts payable, accrued
expenses and other............................. (14,824,000) (7,913,000)
---------------- ---------------
12,972,000 34,714,000
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale................ 47,049,000 86,276,000
Fixed maturities held for investment............... - 3,300,000
Maturities and repayments of:
Fixed maturities available for sale................ 13,921,000 12,374,000
Fixed maturities held for investment............... 5,264,000 2,489,000
Purchases of:
Fixed maturities available for sale................ (34,556,000) (123,882,000)
Fixed maturities held for investment............... (3,689,000) (22,885,000)
(Increase) decrease in short-term
investments - net.................................. (8,027,000) 10,919,000
(Increase) decrease in title plants.................. (459,000) (525,000)
Cash outlay for acquisition.......................... - (3,000,000)
Change in investments receivable/payable............. 4,000 1,976,000
Purchases of real estate and equipment - net......... (12,747,000) (6,237,000)
Other -- net......................................... (1,314,000) (359,000)
---------------- ---------------
5,446,000 (39,554,000)
---------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends............................................ (21,000,000) -
---------------- ---------------
DECREASE IN CASH..................................... (2,582,000) (4,840,000)
Cash, beginning of period............................ 14,328,000 15,230,000
---------------- ---------------
Cash, end of period.................................. $ 11,746,000 $ 10,390,000
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Federal income taxes paid............................ $ 20,291,000 $ 8,100,000
================ ===============
</TABLE>
F-56
<PAGE>
COMMONWEALTH AND TRANSNATION TITLE INSURANCE COMPANIES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited combined financial statements of Commonwealth and
Transnation and their respective subsidiaries have been prepared in
conformity with generally accepted accounting principles. Such financial
statements include informed estimates and judgments of management for
those transactions that are not yet complete or for which the ultimate
effects cannot be precisely determined. Actual results may differ from
these estimates. All intercompany accounts and transactions have been
eliminated.
These financial statements, which are for interim periods, do not include
all disclosures provided in the annual combined financial statements.
These unaudited combined financial statements should be read in
conjunction with the annual audited combined financial statements and the
accompanying footnotes. The December 31, 1996 balance sheet was derived
from audited combined financial statements, but does not include all
disclosures required by generally accepted accounting principles.
In the opinion of management of Commonwealth/Transnation, the
accompanying unaudited combined financial statements contain all
adjustments (consisting of normal recurring adjustments only) necessary
for a fair presentation of the financial statements. The results of
operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
F-57
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or other person has been
authorized to give any information or to make any
representation other than those contained in this
Prospectus and, if given or made, such information or
representation must not be relied upon as having been
authorized by the Company or any Underwriter. This 1,750,000 Shares
Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other
than the securities to which it relates, nor does it [LOGO]
constitute an offer to sell or the solicitation of an
offer to buy any of the securities offered hereby in
any jurisdiction in which such offer or solicitation LAWYERS TITLE
is not authorized, or in which the person making such CORPORATION
offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Common Stock
Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the
information contained herein is correct as of any
time subsequent to the date hereof or that there has
been no change in the affairs of the Company since
the date hereof.
--------------------------
________________
TABLE OF CONTENTS
Page PROSPECTUS
________________
Available Information..........................
Incorporation of Certain Documents
by Reference.................................
Forward-Looking and Cautionary
Statements...................................
Prospectus Summary.............................
Risk Factors...................................
Use of Proceeds................................ DONALDSON, LUFKIN & JENRETTE
Price Range of Common Stock and Securities Corporation
Dividends....................................
Capitalization.................................
Dilution....................................... FURMAN SELZ LLC
The Combined Company...........................
Lawyers Title Corporation and
Subsidiaries Pro Forma WHEAT FIRST BUTCHER SINGER
Condensed Combined Financial Statements......
Lawyers Title Corporation Selected
Consolidated Financial and Other Data........ FERRIS, BAKER WATTS
Lawyers Title Corporation Management's Incorporated
Discussion and Analysis of Financial
Condition and Results of Operations .........
Commonwealth Land Title Insurance Company
and Transnation Title Insurance Company
Combined Selected Financial and Other Data...
Commonwealth Land Title Insurance Company
and Transnation Title Insurance Company
Management's Discussion and Analysis
of Financial Condition and Results , 1998
of Operations ...............................
Business.......................................
The Acquisition................................
Management and Ownership of the Combined
Company......................................
Description of Capital Stock...................
Shares Eligible for Future Sale................
Underwriting...................................
Legal Matters..................................
Experts........................................
Index to Financial Statements..................
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 18,797*
National Association of Securities Dealers Examination Fee 6,878*
Printing Expenses 50,000
Accounting Fees and Expenses 100,000
Legal Fees and Expenses 250,000
Blue Sky Fees and Expenses 1,500
Miscellaneous Expenses 2,825
---------
Total $ 430,000
=========
</TABLE>
___________________
* Represents actual expenses. All other expenses are estimates.
Item 15. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia permits a
Virginia corporation to indemnify any director or officer for reasonable
expenses incurred in any legal proceeding in advance of final disposition of the
proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
prescribed by the Code, and a determination is made by the board of directors
that such standard has been met. In a proceeding by or in the right of the
corporation, no indemnification shall be made in respect of any matter as to
which an officer or director is adjudged to be liable to the corporation, unless
the court in which the proceeding took place determines that, despite such
liability, such person is reasonably entitled to indemnification in view of all
the relevant circumstances. In any other proceeding, no indemnification shall be
made if the director or officer is adjudged liable to the corporation on the
basis that personal benefit was improperly received by him. Corporations are
given the power to make any other or further indemnity, including advancement of
expenses, to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or any resolution adopted,
before or after the event, by the shareholders, except an indemnity against
willful misconduct or a knowing violation of the criminal law. Unless limited by
its articles of incorporation, indemnification of a director or officer is
mandatory when he entirely prevails in the defense of any proceeding to which he
is a party because he is or was a director or officer.
The Articles of Incorporation of the undersigned Registrant contain
provisions indemnifying the directors and officers of the Registrant to the full
extent permitted by Virginia law. In addition, the Articles of Incorporation
eliminate the personal liability of the Registrant's directors and officers to
the Registrant or its shareholders for monetary damages to the full extent
permitted by Virginia law.
Item 16. Exhibits
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
1.1 Form of Underwriting Agreement between the Registrant, Donaldson,
Lufkin & Jenrette Securities Corporation, Furman Selz LLC, Wheat, First
Securities, Inc., and Ferris, Baker Watts, Incorporated.*
2.1 Amended and Restated Stock Purchase Agreement, dated December 11, 1997,
by and among the Registrant, Lawyers Title Insurance Corporation,
Reliance Insurance Company and Reliance Group Holdings, Inc.,
incorporated by reference to Appendix A to the Registrant's revised
preliminary Proxy Statement for its Special Meeting of Shareholders to
be held in February 1998, filed with the Commission on December 24,
1997.
II-1
<PAGE>
4.1 Articles of Incorporation, incorporated by reference to Exhibit 3A of
the Registrant's registration statement on Form 10, File No. 0-19408.
4.2 Proposed Articles of Amendment of the Articles of Incorporation of the
Registrant, incorporated by reference to Appendix B to the Registrant's
revised preliminary Proxy Statement for its Special Meeting of
Shareholders to be held in February 1998, filed with the Commission on
December 24, 1997.
4.3 Bylaws, incorporated by reference to Exhibit 3A of the Registrant's
registration statement on Form 10, File No. 0-19408.
4.4 Amended and Restated Rights Agreement, dated as of August 20, 1997,
between the Registrant and Wachovia Bank, N.A., as Rights Agent, which
Amended and Restated Rights Agreement includes an amended Form of
Rights Certificate, incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K dated August 20, 1997.
4.5 First Amendment to Amended and Restated Rights Agreement, dated as of
December 11, 1997, between the Registrant and Wachovia Bank, N.A., as
Rights Agent, incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K dated December 11, 1997
4.6 Form of Stock Certificate, incorporated by reference to Exhibit 4.3 of
the Registrant's Form 10-K for the year ended December 31, 1995, File
no. 1-13990.
5.1 Opinion of Williams Mullen Christian & Dobbins.
23.1 Consent of Williams Mullen Christian & Dobbins (included in Exhibit
5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney (included on signature page).
______________
* To Be Filed by Amendment
Item 17. Undertakings
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act), that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
II-2
<PAGE>
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richmond, Commonwealth of Virginia, on December
31, 1997.
LAWYERS TITLE CORPORATION
By: /s/ Charles H. Foster, Jr.
------------------------------------
Charles H. Foster, Jr.
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints Russell W. Jordan, III and John
M. Carter, each of whom may act individually, as attorney and agent for the
undersigned, with full power of substitution, for and in the name, place and
stead of the undersigned, in any and all capacities, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
any and all amendments and exhibits to this registration statement and any and
all applications, instruments and other documents to be filed with the
Securities and Exchange Commission pertaining to the registration of securities
covered hereby with full power and authority to do and perform any and all acts
and things whatsoever requisite or desirable.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Charles H. Foster, Jr. Chairman and December 31, 1997
- ------------------------------------------- Chief Executive Officer and Director
Charles H. Foster, Jr. (Principal Executive Officer)
/s/ G. William Evans Vice President and Treasurer December 31, 1997
- ------------------------------------------- (Principal Financial Officer)
G. William Evans
/s/ John R. Blanchard Controller December 31, 1997
- ------------------------------------------- (Principal Accounting Officer)
John R. Blanchard
/s/ Janet A. Alpert President and December 31, 1997
- ------------------------------------------- Chief Operating Officer and Director
Janet A. Alpert
<PAGE>
/s/ Theodore L. Chandler, Jr. Director December 31, 1997
- -------------------------------------------
Theodore L. Chandler, Jr.
/s/ Michael Dinkins Director December 31, 1997
- -------------------------------------------
Michael Dinkins
/s/ James Ermer Director December 31, 1997
- -------------------------------------------
James Ermer
/s/ John P. McCann Director December 31, 1997
- -------------------------------------------
John P. McCann
/s/ J. Garnett Nelson Director December 31, 1997
- -------------------------------------------
J. Garnett Nelson
/s/ Robert F. Norfleet, Jr. Director December 31, 1997
- -------------------------------------------
Robert F. Norfleet, Jr.
/s/ Eugene P. Trani Director December 31, 1997
- -------------------------------------------
Eugene P. Trani
/s/ Marshall B. Wishnack Director December 31, 1997
- -------------------------------------------
Marshall B. Wishnack
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Document
1.1 Form of Underwriting Agreement between the Registrant, Donaldson,
Lufkin & Jenrette Securities Corporation, Furman Selz LLC, Wheat,
First Securities, Inc. and Ferris, Baker Watts Incorporated.*
2.1 Amended and Restated Stock Purchase Agreement, dated December 11,
1997, by and among the Registrant, Lawyers Insurance Corporation,
Reliance Insurance Company and Reliance Group Holdings, Inc.,
incorporated by reference to Appendix A to the Registrant's revised
preliminary Proxy Statement for its Special Meeting of Shareholders
to be held in February 1998, filed with the Commission on December
24, 1997.
4.1 Articles of Incorporation, incorporated by reference to Exhibit 3A
of the Registrant's registration statement on Form 10, File No.
0-19408.
4.2 Proposed Articles of Amendment of the Articles of Incorporation of
the Registrant, incorporated by reference to Appendix B to the
Registrant's revised preliminary Proxy Statement for its Special
Meeting of Shareholders to be held in February 1998, filed with the
Commission on December 24, 1997.
4.3 Bylaws, incorporated by reference to Exhibit 3A of the Registrant's
registration statement on Form 10, File No.0-19408.
4.4 Amended and Restated Rights Agreement, dated as of August 20, 1997,
between the Registrant and Wachovia Bank, N.A., as Rights Agent,
which Amended and Restated Rights Agreement includes an amended Form
of Rights Certificate, incorporated by reference to Exhibit 4.1 of
the Registrant's Current Report on Form 8-K dated August 20, 1997.
4.5 First Amendment to Amended and Restated Rights Agreement, dated as
of December 11, 1997, between the Registrant and Wachovia Bank,
N.A., as Rights Agent, incorporated by reference to Exhibit 4.1 of
the Registrant's Current Report on Form 8-K dated December 11, 1997.
4.6 Form of Stock Certificate, incorporated by reference to Exhibit 4.3
of the Registrant's Form 10-K for the year ended December 31, 1995,
File No. 1-13990.
5.1 Opinion of Williams Mullen Christian & Dobbins.
23.1 Consent of Williams Mullen Christian & Dobbins (included in Exhibit
5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Powers of Attorney (included on signature page).
_________________
* To Be Filed by Amendment.
Exhibits 5.1 and 23.1
[WILLIAMS, MULLEN, CHRISTIAN & DOBBINS LETTERHEAD]
January __, 1998
Board of Directors
Lawyers Title Corporation
6630 West Broad Street
Richmond, VA 23230
Ladies and Gentlemen:
This letter is in reference to the Registration Statement on Form S-3
(the "Registration Statement") that is about to be filed by Lawyers Title
Corporation (the "Company") with the Securities and Exchange Commission for the
registration under the Securities Act of 1933, as amended, of 1,750,000 shares
of the Company's Common Stock, without par value, and associated Preferred Share
Purchase Rights (together, the "Shares"), which Shares are proposed to be
offered to the public pursuant to an Underwriting Agreement to be filed as an
exhibit to the Registration Statement (the "Offering").
We have examined such corporate proceedings, records and documents as
we considered necessary for the purposes of this opinion.
The opinion expressed herein is limited in all respects to the
application of the law of the Commonwealth of Virginia.
Based on the foregoing, and subject to the limitations and
qualifications set forth herein, it is our opinion that the aforementioned
Shares, when issued against payment therefor pursuant to the Offering, will be
validly issued, fully paid and non-assessable under the laws of the Commonwealth
of Virginia.
Our opinion is expressed as of the date that shares of Common Stock are
issued pursuant to the Offering against payment therefor, and we do not assume
any obligation to update or supplement our opinion to reflect any fact or
circumstance subsequently arising or any change in law subsequently occurring
after such date. We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement and to the reference to
us under the caption "Legal Matters" in the Prospectus forming a part of the
Registration Statement.
Very truly yours,
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 19, 1997, in the Registration Statement on Form
S-3 and related Prospectus of Lawyers Title Corporation for the registration of
shares of its common stock.
We also consent to the incorporation by reference therein of our report dated
February 19, 1997, with respect to the consolidated financial statements and
schedules of Lawyers Title Corporation included in its Annual Report (Form 10-K)
for the year ended December 31, 1996, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young, LLP
Richmond, Virginia
January 6, 1998
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Lawyers Title
Corporation on Form S-3 of our report dated February 12, 1997 (August 20, 1997
as to Note 10), appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 8, 1998
