================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: February 27, 1998
(Date of earliest event reported)
LANDAMERICA FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 1-13990 54-1589611
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
6630 West Broad Street
Richmond, Virginia 23230
(Address of Principal Executive Offices) (Zip Code)
(804) 281-6700
Registrant's telephone number, including area code
Lawyers Title Corporation
(former Name or Former Address, if
Changed Since Last Report)
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<PAGE>
Item 2. Acquisition or Disposition of Assets.
On February 27, 1998, LandAmerica Financial Group, Inc. (formerly
Lawyers Title Corporation) (the "Company") acquired all of the issued and
outstanding capital stock of Commonwealth Land Title Insurance Company
("Commonwealth") and Transnation Title Insurance Company ("Transnation")
(collectively, the "Acquisition") pursuant to an Amended and Restated Stock
Purchase Agreement (the "Stock Purchase Agreement"), dated December 11, 1997, by
and among the Company, Lawyers Title Insurance Corporation ("LTIC"), Reliance
Group Holdings, Inc. ("Reliance") and Reliance Insurance Company ("RIC").
Commonwealth and Transnation together comprise the third largest title insurance
operation in the United States based upon total premiums and fees in 1996. As a
result of the Acquisition, Commonwealth and Transnation became wholly owned
subsidiaries of the Company.
The purchase price paid by the Company in connection with the
Acquisition consisted of (i) approximately $200.7 million in cash funded by a
Revolving Credit Agreement, dated November 7, 1997, between the Company and Bank
of America National Trust and Savings Association, individually and as
Administrative Agent for a syndicate of 11 other financial institutions, (ii)
the issuance to RIC of 4,039,473 shares of the Company's Common Stock, (iii) the
issuance to RIC of 2,200,000 shares of the Company's 7% Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"), which is initially
convertible into 4,824,561 shares of Common Stock, and (iv) $65.9 million in
cash, representing the net proceeds from the sale of 1,750,000 shares of Common
Stock offered to the public by the Company. The various components of the
purchase price were determined by arms-length negotiations between the parties.
Based upon a value for the 4,039,473 shares of Common Stock of $175.0 million
and an estimated value for the 2,200,000 shares of Series B Preferred Stock of
$224.8 million, the aggregate purchase price paid by the Company to RIC at the
closing of the Acquisition was approximately $666.4 million. For information on
the estimated aggregate purchase price to be recorded by the Company for
accounting purposes, see footnote 1 to the Pro Forma Condensed Combined
Financial Statements set forth in "Item 7(b) - Pro Forma Financial Information"
below.
In connection with the consummation of the Acquisition, the Company (i)
amended its Articles of Incorporation to establish the Series B Preferred Stock,
(ii) increased the size of the Board of Directors from 10 to 14 and elected
Herbert Wender, Robert M. Steinberg, Lowell C. Freiberg and George E. Bello as
additional directors of the Company, (iii) completed the registration under the
Securities Act of 1933, as amended, of 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), and
(iv) entered into a Voting and Standstill Agreement with Reliance and RIC as
described in the Company's definitive Proxy Statement for the Special Meeting of
Shareholders held on February 27, 1998, a copy of which was filed with the
Securities and Exchange Commission on January 29, 1998.
As of the close of business on February 27, 1998, the total number of
shares of Common Stock issued and outstanding was 15,044,593. The 4,039,473
shares of Common Stock acquired by RIC at the closing of the Acquisition
represent approximately 26.8% of the issued and outstanding shares of Common
Stock as of that date.
In addition, the Company changed its name from "Lawyers Title
Corporation" to "LandAmerica Financial Group, Inc." effective as of February 27,
1998. The change in name for the Company is intended to signify, among other
things, an expansion of the products and services beyond traditional title
insurance to be developed and offered by the combined company following the
Acquisition. LTIC, Commonwealth and Transnation will continue to operate under
their current names for the foreseeable future.
Effective March 2, 1998, the Common Stock of the Company began trading
on the New York Stock Exchange ("NYSE") under the symbol "LFG." Prior to that
date, the Common Stock traded on the NYSE under the symbol "LTI."
-2-
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following audited combined financial statements of Commonwealth and
Transnation and their subsidiaries are included in this report:
Independent Auditors' Report
Combined Statements of Income for the Three Years Ended
December 31, 1997, 1996 and 1995
Combined Balance Sheets at December 31, 1997 and 1996
Combined Statements of Changes in Shareholder's Equity for the
Three Years Ended December 31, 1997, 1996 and 1995
Combined Statements of Cash Flows for the Three Years Ended
December 31, 1997, 1996 and 1995
Notes to Combined Financial Statements
-3-
<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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 11, 1998
(February 27, 1998 as to Note 10)
-4-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Premiums and fees................................................ $ 863,746,000 $ 780,157,000 $ 671,936,000
Net investment income............................................ 30,990,000 30,455,000 27,933,000
Gain on sales of investments..................................... 1,596,000 346,000 1,729,000
------------- ------------- -------------
896,332,000 810,958,000 701,598,000
------------- ------------- -------------
EXPENSES:
Commissions to agents............................................ 379,755,000 355,834,000 310,729,000
Compensation and employee benefits............................... 240,950,000 206,083,000 188,097,000
Provision for losses............................................. 41,473,000 61,116,000 58,486,000
Taxes, other than federal income taxes........................... 13,397,000 12,923,000 9,782,000
Other operating expenses......................................... 155,852,000 136,422,000 120,294,000
------------- ------------- -------------
831,427,000 772,378,000 687,388,000
------------- ------------- -------------
Income before income taxes....................................... 64,905,000 38,580,000 14,210,000
Provision for income taxes....................................... 22,729,000 13,347,000 4,755,000
------------- ------------- -------------
NET INCOME....................................................... $ 42,176,000 $ 25,233,000 $ 9,455,000
============= ============= =============
</TABLE>
See notes to combined financial statements.
-5-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held-for-investment -- at amortized
cost (quoted market $132,422,000 and $140,789,000).................................... $ 128,134,000 $ 139,798,000
Fixed maturities available-for-sale -- at quoted market
(amortized cost $273,162,000 and $284,381,000)........................................ 284,173,000 289,991,000
Short-term investments.................................................................. 50,038,000 25,860,000
First mortgage and other secured loans.................................................. 6,840,000 5,453,000
Cash...................................................................................... 19,742,000 14,328,000
Accounts receivable, less allowances of
$5,886,000 and $5,663,000............................................................... 32,488,000 23,987,000
Real estate and equipment -- at cost, less accumulated
depreciation of $19,551,000 and $25,746,000............................................. 25,306,000 15,373,000
Title plants.............................................................................. 50,233,000 49,750,000
Deferred federal income tax benefit....................................................... 25,817,000 27,243,000
Goodwill.................................................................................. 16,525,000 12,944,000
Other assets.............................................................................. 13,192,000 16,027,000
------------- -------------
$ 652,488,000 $ 620,754,000
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserve for losses........................................................................ $ 272,792,000 $ 264,838,000
Accounts payable and accrued expenses..................................................... 91,079,000 76,168,000
Current federal income taxes.............................................................. 6,707,000 6,091,000
------------- -------------
370,578,000 347,097,000
------------- -------------
Commitments and contingencies (Note 9)
Shareholder's equity:
Common stock............................................................................ 11,649,000 11,649,000
Additional paid-in capital.............................................................. 127,370,000 127,551,000
Retained earnings....................................................................... 135,733,000 130,810,000
Net unrealized gain on investments...................................................... 7,158,000 3,647,000
------------- -------------
281,910,000 273,657,000
------------- -------------
$ 652,488,000 $ 620,754,000
============= =============
</TABLE>
See notes to combined financial statements.
-6-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Retained Gain (Loss) on Shareholder's
Stock Capital Earnings Investment Equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 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
Net income......................... 42,176,000 42,176,000
Dividends.......................... (37,253,000) (37,253,000)
Appreciation after applicable
deferred income tax provision
of $1,889,000................... 3,511,000 3,511,000
Stock Purchase Plan................ (181,000) (181,000)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ 11,649,000 $ 127,370,000 $ 135,733,000 $ 7,158,000 $ 281,910,000
============= ============= ============= ============= =============
</TABLE>
See notes to combined financial statements.
-7-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
1997 1996 1995
-------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 42,176,000 $ 25,233,000 $ 9,455,000
Adjustments to reconcile net income to net cash
provided from (used in) operating activities:
Increase in reserve for losses..................................... 7,954,000 24,061,000 12,714,000
Change in accounts receivable...................................... (9,894,000) 1,780,000 557,000
Depreciation, bad debts and amortization........................... 9,481,000 7,797,000 6,838,000
Change in accounts payable, accrued expenses and other............. 11,466,000 8,478,000 (13,539,000)
-------------- ---------------- ---------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES............................ 61,183,000 67,349,000 16,025,000
-------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available-for-sale.................................. 47,049,000 88,225,000 29,677,000
Fixed maturities held-for-investment................................. 3,300,000 4,267,000
Maturities and repayments of:
Fixed maturities available-for-sale.................................. 18,361,000 13,671,000 2,869,000
Fixed maturities held-for-investment................................. 15,893,000 2,700,000 2,005,000
Purchases of:
Fixed maturities available-for-sale.................................. (53,647,000) (138,310,000) (37,922,000)
Fixed maturities held-for-investment................................. (3,443,000) (24,817,000) (10,982,000)
(Increase) decrease in short-term investments - net.................... (24,178,000) 15,360,000 13,055,000
Purchases of title plants - net........................................ (659,000) (577,000) (985,000)
Purchases of real estate and equipment - net........................... (16,018,000) (6,266,000) (4,439,000)
Cash outlay for acquisitions........................................... (3,000,000)
Other - net............................................................ (1,693,000) (321,000) (1,730,000)
-------------- ---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (18,335,000) (50,035,000) (4,185,000)
-------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany receivables and payables - net............................ (1,909,000)
Stock Purchase Plan.................................................... (181,000)
Dividends.............................................................. (37,253,000) (18,216,000) (4,000,000)
Cash received from capital contribution................................ 40,000
-------------- ---------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES.................................. (37,434,000) (18,216,000) (5,869,000)
-------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH............................................ 5,414,000 (902,000) 5,971,000
Cash, beginning of year................................................ 14,328,000 15,230,000 9,259,000
-------------- ---------------- ---------------
Cash, end of year...................................................... $ 19,742,000 $ 14,328,000 $ 15,230,000
============== ================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Federal income taxes paid.............................................. $ 20,518,000 $ 10,944,000 $ 6,299,000
============== ================ ===============
</TABLE>
See notes to combined financial statements.
-8-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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 1996 and 1995 combined financial statements to conform with the 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, primarily relating to risk management, data
processing and investment services, are provided by Reliance Insurance to the
Companies. The costs of such services amounted to $5,141,000, $4,422,000 and
$4,292,000 for 1997, 1996 and 1995, respectively, and are reflected in the
statements of income. These costs were allocated to the Companies either on a
direct basis or using reasonable allocation methods including, for investment
services, a percentage of invested assets managed. Management of the Companies
believes that the cost of these services are substantially similar to the costs
that they would have incurred if the Companies had operated as unaffiliated
entities.
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 approximate their fair value. Realized
gains and losses, determined on a specific identification basis, are included in
income.
-9-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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.
Effective January 1, 1997, the Companies adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
The adoption of this statement had no material effect on the Companies' combined
financial statements.
-10-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of
and Enterprise and Related Information. In 1998, the FASB issued SFAS No. 132,
Employers' Disclosures About Pensions and Other Postretirement Benefits. The
adoption of these statements, which is not required until 1998, is not expected
to have a material effect on the Companies' combined financial statements.
2. INVESTMENTS
<TABLE>
<CAPTION>
Fixed maturities held-for-investment at December 31, 1997 consisted of:
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........................... $ - $ - $ - $ -
Public utilities..................................... 81,509,000 83,627,000 2,223,000 105,000
Corporate bonds and other............................ 36,653,000 38,282,000 1,629,000 -
Redeemable preferred stock............................. 9,972,000 10,513,000 541,000 -
------------ ------------ ------------ ------------
$128,134,000 $132,422,000 $ 4,393,000 $ 105,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Fixed maturities available-for-sale at December 31, 1997 consisted of:
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......................... $ 81,922,000 $ 81,089,000 $ 884,000 $ 51,000
Public utilities..................................... 94,755,000 92,228,000 2,531,000 4,000
Corporate bonds and other............................ 49,161,000 47,863,000 1,459,000 161,000
Redeemable preferred stock............................. 58,335,000 51,982,000 6,353,000 -
------------ ------------ ------------ ------------
$284,173,000 $273,162,000 $ 11,227,000 $ 216,000
============ ============ ============ ============
</TABLE>
-11-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
2. INVESTMENTS - Continued
<TABLE>
<CAPTION>
Fixed maturities held-for-investment at December 31, 1996 consisted of:
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>
<TABLE>
<CAPTION>
Fixed maturities available-for-sale at December 31, 1996 consisted of:
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>
The carrying value of financial instruments not publicly traded, recorded at
estimated fair value, was $45,454,000 and $44,800,000 at December 31, 1997 and
1996, respectively.
The contractual maturities of fixed maturity investments at December 31, 1997
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.................................. $ - $ - $ 10,737,000 $ 10,721,000
Due after one year through five years................ 11,421,000 11,669,000 6,782,000 6,969,000
Due after five years through ten years............... 47,603,000 49,450,000 30,201,000 30,964,000
Due after ten years.................................. 59,138,000 60,790,000 105,805,000 108,723,000
Redeemable preferred stock............................. 9,972,000 10,513,000 51,982,000 58,335,000
Mortgage-backed securities............................. - - 67,655,000 68,461,000
------------ ------------ ------------ ------------
$128,134,000 $132,422,000 $273,162,000 $284,173,000
============ ============ ============ ============
</TABLE>
-12-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
2. INVESTMENTS - Continued
<TABLE>
<CAPTION>
Net investment income consisted of:
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Fixed maturities..................................... $ 30,311,000 $ 29,632,000 $ 26,971,000
Short-term investments............................... 1,488,000 1,588,000 1,689,000
Other................................................ 804,000 883,000 773,000
------------ ------------ ------------
32,603,000 32,103,000 29,433,000
Investment expenses.................................... 1,613,000 1,648,000 1,500,000
------------ ------------ ------------
$ 30,990,000 $ 30,455,000 $ 27,933,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Gain on sales of investments consisted of:
<S> <C> <C> <C>
Fixed maturities:
Realized gains....................................... $ 1,623,000 $ 1,718,000 $ 1,754,000
Realized losses...................................... (27,000) (1,372,000) (25,000)
------------ ------------ ------------
$ 1,596,000 $ 346,000 $ 1,729,000
============ ============ ============
</TABLE>
During 1997, the Companies sold no fixed maturities held for investment. During
1996 and 1995, the Companies sold fixed maturities held for investment with an
amortized cost of $2,963,000 and $4,221,000, respectively, resulting in realized
gains of $337,000 and $45,000, 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 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ............................................... $ 21,135,000 $ 18,094,000 $ 5,066,000
Deferred............................................... 1,594,000 (4,747,000) (311,000)
------------ ------------ -----------
$ 22,729,000 $ 13,347,000 $ 4,755,000
============ ============ ===========
</TABLE>
-13-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
3. PROVISION FOR INCOME TAXES - 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 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations before income taxes............. $ 64,905,000 $ 38,580,000 $ 14,210,000
============ ============ ============
Tax provision at statutory rate........................ $ 22,717,000 $ 13,503,000 $ 4,974,000
Reconciliation to actual tax rate:
Dividends received deduction......................... (1,198,000) (1,248,000) (1,199,000)
Goodwill............................................. 340,000 268,000 126,000
Non-deductible meals and entertainment............... 808,000 652,000 578,000
Tax exempt interest income........................... (20,000) (46,000) (67,000)
Other................................................ 82,000 218,000 343,000
------------ ------------ ------------
$ 22,729,000 $ 13,347,000 $ 4,755,000
============ ============ ============
</TABLE>
The tax effects of items comprising the Companies net deferred tax assets were
as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Title loss reserves................................................ $ 87,445,000 $ 83,004,000
Tax basis differential for equipment............................... 4,528,000 6,133,000
Allowance for doubtful accounts.................................... 2,248,000 2,044,000
Pension reserves................................................... 4,769,000 3,318,000
Other deferred tax assets.......................................... 3,077,000 3,211,000
------------ ------------
102,067,000 97,710,000
------------ ------------
Deferred tax liabilities:
Statutory premium reserve......................................... 61,587,000 56,095,000
Financing lease arrangement....................................... 3,434,000 5,222,000
Unrealized security gains......................................... 5,509,000 1,963,000
Other deferred tax liabilities.................................... 5,720,000 7,187,000
------------ ------------
76,250,000 70,467,000
------------ ----------
Net deferred tax assets............................................... $ 25,817,000 $ 27,243,000
============ ============
</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 $275,623,000 at December
31, 1997 and $258,729,000 at December 31, 1996.
The Companies had investments on deposit with insurance departments of various
states as required by law with aggregate carrying values of $11,811,000 at
December 31, 1997 and $12,462,000 at December 31, 1996.
-14-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
4. RESTRICTED ASSETS AND SHAREHOLDER'S EQUITY - Continued
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,
1997 and 1996. 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, 1997
and 1996. Total shareholder's equity of Commonwealth was $189,899,000 and
$184,926,000 at December 31, 1997 and 1996, respectively. Total shareholder's
equity of Transnation was $92,011,000 and $88,731,000 at December 31, 1997 and
1996, 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, $32,874,000 is available for dividends in 1998.
Under Arizona law, Transnation is limited to the lesser of 10% of policyholder's
surplus at December 31 of the preceding year or 100% of the prior year's
statutory net investment income. In accordance with these restrictions,
$6,560,000 is available for dividends in 1998.
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 common stock.
<TABLE>
<CAPTION>
Net periodic pension cost includes the following components:
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period...... $ 3,761,000 $ 3,945,000 $ 3,076,000
Interest cost on projected benefit obligation.......... 4,592,000 4,227,000 3,859,000
Actual return on plan assets........................... (4,786,000) (1,552,000) (5,342,000)
Net amortization and deferral.......................... (714,000) (3,770,000) 1,047,000
------------ ------------ ------------
Net periodic pension cost.............................. $ 2,853,000 $ 2,850,000 $ 2,640,000
============ ============ ============
</TABLE>
-15-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
5. POSTRETIREMENT BENEFIT PLANS - 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 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................................. $ 53,892,000 $ 43,935,000
Nonvested.......................................................... 4,273,000 3,494,000
------------ -------------
Accumulated benefit obligation......................................... 58,165,000 47,429,000
Effect of anticipated future compensation levels....................... 14,118,000 10,911,000
------------ -------------
Projected benefit obligation........................................... 72,283,000 58,340,000
Plan assets at market value............................................ (52,917,000) (49,313,000)
------------ -------------
Projected benefit obligation in excess of plan assets.................. 19,366,000 9,027,000
Unrecognized net assets at date of plan adoption....................... 2,333,000 2,969,000
Unrecognized net loss.................................................. (12,400,000) (4,319,000)
------------ -------------
Accrued pension cost................................................... $ 9,299,000 $ 7,677,000
============ =============
</TABLE>
Contributions to the pension plan were $1,231,000 in 1997 and $3,985,000 in
1996. No contributions were made in 1995.
The assumptions used to measure the projected benefit obligation at December 31,
1997 and 1996 included discount rates of 7.25% and 8.0%, respectively, and
weighted average rates of compensation increase of 3.9% and 4.0%, respectively.
The expected long-term investment rate of return on plan assets for the years
ended December 31, 1997 and 1996 was 10.0%.
In addition to pension benefits, Commonwealth provides unfunded postretirement
medical and life insurance plans for certain employees who were hired prior to
1990.
<TABLE>
<CAPTION>
Postretirement benefit cost includes the following components:
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period................ $ 97,000 $ 168,000 $ 167,000
Interest cost on accumulated postretirement benefit obligation... 549,000 500,000 510,000
Net amortization and deferral.................................... 346,000 346,000 303,000
----------- ------------ ----------
Postretirement benefit cost...................................... $ 992,000 $ 1,014,000 $ 980,000
=========== ============ ==========
</TABLE>
-16-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
5. POSTRETIREMENT BENEFIT PLANS - Continued
The components of the accumulated postretirement benefit obligation included in
accounts payable and accrued expenses were as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................. $ 5,433,000 $ 3,462,000
Other active plan participants....................................... 2,113,000 3,240,000
------------ ------------
Accumulated benefit obligation......................................... 7,546,000 6,702,000
Unrecognized net gain (loss)........................................... (257,000) 559,000
Unrecognized transition obligation..................................... (5,187,000) (5,533,000)
------------ ------------
Accrued postretirement benefit cost.................................... $ 2,102,000 $ 1,728,000
============ ============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1997 was 8.0% for 1998,
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, 1997 and the 1997 net postretirement health care cost by
approximately 1.5% and 1.4%, respectively. The assumed discount rates used in
determining the accumulated postretirement benefit obligation at December 31,
1997 and 1996 were 7.25% and 8.0%, respectively.
6. RESERVE FOR LOSSES
The reconciliation of the beginning to ending reserve for losses is as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses, beginning of year............................ $264,838,000 $240,777,000 $228,063,000
------------ ------------ ------------
Provision for policy claims and related expenses:
Provision for insured events of the current year............... 60,618,000 59,771,000 57,900,000
(Decrease) increase in provision for insured events of
prior years................................................. (19,145,000) 1,345,000 586,000
------------ ------------- ------------
Total provision............................................. 41,473,000 61,116,000 58,486,000
------------ ------------ ------------
Payments, net of recoveries, for policy claims and related expenses:
Attributable to insured events of the current year............. 1,468,000 1,755,000 2,187,000
Attributable to insured events of prior years.................. 32,051,000 35,300,000 43,585,000
------------ ------------ ------------
Total payments.............................................. 33,519,000 37,055,000 45,772,000
------------ ------------ ------------
Reserve for losses, end of year.................................. $272,792,000 $264,838,000 $240,777,000
============ ============ ============
</TABLE>
The favorable development in 1997 on the reserve for losses established in prior
years reflects the favorable paid claims experience in recent years. This
favorable trend reflects several factors, including the strong 1993 refinance
market, enhanced underwriting policies and procedures and technology advances in
the title production process.
-17-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash................................................... $ 509,198,000 $ 263,348,000
Investments held for specific accounts................. 534,296,000 333,658,000
-------------- -------------
$1,043,494,000 $ 597,006,000
============== =============
</TABLE>
8. STATUTORY INFORMATION
The Companies had combined policyholders' surplus of $200,949,000 and
$199,587,000 at December 31, 1997 and 1996, respectively, and combined statutory
net income of $45,215,000, $40,094,000 and $12,439,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Commonwealth had policyholders'
surplus of $135,347,000 and $136,559,000 at December 31, 1997 and 1996,
respectively, and statutory net income of $32,874,000, $31,806,000 and
$10,580,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Transnation had policyholders' surplus of $65,603,000 and $63,028,000 at
December 31, 1997 and 1996, respectively, and statutory net income of
$12,341,000, $8,288,000 and $1,859,000 for the years ended December 31, 1997,
1996 and 1995, 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 AND CONTINGENCIES
The Companies lease certain office facilities and equipment under lease
agreements that expire at various dates through 2011. Rental expense in 1997,
1996 and 1995 was $33,036,000, $31,552,000 and $30,956,000, respectively. At
December 31, 1997, future minimum rental commitments under noncancelable
operating leases, principally for office space, were:
Year Ended December 31
- ------------------------------------------------------------
1998 .......................................................... $ 17,902,000
1999 .......................................................... 14,047,000
2000 .......................................................... 10,301,000
2001 .......................................................... 6,633,000
2002 .......................................................... 3,695,000
2003 and later.................................................... 5,034,000
-------------
$ 57,612,000
=============
-18-
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
9. COMMITMENTS AND CONTINGENCIES - Continued
The Companies are involved in certain litigation arising in the course of their
businesses, some of which involve claims of substantial amounts. Although the
ultimate outcome of these matters cannot be ascertained at this time, and the
results of legal proceedings cannot be predicted with certainty, the Companies
are contesting the allegations of the complaints in each pending action against
them and believe, 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 the Companies.
10. SUBSEQUENT EVENT
On February 27, 1998, Reliance Insurance sold the Companies to LandAmerica
Financial Group, Inc. (formerly Lawyers Title Corporation) for cash, common
stock and convertible preferred stock.
* * * * * *
-19-
<PAGE>
(b) Pro Forma Financial Information.
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited Pro Forma Condensed Combined Balance Sheet as
of December 31, 1997 and the unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 (the "Pro Forma Financial
Statements") are based upon the respective consolidated/combined financial
statements of the Company and of Commonwealth/Transnation. The consolidated
financial statements of the Company will be filed with the Company's Form 10-K
for the fiscal year ended December 31, 1997 on or before March 31, 1998. The
combined financial statements of Commonwealth and Transnation
("Commonwealth/Transnation") are included in this Current Report on Form 8-K.
See "Item 7(a) - Financial Statements of Businesses Acquired."
The Pro Forma Condensed Combined Balance Sheet as of December 31, 1997
is presented as if the Acquisition had occurred on December 31, 1997. The Pro
Forma Condensed Combined Statement of Operations for the year ended December 31,
1997 is presented as if the Acquisition had occurred on January 1, 1997. 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 December 31, 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, 1997 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 historical financial statements and notes thereto of the Company and
of Commonwealth/Transnation for the year ended December 31, 1997.
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 post-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.
-20-
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 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.......................................... $ 297,644 $ 469,185 - $ 766,829
Cash................................................. 35,629 19,742 $ 200,681 [1d] 65,324
65,921 [1b]
(200,681) [1d]
( 65,921) [1b]
9,953 [4]
Notes and accounts receivable........................ 36,962 32,488 - 69,450
Property and equipment - net......................... 21,896 25,306 - 47,202
Title plants......................................... 48,984 50,233 - 99,217
Goodwill............................................. 57,687 16,525 306,120 [1] 367,679
(12,653) [2]
Deferred income tax benefit.......................... 21,610 25,817 17,653 [2] 65,080
Other assets......................................... 34,281 13,192 - 47,473
--------- ------ -------- ------
Total assets.................................... $ 554,693 $ 652,488 $ 321,073 $1,528,254
========= ========= ========= ==========
LIABILITIES
Policy and contract claims........................... $ 202,477 $ 272,792 - $ 475,269
Accounts payable and accrued
expenses........................................... 52,818 97,786 5,000 [1e] 170,604
10,000 [1f]
5,000 [2]
Debt................................................. 6,994 - 200,681 [1d] 207,675
--------- -------- ------- -------
Total liabilities............................... 262,289 370,578 220,681 853,548
--------- ------- ------- -------
SHAREHOLDERS' EQUITY
Preferred stock...................................... - 175,700 [1c] 175,700
-
Common stock......................................... 168,066 11,649 130,728 [1a] 374,668
65,921 [1b]
9,953 [4]
(11,649) [1]
Additional paid in capital........................... 127,370 (127,370) [1] -
-
Unrealized gains..................................... 7,536 7,158 (7,158) [1] 7,536
Retained earnings.................................... 116,802 135,733 (135,733) [1] 116,802
--------- ------- --------- -------
Total shareholders' equity...................... 292,404 281,910 100,392 674,706
--------- ------- ------- -------
Total liabilities and
shareholders' equity............................... $ 554,693 $ 652,488 $ 321,073 $ 1,528,254
========= ========= ========= ===========
</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.
-21-
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 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 $ 504,024 $ 833,895 $ - $ 1,337,919
Title search, escrow and other.................. 118,757 29,851 - 148,608
Net investment income........................... 16,555 30,990 - 47,545
Realized investment gains....................... (237) 1,596 - 1,359
----- ----- -------- ---------
639,099 896,332 - 1,535,431
------- ------- -------- ---------
EXPENSES
Salaries and employee benefits.................. 200,488 240,950 - 441,438
Agents' commissions............................. 218,358 379,755 - 598,113
Provision for policy and contract
claims........................................ 33,749 41,473 - 75,222
General, administrative and other............... 146,035 169,249 19,277 [3] 334,561
------- ------- ------ ---------
598,630 831,427 19,277 1,449,334
------- ------- ------ ---------
OPERATING INCOME BEFORE
INCOME TAXES.................................... 40,469 64,905 (19,277) 86,097
INCOME TAX EXPENSE................................ 14,312 22,729 (6,747) [3] 30,294
-------- --------- ----------- ------
NET INCOME........................................ $ 26,157 $ 42,176 $ (12,530) 55,803
======== ======== ========== ======
PREFERRED STOCK DIVIDENDS......................... 7,700
-----
INCOME AVAILABLE TO
COMMON SHAREHOLDERS.............................. $ 48,103
======
NET INCOME PER COMMON SHARE........................ $ 2.93 $ 3.21
NET INCOME PER COMMON SHARE ASSUMING DILUTION...... $ 2.84
$ 2.78
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING....................... 8,924 14,976
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
ASSUMING DILUTION............................... 9,224 20,100
</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.
-22-
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
December 31, 1997
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:
<TABLE>
<CAPTION>
Recorded
Value
<S>
a. The issuance of 4,039,473 shares of Common Stock to RIC at a price of <C>
$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
Stock Purchase Agreement on December 11, 1997. $130,728
b. The sale of 1,750,000 shares of Common Stock at $40.125 (based upon the
closing sales price of the Common Stock on February 24, 1998) per share
concurrently with the closing of the Acquisition. The recorded proceeds
have been adjusted for estimated offering costs of approximately $4.3 65,921
million.
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 dividends on the Series B Preferred Stock for a
period of five years from the date of issuance until the first available
call date thereon, discounted by 5.75%, the interest rate on five year
treasury securities at December 11, 1997, less a 7% discount for
illiquidity and the inability to hedge the Series B Preferred Stock
using the underlying Common Stock of the Company. Wheat First
Securities, Inc., as financial advisor to the Company in connection with
the Acquisition, presented the Company with an independent valuation of
the Series B Preferred Stock. 175,700
d. The incurrence by the Company of approximately $200.7 million of debt
from bank financing, the proceeds of which were paid to RIC in
connection with the Acquisition. See Note 7 below. 200,681
e. Assumed transaction costs of $5.0 million. 5,000
f. Estimated employee termination and relocation costs of $10.0 million.
See Note 5 below. 10,000
--------
Total recorded purchase price $588,030
========
</TABLE>
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.
-23-
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
December 31, 1997
Notes to Pro Forma Financial Statements
3. This pro forma adjustment reflects: (i) interest incurred on debt assumed in
connection with the Acquisition at an assumed interest rate of 5.950%, the
Interbank Offered Rate ("IBOR") at February 24, 1998 plus 0.325%, or $12.0
million for the year ended December 31, 1997, (ii) amortization of goodwill
acquired at the time of the Acquisition over a period of forty years or $7.3
million for the year ended December 31, 1997 and (iii) income taxes incurred
at the federal statutory rate of 35.0%, or $6.7 million for the year ended
December 31, 1997. A change of 0.125% in the assumed interest rate would
increase or decrease interest expense approximately $0.3 million.
4. This pro forma adjustment reflects the issuance of 262,500 shares of Common
Stock at $40.125 per share in connection with the exercise of the
over-allotment option by the underwriters in the public offering. The
recorded proceeds have been adjusted for estimated offering costs of
approximately $0.6 million.
5. Management has identified certain expense savings which it believes will be
achieved through reductions in staff, consolidation of data processing and
elimination of certain duplicate or excess facilities. The number of
regional offices and field head count will be reduced with the elimination
of redundant title plants and back office production centers. These expense
savings have been identified by members of senior management of the Company
who have served on task forces devoted to various aspects of integrating the
operations of the Company and Commonwealth/Transnation. 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 Company's title insurance subsidiaries
following the Acquisition. 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. No adjustment has
been included in these Pro Forma Condensed Combined 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.
To implement the changes necessary to realize such savings, the Company will
incur certain expenses, primarily relating to the termination of leases on
certain offices to be closed and the payment of employee severance benefits.
Pursuant to EITF 95-3, the Company has included in the Pro Forma Condensed
Combined Balance Sheet a pro forma adjustment of $10.0 million relating to
anticipated exit, employee termination and relocation costs for certain
Commonwealth and Transnation leases and employees. Of this amount,
approximately $5.8 million is expected to be incurred relating to the
termination of leases, $3.5 million is expected to be incurred relating to
employee severance benefits and $0.7 million is expected to be incurred
relating to relocation costs. At this time, the Company has not determined
precisely which leases will be canceled or which employee groups will be
terminated and the plan has not been communicated to employees. It is
anticipated that the plan will be finalized shortly after the Acquisition is
consummated and will be completed within one year from that date. Any
adjustments to the $10.0 million accrual for exit, termination and
relocation costs will result in an addition to or reduction of the
Commonwealth/Transnation purchase price.
-24-
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
December 31, 1997
Notes to Pro Forma Financial Statements
5. (continued)
In addition, the Company anticipates that, in the first quarter of 1998, it
will record a one-time after-tax charge to earnings of approximately $9.8
million (approximately $15.0 million before tax) relating to exit, employee
termination and relocation costs of Company leases and employees. At this
time, the Company has not determined precisely which leases will be canceled
and which employee groups will be terminated. It is anticipated that the
plan will be finalized and communicated to employees shortly after the
Acquisition is consummated and the costs associated with the plan will be
recognized as an expense at that time.
On February 23, 1998, the FTC accepted an Agreement Containing Consent Order
with the Company (the "Consent Order"). The Consent Order requires that the
Company divest, within six months from the date of the Consent Order, either
the rights, title and interest held by the Company prior to consummation of
the Acquisition or the rights, title and interest held by Reliance prior to
consummation of the Acquisition of all title plants serving each of 12
localities named in the Consent Order. Seven of such localities are in
Florida, three are in Michigan, and one each is in Washington, D.C., and St.
Louis, Missouri. The Consent Order further requires that the Company divest
all user or access agreements pertaining to each divested title plant. In
addition, the Company cannot acquire, without prior notice to the FTC, any
interest in a title plant in any of the named localities for a period of 10
years following the date of the Consent Order. The Company believes that the
divestitures will not result in a material loss nor will such divestitures
have a material effect on future operations due to the Company's access to
other title plants in these markets.
6. The significant adjustments comprising the purchase price allocation are as
follows:
Book value of Commonwealth/Transnation
net assets acquired at December 31, 1997
(including title plants of $50,233).......... $ 281,910
Adjustments:
Increase in deferred income tax asset........ $ 17,653
Increase in accounts payable and
accrued expenses for OPEB liability........ (5,000)
---------
Total adjustments.............................. 12,653
Goodwill....................................... 293,467
---------
Total purchase price................... $ 588,030
=========
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. However, the Company does not believe that the
difference between the recorded book value and the fair value ultimately
assigned to the title plants will have a material impact on the Company's
pro forma financial position or results of operations. In addition, the
Company believes that, with the exception of title plants, the fair values
of the assets and liabilities of Commonwealth/Transnation approximate their
recorded book values in all material respects.
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<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Pro Forma Condensed Combined Financial Statements
December 31, 1997
Notes to Pro Forma Financial Statements
7. The Stock Purchase Agreement provided for adjustment of the $207.5 million
cash portion of the purchase price in certain circumstances. Based upon the
unused dividend capacity of Commonwealth/Transnation as of February 27,
1998, the Company adjusted the cash portion of the purchase price payable to
RIC by approximately $6.8 million to $200.7 million at the closing of the
Acquisition.
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<PAGE>
(c) Exhibits.
Exhibit No. Description
----------- -----------
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 definitive Proxy Statement for
its Special Meeting of Shareholders to be
held on February 27, 1998, filed with the
Commission on January 29, 1998.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
LANDAMERICA FINANCIAL GROUP, INC.
Dated: March 16, 1998 By: /s/ Charles H. Foster, Jr.
-----------------------------------
Charles H. Foster, Jr.
Chairman and Chief Executive Officer
<PAGE>
INDEX TO EXHIBITS
No. Description
- --- -----------
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 definitive Proxy
Statement for its Special Meeting of Shareholders to be
held on February 27, 1998, filed with the Commission on
January 29, 1998.
