Filed Pursuant to Rule 424(B)(1)
File Number 333-43913
PROSPECTUS
February 24, 1998
1,750,000 Shares
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 February 24, 1998, the closing sales price of the Common
Stock as reported on the New York Stock Exchange Composite Tape was $40.13 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 11 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.
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to the Discounts and to the
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share ......... $ 40.125 $ 2.210 $ 37.915
Total (3) ......... $70,218,750 $3,867,500 $66,351,250
</TABLE>
(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 $80,751,562, $4,447,625 and $76,303,937, 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. It is expected that delivery of the Shares
offered hereby will be made in New York, New York, on or about February 27,
1998.
Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz
Wheat First Union
Ferris, Baker Watts
Incorporated
<PAGE>
[U.S. MAP CONTAINING LAWYERS' TITLE AND COMMONWEALTH/TRANSNATION LOCATIONS]
The map above sets forth, as of February 24, 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.
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.
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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"), as amended by Form 10-K/A (Amendment No. 1), filed
on January 21, 1998;
(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 and on Form 10-Q/A for the
quarter ended September 30, 1997;
(d) the Company's Current Reports on Form 8-K filed on September 2, 1997,
November 20, 1997, December 23, 1997 and February 6, 1998;
(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 on 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 on September 2, 1997 and December 23, 1997,
respectively; and
(f) the Company's definitive Proxy Statement for its Special Meeting of
Shareholders to be held on February 27, 1998, filed on January 29, 1998 (the
"Proxy Statement").
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.
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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," "the Company believes" 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 cost 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.
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 officials of those states, following application by
such purchaser, determine 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.
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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 the volume of
residential transactions.
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
United States, 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 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. 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
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Commonwealth/Transnation, duplicative headquarters will be eliminated,
substantially all corporate departments will be consolidated and the number of
regional offices 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 annual pre-tax expense savings of approximately $40.0 million. To
implement the changes necessary to realize such savings, 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 of approximately $9.8 million.
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, particularly in the largest
real estate markets, will enable it to better serve the large national
residential mortgage originators. This is particularly important as these
lenders are becoming increasingly dominant; the market share of the top ten
national residential mortgage originators increased from 15.3% in 1989 to 30.8%
in 1997, according to Inside Mortgage Finance.
Management believes that the continued application of new 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. 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: (i) the
continued automation of title plants (compilations of public title records
which facilitate the preparation of title reports); (ii) the implementation of
enhanced title escrow production systems; (iii) document imaging; (iv) on-line
order taking; and (v) the on-line delivery of information and multiple products
to customers and lenders. These enhancements will streamline what currently are
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
current 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 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.
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 Lawyers Title's
claims-paying ability ratings, 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 the 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 hereby. 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
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Common Stock; (iii) the greater of the net proceeds from the sale of the
1,750,000 Shares offered hereby, 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 on February 27, 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.
1997 Earnings Update
On February 6, 1998, the Company issued a press release (the "Earnings
Release") in which the Company disclosed that its total revenues and net income
for the year ended December 31, 1997 were $639.1 million and $26.2 million,
respectively, and that its total revenues and net income for the quarter ended
December 31, 1997 were $187.1 million and $8.9 million, respectively. The
Company's shareholders' equity as of December 31, 1997 was $292.4 million. A
copy of the Earnings Release has been filed with the Commission on a Current
Report on Form 8-K and is incorporated by reference into this Prospectus. See
"Incorporation of Certain Documents by Reference."
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.
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."
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The Offering
Common Stock offered by
the Company.................... 1,750,000 shares.
Common Stock to be outstanding
after the Offering (1).......... 14,782,093 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."
Condition 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 8,992,620 shares of Common Stock outstanding as of February 24,
1998, and 4,039,473 shares of Common Stock to be issued in the Acquisition
and excludes: (i) 730,997 shares of Common Stock issuable upon the
exercise of outstanding stock options, of which 548,285 were exercisable;
(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.
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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, and Commonwealth and Transnation, respectively, 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.
9
<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 96,492 111,724 132,567 301,756
--------- --------- --------- --------- --------- -----------
Total expenses ......................... 459,297 474,916 492,231 458,972 538,642 1,330,864
Income before income taxes ............... 11,864 28,965 8,969 23,860 55,540 74,276
Provision for income taxes ............... -- -- 2,155 6,809 19,021 25,423
--------- --------- --------- --------- --------- -----------
Net income ............................... $ 11,864 $ 28,965 $ 6,814 $ 17,051 $ 36,519 48,853
========= ========= ========= ========= =========
Preferred stock dividends ................ 7,700
-----------
Net income available to common
shareholders ............................ $ 41,153
===========
Per Share Data:
Earnings per common and dilutive
common equivalent share (3) ............. $ 1.88 $ 4.31 $ 0.80 $ 1.92 $ 4.11 $ 2.76
Earnings per common share assuming
full dilution (3) ....................... 1.84 4.19 0.79 1.87 4.01 2.48
Weighted average number of common
and dilutive common equivalent
shares outstanding (000s) ............... 6,309 6,906 8,494 8,885 8,888 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 % 47.7 % 44.1 % 51.7 % 53.5 % 46.4 %
Percentage agency operations ............ 57.0 % 52.3 % 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 (4) ........................... 13.3 % 11.2 % 9.6 % 5.2 % 5.2 % 6.8 %
Expense ratio (5) ........................ 88.8 % 86.7 % 91.2 % 92.5 % 91.0 % 91.0 %
--------- --------- --------- --------- --------- -----------
Combined ratio (6) ....................... 102.1 % 97.9 % 100.8 % 97.7 % 96.2 % 97.8 %
========= ========= ========= ========= ========= ===========
<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 ....... 96,396 102,994 238,749
--------- --------- ------------
Total expenses ......................... 388,714 425,444 1,033,476
Income before income taxes ............... 29,665 26,519 55,807
Provision for income taxes ............... 10,046 9,220 19,203
--------- --------- ------------
Net income ............................... $ 19,619 $ 17,299 36,604
========= =========
Preferred stock dividends ................ 5,775
------------
Net income available to common
shareholders ............................ $ 30,829
============
Per Share Data:
Earnings per common and dilutive
common equivalent share (3) ............. $ 2.21 $ 1.87 $ 2.06
Earnings per common share assuming
full dilution (3) ....................... 2.14 1.85 1.84
Weighted average number of common
and dilutive common equivalent
shares outstanding (000s) ............... 8,888 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 (4) ........................... 5.2 % 5.4 % 5.1 %
Expense ratio (5) ........................ 90.9 % 91.0 % 91.5 %
--------- --------- ------------
Combined ratio (6) ....................... 96.1 % 96.4 % 96.6 %
========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments ................... $ 233,146 $ 269,370 $ 252,011 $ 285,472 $ 316,052
Total assets ........................... 363,673 438,140 453,259 475,843 520,968
Total debt ............................. 1,218 1,165 8,872 4,146 4,200
Reserve for policy and contract
claims (2) ............................ 179,022 187,619 198,906 193,791 196,285
Shareholders' equity ................... 143,978 201,161 203,323 238,385 262,168
Book value per share attributable to
common shareholders ................... 22.26 23.90 22.89 26.83 29.49
<CAPTION>
At September 30,
----------------------------
Pro Forma
1997 1997
------------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and investments ................... $ 317,715 $ 781,675
Total assets ........................... 540,944 1,483,209
Total debt ............................. 8,216 215,716
Reserve for policy and contract
claims (2) ............................ 199,865 465,458
Shareholders' equity ................... 281,330 653,679
Book value per share attributable to
common shareholders ................... 31.51 36.94
</TABLE>
- ---------
(1) The Company expects to achieve approximately $40.0 million of recurring
annual pre-tax 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. 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. See Note 4 to Pro
Forma Condensed Combined Financial Statements.
(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 Operation" and "Notes to Consolidated
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 3.0% 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.
(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.
10
<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
-------------- -------------- --------------
(Dollars in thousands, except other data)
<S> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums .............................. $ 704,110 $ 747,202 $ 792,919
Title search, escrow and other fees ................... 66,409 146,148 63,843
------------ ------------ ------------
Operating revenues .................................... 770,519 893,350 856,762
Net investment income ................................. 15,126 24,224 26,455
Net realized investment gains ......................... 1,576 4,786 516
------------ ------------ ------------
Total revenues ....................................... 787,221 922,360 883,733
Expenses:
Salaries and employee benefits ........................ 185,443 219,904 211,150
Agents' commissions ................................... 374,419 426,885 432,041
Provision for policy and contract claims .............. 68,210 81,803 75,867
General, administrative and other ..................... 127,114 133,002 132,871
------------ ------------ ------------
Total expenses ....................................... 755,186 861,594 851,929
Income before income taxes ............................. 32,035 60,766 31,804
Provision for income taxes ............................. 10,248 20,480 10,809
Income from continuing operations ...................... 21,787 40,286 20,995
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
============ ============ ============
Common stock dividends ................................. $ 22,700 $ 19,500 $ 19,000
Per Share Data (1)
Other Data:
Title policies issued .................................. 1,496,960 1,651,806 1,736,134
Title insurance operating revenues:
Percentage direct operations .......................... 40.0% 40.9% 35.0%
Percentage agency operations .......................... 60.0% 59.1% 65.0%
Employees at end of period ............................. 3,977 4,623 4,035
Loss ratio (2) ......................................... 8.9% 9.2% 8.9%
Expense ratio (3) ...................................... 89.1% 87.3% 90.5%
------------ ------------ ------------
Combined ratio (4) ..................................... 98.0% 96.5% 99.4%
============ ============ ============
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------- ---------------------------
1995 1996 1996 1997
-------------- -------------- ------------- -------------
(Dollars in thousands, except other data)
<S> <C> <C> <C> <C>
Operating Results Data:
Revenues:
Title insurance premiums .............................. $ 582,329 $ 668,807 $ 488,980 $ 517,922
Title search, escrow and other fees ................... 89,607 111,350 87,000 94,975
------------ ------------ --------- ---------
Operating revenues .................................... 671,936 780,157 575,980 612,897
Net investment income ................................. 27,933 30,455 22,663 23,236
Net realized investment gains ......................... 1,729 346 376 1,187
------------ ------------ --------- ---------
Total revenues ....................................... 701,598 810,958 599,019 637,320
Expenses:
Salaries and employee benefits ........................ 188,097 206,083 153,695 173,847
Agents' commissions ................................... 310,729 355,834 263,138 268,960
Provision for policy and contract claims .............. 58,486 61,116 47,461 29,470
General, administrative and other ..................... 130,076 149,345 109,880 120,872
------------ ------------ --------- ---------
Total expenses ....................................... 687,388 772,378 574,174 593,149
Income before income taxes ............................. 14,210 38,580 24,845 44,171
Provision for income taxes ............................. 4,755 13,347 8,520 15,192
Income from continuing operations ...................... 9,455 25,233 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 ............................................. $ 9,455 $ 25,233 $ 16,325 $ 28,979
============ ============ ========= =========
Common stock dividends ................................. $ 4,000 $ 18,216 -- $ 21,000
Per Share Data (1)
Other Data:
Title policies issued .................................. 1,094,467 1,234,655 925,052 929,690
Title insurance operating revenues:
Percentage direct operations .......................... 40.2% 41.4% 41.3% 43.9%
Percentage agency operations .......................... 59.8% 58.6% 58.7% 56.1%
Employees at end of period ............................. 3,755 3,934 3,922 4,143
Loss ratio (2) ......................................... 8.7% 7.8% 8.2% 4.8%
Expense ratio (3) ...................................... 93.5% 91.1% 91.4% 91.8%
------------ ------------ --------- ---------
Combined ratio (4) ..................................... 102.2% 98.9% 99.6% 96.6%
============ ============ ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments ....................... $ 371,808 $ 423,801 $ 416,533 $ 440,071 $ 475,430
Total assets ............................... 481,612 546,968 552,390 573,820 620,754
Total debt ................................. -- -- -- -- --
Reserve for policy and contract claims ..... 171,740 200,874 228,063 240,777 264,838
Shareholders' equity ....................... 236,262 260,863 253,466 270,737 273,657
<CAPTION>
At September 30,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and investments ....................... $458,425 $463,960
Total assets ............................... 610,119 626,532
Total debt ................................. -- --
Reserve for policy and contract claims ..... 262,341 265,593
Shareholders' equity ....................... 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.
11
<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.
Effect of Competition on Revenues
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."
Potential Uncertainty of 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 reductions in staff and the
consolidation or elimination of duplicative 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 of Revenues 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 and Demands on Available Cash
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 Following the Acquisition
Upon consummation of the Acquisition and the issuance by the Company of
the 1,750,000 Shares offered hereby, RIC will hold 4,039,473 shares of Common
Stock, representing approximately 27.3% 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 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 they hold 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
12
<PAGE>
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 45.2% 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 upon the Occurrence of Certain Events
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 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 combined ratio as it
compares to comparable title insurance companies and the Company's
claims-paying ability ratings, 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 newly created seats. In addition, in the
event of certain defaults related primarily 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 newly created seats. Furthermore, if the
Company defaults on any of its material debt obligations in excess of $15.0
million 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 directors designated by
RIC will constitute a majority of the Board of Directors. See "Description of
Capital Stock - Acquisition Covenants Regarding Non-Performance Remedies."
Immediate Dilution to Investors
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."
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."
Government Regulation of Insurance Subsidiaries
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
13
<PAGE>
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 and
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 defined below), 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 "Business - Regulation" and "Description of Capital Stock -
Preferred Share Purchase Rights," " - Certain Provisions of the Company's
Charter and Bylaws," " - Affiliated Transactions," and " - Control Share
Acquisitions."
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 that 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 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 effect 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 the 1,750,000 Shares
offered hereby, based on the offering price of $40.125 per Share, will be
approximately $65.9 million after deducting underwriting discounts and
commissions and estimated offering expenses (approximately $75.9 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 offered hereby 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 hereby, 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 approximately $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.
14
<PAGE>
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 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 historical management of its portfolio of fixed income investment
grade securities. See "Business - Investment Policies."
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>
Sales Price Dividends
------------------------- ----------
High Low
----------- -----------
<S> <C> <C> <C>
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 29.13 0.05
Year Ended December 31, 1998
First quarter (through February 24, 1998) ......... $ 40.19 $ 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 February 24, 1998, the closing price of
the Common Stock as reported on the NYSE Composite Tape was $40.13 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, as
described below, 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 insurance
subsidiaries are subject to regulations that require minimum amounts of
statutory surplus. Under these and other such statutory regulations, 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.
Certain of the Company's insurance subsidiaries are also subject to state
regulations that require that the payment of any extraordinary dividends
receive prior approval of the insurance regulators of such states.
Specifically, the insurance regulations of Virginia restrict the amount of
dividends that Lawyers Title can distribute to the Company in any twelve month
period without prior approval. Under Virginia law, payment of dividends or
distributions by a domestic insurer in any twelve month period without the
prior approval of the Virginia Bureau 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
15
<PAGE>
insurer for the preceding calendar year. Accordingly, based on statutory
financial results for the year ended December 31, 1996, the payment of
dividends by Lawyers Title to the Company over any twelve month period that
ended in calendar year 1997 was limited to $14.1 million without prior
approval. 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. Under these and
other such statutory regulations, 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.
Commonwealth and Transnation are also subject to state regulations that
require that the payment of any extraordinary dividends receive prior approval
of the insurance regulators of such 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 twelve
month period without prior approval. Under Arizona law, payment of dividends or
distributions by a domestic insurer in any twelve 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 twelve 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. Accordingly, based on statutory financial
results for the year ended December 31, 1996, payment of dividends by
Commonwealth and Transnation to RIC over any twelve month period that ended in
calendar year 1997 was limited to an aggregate amount of $37.3 million without
prior approval. 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."
16
<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 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; and (iv) the 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>
Debt:
Credit Facility ........................................... $ 8,216 $215,716
-------- --------
Total 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) ............. 167,621 364,270
Unrealized investment gains (less related deferred income
tax of $2,863)........................................... 5,317 5,317
Retained earnings ......................................... 108,392 108,392
-------- --------
Total shareholders' equity .............................. 281,330 653,679
-------- --------
Total capitalization ................................... $289,546 $869,395
======== ========
</TABLE>
- ---------
(1) Does not include: (i) 785,976 shares of Common Stock issuable upon the
exercise of stock options, of which 476,551 were exercisable; (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."
17
<PAGE>
DILUTION
At September 30, 1997, the Company had a consolidated net tangible book
value attributable to common shareholders 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 hereby at the public offering price of $40.125 per
share and the receipt by the Company of approximately $65.9 million in net
proceeds from the Offering after deducting underwriting discounts and
commissions and offering expenses estimated at $4.3 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 attributable to
common shareholders at September 30, 1997 would have been $168.8 million, or
$11.47 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 attributable to
common shareholders of $13.45 per share to existing shareholders and an
immediate dilution of $28.66 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>
(A) (B)
Pro Forma Net Tangible Pro Forma Net Tangible
Book Value Attributable Book Value Attributable
to Common Shareholders to Common Shareholders
Assuming No Conversion of Assuming Conversion of
Series B Preferred Stock Series B Preferred Stock
--------------------------- -------------------------
<S> <C> <C>
Public offering price per share .......................... $ 40.13 $ 40.13
Historical net tangible book value attributable to common
shareholders 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) ...................... $ 2.09 $ 2.09
Decrease per share in pro forma net tangible book value
attributable to the Acquisition (3) ................... $ 15.54 $ 12.75
Pro forma net tangible book value attributable to common
shareholders per share after the Offering and the
Acquisition (4) ......................................... $ 11.47 $ 14.26
Dilution per share to the new investors (5) .............. $ 28.66 $ 25.87
</TABLE>
- ---------
(1) Historical net tangible book value attributable to common shareholders 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 offering price of $40.125 per share of Common Stock and after
deducting underwriting discounts and commissions and estimated offering
expenses.
(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 attributable to common
shareholders of $168.8 million, assuming no conversion of the Series B
Preferred Stock, and $278.8 million, assuming conversion of the Series B
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 attributable
to common shareholders per share of Common Stock after the Offering and the
Acquisition from the public offering price of $40.125 per share of Common
Stock.
18
<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 being 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 that 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
$9.8 million.
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 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 as these
lenders are becoming increasingly dominant; the market share of the top ten
national residential mortgage originators increased from 15.3% in 1989 to 30.8%
in 1997, according to 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.
19
<PAGE>
Third, each of Lawyers Title, Commonwealth, Transnation and their
respective subsidiaries has 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.
The Combined Company
Title Insurance Premiums By State
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
------------------------
Amount %
------------- ----------
<S> <C> <C>
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%
========== =====
</TABLE>
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 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: (i)
the continued automation of title plants (compilations of public title records
which facilitate the preparation of title reports); (ii) the implementation of
enhanced title escrow production systems; (iii) document imaging; (iv) on-line
order taking; and (v) the on-line delivery of information and multiple products
to customers and lenders. These enhancements will streamline what currently are
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.
20
<PAGE>
As a result of the Acquisition, the Company will obtain certain beneficial
technology and technological expertise that will enable it to continue to
improve its service. 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 that 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.
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 past 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 easy accessibility of credit and mortgage
information, lenders are beginning to demand that basic title information
be made available more quickly. 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 Company, Inc.
("A.M. Best") 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 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
21
<PAGE>
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 that 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. ("Datatrace"), also a subsidiary of
Lawyers Title, provides automated title 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 through 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 ("Argonaut"), and facilitates tax-free property exchanges
pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended
(the "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 United States. 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
22
<PAGE>
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 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 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 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 that 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 that 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
23
<PAGE>
overall head count on a same store basis by 24% from its peak level and
effect salary reductions for continuing employees of up to 10% for a period
of approximately six months. In an effort to reduce salary expense, the
Company is committed to electronic commerce so orders can be received
electronically, thus eliminating the need to manually rekey the customer's
information. Single Source and Commonwealth OneStop(R) both utilize this
electronic commerce. In addition, the Company has begun a workflow redesign
in many offices that will lower costs and improve service, the benefits of
which will increase as additional investments are made in technology.
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 41.4% of
Commonwealth/Transnation's total title insurance revenues were derived from
direct operations and 58.6% came from agency operations. Based on 1996
combined title insurance revenues, the Combined Company would have derived
approximately 46.4% from direct operations and 53.6% 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, management expects the percentage of
revenues from agency operations in any one calendar year to vary from 45%
to 55%.
24
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
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.
25
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
At September 30, 1997
(Dollars in thousands)
(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
65,921 (1b)
(207,500)(1d)
(65,921)(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 16,209 310,733 (1) 374,929
(10,826)(2)
Deferred income tax benefit ......................... 25,500 26,237 15,826 (2) 67,563
Other assets ........................................ 35,410 14,524 -- 49,934
--------- --------- ------------ ----------
Total assets ....................................... $ 540,944 $ 626,532 $ 316,733 $1,483,209
========= ========= ============ ==========
LIABILITIES
Policy and contract claims .......................... $ 199,865 $ 265,593 $ -- $ 465,458
Accounts payable and accrued expenses ............... 51,533 76,823 5,000 (1e) 148,356
10,000 (1f)
5,000 (2)
Debt ................................................ 8,216 -- 207,500 (1d) 215,716
--------- --------- ------------ ----------
Total liabilities .................................. 259,614 342,416 227,500 829,530
--------- --------- ------------ ----------
SHAREHOLDERS' EQUITY
Preferred stock ..................................... -- -- 175,700 (1c) 175,700
Common stock ........................................ 167,621 11,649 130,728 (1a) 364,270
65,921 (1b)
(11,649)(1)
Additional paid in capital .......................... -- 127,551 (127,551)(1) --
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 88,233 653,679
--------- --------- ------------ ----------
Total liabilities and shareholders' equity ......... $ 540,944 $ 626,532 $ 315,733 $1,483,209
========= ========= ============ ==========
</TABLE>
See notes to the pro forma condensed combined financial statements.
Parenthetical numbers to the right of the "Pro Forma Adjustments" column refer
to such notes.
26
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1997
(Dollars in thousands, except 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
--------- -------- ---------- -----------
Total revenues ........................................ 451,963 637,320 -- 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 14,883 (3) 238,749
--------- -------- ---------- -----------
Total expenses ........................................ 425,444 593,149 14,883 1,033,476
--------- -------- ---------- -----------
OPERATING INCOME BEFORE INCOME TAXES ..................... 26,519 44,171 (14,883) 55,807
INCOME TAX EXPENSE ....................................... 9,220 15,192 (5,209)(3) 19,203
--------- -------- ---------- -----------
NET INCOME ............................................... $ 17,299 $ 28,979 $ (9,674) 36,604
========= ======== ==========
PREFERRED STOCK DIVIDENDS ................................ 5,775
-----------
INCOME AVAILABLE TO COMMON SHAREHOLDERS .................. $ 30,829
===========
EARNINGS PER COMMON SHARE AND DILUTIVE COMMON
EQUIVALENT SHARE ........................................ $ 1.87 $ 2.06
EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION ......... $ 1.85 $ 1.84
WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE
COMMON EQUIVALENT SHARES OUTSTANDING (000s) ............. 9,231 14,973
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
ASSUMING FULL DILUTION (000s) ........................... 9,332 19,946
</TABLE>
See notes to the pro forma condensed combined financial statements.
Parenthetical numbers to the right of the "Pro Forma Adjustments" column refer
to such notes.
27
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
(Dollars in thousands, except 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
--------- -------- ---------- -----------
Total revenues ........................................ 594,182 810,958 -- 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 19,844 (3) 301,756
--------- -------- ---------- -----------
Total expenses ........................................ 538,642 772,378 19,844 1,330,864
--------- -------- ---------- -----------
OPERATING INCOME BEFORE INCOME TAXES ..................... 55,540 38,580 (19,844) 74,276
INCOME TAX EXPENSE ....................................... 19,021 13,347 (6,945)(3) 25,423
--------- -------- ---------- -----------
NET INCOME ............................................... $ 36,519 $ 25,233 $ (12,899) 48,853
========= ======== ==========
PREFERRED STOCK DIVIDENDS ................................ 7,700
-----------
INCOME AVAILABLE TO COMMON SHAREHOLDERS .................. $ 41,153
===========
EARNINGS PER COMMON SHARE AND DILUTIVE COMMON
EQUIVALENT SHARE ........................................ $ 4.11 $ 2.76
EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION ......... $ 4.01 $ 2.48
WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE
COMMON EQUIVALENT SHARES OUTSTANDING (000s) ............. 8,888 14,891
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
ASSUMING FULL DILUTION (000s) ........................... 9,118 19,732
</TABLE>
See notes to the pro forma condensed combined financial statements.
Parenthetical numbers to the right of the "Pro Forma Adjustments" column refer
to such notes.
28
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997 and December 31, 1996
Notes to Pro Forma Condensed Combined 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> <C> <C>
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 $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
million. 65,921
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. ("Wheat First"), 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 $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
f. Estimated employee termination and relocation costs of $10.0 million. See Note 4 below. 10,000
--------
Total recorded purchase price $594,849
========
</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.
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 $12.3
million for the year ended December 31, 1996 and $9.3 million 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 $7.5 million
for the year ended December 31, 1996 and $5.6 million for the nine months
ended September 30, 1997; and (iii) income taxes incurred at the federal
statutory rate of 35.0%, or $6.9 million for the year ended December 31,
1996 and $5.2 million for the nine months ended September 30, 1997. A
change of 0.125% in the assumed interest rate would increase or decrease
interest expense by approximately $0.3 million.
4. 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 the unaudited 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.
29
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1997 and December 31, 1996
Notes to Pro Forma Condensed Combined Financial Statements
4. (continued)
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.
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 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.
5. The significant adjustments comprising the purchase price allocation are as
follows:
<TABLE>
<S> <C> <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 .......... $ 15,826
Increase in accounts payable and accrued
expenses for OPEB liability ................... (5,000)
--------
Total adjustments ................................ 10,826
Goodwill ......................................... 299,907
--------
Total purchase price ........................... $594,849
========
</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. 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.
30
<PAGE>
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.
6. The Stock Purchase Agreement contains provisions providing for potential
adjustment of the cash portion of the purchase price in certain
circumstances. See "The Acquisition - Description of the Acquisition."
Based upon (i) 1997 year-to-date statutory earnings and dividends paid by
Commonwealth/Transnation during the preceding twelve months and (ii)
projected 1997 total statutory earnings and 1997 actual dividends for
Commonwealth/Transnation, the Company does not expect the potential
adjustment to the purchase price to be material to either the aggregate
purchase price payable to RIC at the Closing of the Acquisition or to the
Company's financial position or results of operations.
31
<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.
32
<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 dilutive
common equivalent share (2) ............. $ 1.88 $ 4.31 $ 0.80 $ 1.92 $ 4.11
Earnings per common share assuming
full dilution (2) ....................... 1.84 4.19 0.79 1.87 4.01
Weighted average number of common
and dilutive common equivalent
shares outstanding (000s) ............... 6,309 6,726 8,494 8,885 8,888
Weighted average number of shares
assuming full dilution (000s) ........... 6,437 6,906 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 % 47.7 % 44.1 % 51.7 % 53.5 %
Percentage agency operations ............ 57.0 % 52.3 % 55.9 % 48.3 % 46.5 %
Employees at period end .................. 2,800 3,429 3,453 3,523 3,757
Loss ratio (3) ........................... 13.3 % 11.2 % 9.6 % 5.2 % 5.2 %
Expense ratio (4) ........................ 88.8 % 86.7 % 91.2 % 92.5 % 91.0 %
--------- --------- --------- --------- ---------
Combined ratio (5) ....................... 102.1 % 97.9 % 100.8 % 97.7 % 96.2 %
========= ========= ========= ========= =========
<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 dilutive
common equivalent share (2) ............. $ 2.21 $ 1.87
Earnings per common share assuming
full dilution (2) ....................... 2.14 1.85
Weighted average number of common
and dilutive common equivalent
shares outstanding (000s) ............... 8,888 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 (3) ........................... 5.2 % 5.4 %
Expense ratio (4) ........................ 90.9 % 91.0 %
--------- ---------
Combined ratio (5) ....................... 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) ................................. 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 attributable to
common shareholders ................. 22.26 23.90 22.89 26.83 29.49 31.51
</TABLE>
- ---------
(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 "Notes to Consolidated
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 3.0% 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.
(3) Provision for policy and contract claims as a percentage of operating
revenues.
(4) Total operating expenses excluding interest expense, amortization of
goodwill and provision for policy and contract claims as a percentage of
operating revenues.
(5) The sum of the loss ratio and the expense ratio.
33
<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 60 to 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 30 to 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.
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
34
<PAGE>
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 changed its
estimate of the ultimate net cost of all reported and unreported losses
incurred through September 30, 1996 to reflect favorable experience. Under the
Company's reserving methodology, the provision for losses on policies issued in
each year is based on historical experience determined over a period of years.
As a result, the very high incidence of losses on policies issued in the 1980's
had the effect of pushing up the rate at which losses were provided in the
1990's. The early 1990's were also affected by a high volume of residential
refinance business which time has proven is experiencing a lower incidence of
losses. The Company began to see favorable development indications on the
1991-1994 policy years as those years began to develop some meaningful
experience, i.e., 3-4 years. However, because title losses are paid over a long
period of time and experience has shown that significant losses can be reported
and paid more than 20 years out, the Company chose to proceed cautiously with
respect to projecting its favorable experience over these early years to the
projected ultimate losses for the subject policy years. The Company monitored
development of these years very closely through 1995 and the first three
quarters of 1996 and, while indications continued to be favorable for the
1991-1994 policy years, the Company as of September 30, 1996 did not believe
that the limited development of those years was sufficient to justify a
significant reduction in the projected ultimate losses for those years.
In the fourth quarter of 1996, in connection with the performance of
initial due diligence procedures related to the negotiation of the acquisition
of Commonwealth and Transnation, the Company had the opportunity to see how the
experience of these two major title underwriters compared to its own
experience. The information gained from this experience along with extensive
actuarial studies of the Company's book of business resulted in a determination
that the projected ultimate losses for certain policy year business should be
reduced to give greater weight to the favorable development on those years
through December 31, 1996. The effect of the change in estimate was to decrease
the provision for policy and contract claims by $78 million and increase net
income by $50.7 million and net income per share by $5.70.
Both the change in reserve estimate and the change from discounting to not
discounting reserves were contemplated by the Company as a result of the shift
in the business that now reflects a higher amount of refinance transactions and
an increase in frequency of housing resales.
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
See "Legal Proceedings" in the Form 10-K, which is incorporated by
reference into this Prospectus, for a discussion of pending legal proceedings
for the periods covered by the financial statements of the Company included in
this Prospectus. As of the date of this Prospectus, there are no material
pending legal proceedings to which the Company or any of its
35
<PAGE>
subsidiaries is a party or to which any of their property is subject, and which
would have a material adverse effect on the Company's financial position or
operating results.
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, when 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, when 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.
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 same 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 same period in 1996.
36
<PAGE>
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 same 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 ended
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.
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
37
<PAGE>
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 91.0% from 92.5% in 1995. Salaries and
employee benefits increased 8.4% in 1995 over 1994, and the 1995 expense ratio
increased to 92.5% from 91.2% 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 approximately
24% 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.
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 of 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 and invested 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, $18.3 million and
$6.4 million for the fiscal years ended December 31, 1996, 1995 and 1994,
respectively. 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 both
interest expense and goodwill amortization. In view of the historical 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
38
<PAGE>
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.
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 software for such new centralized system
is being developed by Elliptus, a Lawyers Title subsidiary that develops and
markets title and escrow production software. As development of such software
is nearly complete, management believes that the remaining software development
costs will not be material. Management estimates that the Company's investment
in hardware for the project will total approximately $12.5 million over the
next eighteen months. 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.
39
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
SELECTED COMBINED 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 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.
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.
40
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
SELECTED COMBINED FINANCIAL AND OTHER 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) .................................. 8.9% 9.2% 8.9% 8.7% 7.8%
Expense ratio (3) ............................... 89.1% 87.3% 90.5% 93.5% 91.1%
------------ ------------ ------------ ------------ ------------
Combined ratio (4) .............................. 98.0% 96.5% 99.4% 102.2% 98.9%
============ ============ ============ ============ ============
<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,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments ....................... $ 371,808 $ 423,801 $ 416,533 $ 440,071 $ 475,430
Total assets ............................... 481,612 546,968 552,390 573,820 620,754
Total debt ................................. -- -- -- -- --
Reserve for policy and contract claims ..... 171,740 200,874 228,063 240,777 264,838
Shareholders' equity ....................... 236,262 260,863 253,466 270,737 273,657
<CAPTION>
At September 30,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and investments ....................... $458,425 $463,960
Total assets ............................... 610,119 626,532
Total debt ................................. -- --
Reserve for policy and contract claims ..... 262,341 265,593
Shareholders' equity ....................... 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.
41
<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 60 to 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 60 to 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 that 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.
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
42
<PAGE>
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 8.0%.
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 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 same 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 same periods
in 1996. 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 same 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.
43
<PAGE>
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, as discussed above.
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 net of recoveries 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.
44
<PAGE>
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 had
no long term debt at December 31, 1996.
Based on these sources and Commonwealth/Transnation's historical 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.
45
<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 in which they transact business. 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
that 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.
The Title Policy Process
A brief generalized 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.
46
<PAGE>
(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.
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 that it has previously
issued, principally in California. The Company also issues policies through
Title Insurance Company of America ("TICA") and through Oregon Title Insurance
Company ("Oregon Title").
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.
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 (e.g., 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 5.0% 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 that 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 1990's, 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, approximately 81% of such revenues in 1996 resulted from
policies providing coverage of $1.0 million or less (which tend to be
residential) and approximately 19% of such revenues resulted from policies
providing coverage in excess of $1.0 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.
47
<PAGE>
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 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 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 50.0% ownership interest
in Argonaut, a Michigan limited liability company. Argonaut, which employs
approximately 120 individuals, offers a full line
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of employee relocation services to companies moving employees anywhere in the
world. General Motors Corporation holds the remaining 50.0% 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:
Lawyers Title
Title Insurance Premiums by State
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
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
49
<PAGE>
the insurance contract, such as claims 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.
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, 1995 and 1994 was 5.2%, 5.2% and
9.6%, respectively. 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, expanded its due diligence requirements in acquiring
new agents and 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 5.0% of the total risk with
a minimum primary risk of $5.0 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 $35.0 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.
As a result, 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.
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.
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<PAGE>
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 (known as "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.
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
51
<PAGE>
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 (premiums and
title search, escrow and other fees) 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.
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 the 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. Title plants 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.
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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
See "Legal Proceedings" in the Form 10-K, which is incorporated by
reference into this Prospectus, for a discussion of pending legal proceedings
for the periods covered by the financial statements of the Company included in
this Prospectus. As of the date of this Prospectus, there are no material
pending legal proceedings to which the Company or any of its subsidiaries is a
party or to which any of their property is subject, and which would have a
material adverse effect on the Company's financial position or operating
results.
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 and mortgage originators. 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 (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 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. 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
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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:
Commonwealth/Transnation
Title Insurance Premiums by State
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Texas ................ $ 83,651 10.5% $ 66,576 11.4% $ 75,174 11.2%
Florida .............. 83,643 10.5 61,741 10.6 69,196 10.3
California ........... 85,490 10.8 62,179 10.7 68,802 10.3
New York ............. 54,981 6.9 46,735 8.0 57,096 8.5
Pennsylvania ......... 64,273 8.1 40,079 6.9 45,236 6.8
Michigan ............. 41,808 5.3 34,787 6.0 38,405 5.7
Washington ........... 41,782 5.3 32,553 5.6 36,240 5.4
All Others ........... 337,291 42.6 237,679 40.8 278,658 41.8
-------- ----- -------- ----- -------- -----
Totals .............. $792,919 100.0% $582,329 100.0% $668,807 100.0%
======== ===== ======== ===== ======== =====
</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.
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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 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 that
have good financial security, but whose 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, whose protection
factors are average and where 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.
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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'
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
$270.0 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 $270.0 million at
September 30, 1997 will not result in a reduction based upon a stockholders'
equity of approximately $284.1 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 on February 27, 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
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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 on February 27, 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.
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 $30.0
million for general corporate purposes. A copy of the Credit Agreement has been
filed with the Commission on a Current Report 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. See "Incorporation of Certain
Documents by Reference."
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 the 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 February 23, 1998, 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 $30.0 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) IBOR (reserve adjusted) for one, two, three or six months, subject to
adjustment as described below; or (ii) Bank of America's Base Rate as defined
in the Credit Agreement. Interest based on IBOR includes an adjustment to IBOR
of up to an additional 0.50%, based upon the existence of a rating for the
Company's senior unsecured indebtedness and the ratio of the Company's total
indebtedness to total capitalization at the time of borrowing, as provided in
the Credit Agreement. As of February 24, 1998, interest based on IBOR as so
adjusted was 5.950%. 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 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
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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.
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; and (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 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."
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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 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
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;
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(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 the underwriters' over-allotment option 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 $15.0
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 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 (collectively, 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
"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
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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 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 30
day waiting period until 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.
On February 23, 1998, the FTC accepted 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.
The Consent Order will be subject to public comment for 60 days from the
date that it is placed on the public record. Upon the expiration of the comment
period, the FTC will decide whether to withdraw, modify or make final its
acceptance of the Consent Order. The FTC has terminated the waiting period.
Each proposed divestiture, as described above, is subject to the prior
approval of the FTC to ensure the continued use of such plants as ongoing,
viable title plants. Each agreement with a potential acquirer of a title plant
will be filed with the FTC as part of a divestiture application, which will be
subject to public comment for 30 days. Upon the expiration of the comment
period, the FTC will either approve or deny the divestiture application. Such
divestitures are not conditions to consummation of the Acquisition pursuant to
the Stock Purchase Agreement.
Notwithstanding the Consent Order, 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. Furthermore, at any time before or after the
consummation of the Acquisition, 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 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 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. All such required hearings have been completed.
In certain of the states that
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do not require a hearing prior to approval, the Company and Reliance would be
entitled to a hearing in the event that the state insurance department proposed
not to grant the approval. Approvals have been obtained in all 13 states.
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 17
states where such filings were required. A Form E filing generally must be
reviewed by an insurance department within 30 days of its receipt of the
filing; otherwise, the department may not thereafter object to the transaction.
Within such 30 day period, the insurance department may request additional
information regarding the competitive impact of the transaction. When such a
request is made, the department generally has 30 days from the date it receives
the requested information to complete its review of the filing. An insurance
department may terminate the review period at any time. The initial review
period expired on November 24, 1997, at which time 13 of the 17 states in which
the Form E had been filed either had terminated the review period or declined
to request additional information. Requests for additional information were
received from the other four states and thereafter responded to by the Company
and Reliance. The extended review period either has been terminated by the
department or has expired in these four states.
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 shareholders of the Company.
Pursuant to the Stock Purchase Agreement, RIC has 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 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 address any aspect of state, local
or foreign taxation. No rulings have been or will be requested from the
Internal Revenue Service 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 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 10 to 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>
Class I Class II Class III
(Term Expiring in 1998) (Term Expiring in 1999) (Term Expiring in 2000)
<S> <C> <C>
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 February 24,
1998, 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., 46, 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."
Charles H. Foster, Jr., 55, 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, 51, has been a director of the Company since 1991
and has been Chairman and Chief Executive Officer of the Wheat First Union
division of Wheat First, an investment banking and securities brokerage
company, since February 2, 1998. From April 1997 to February 1998, he was
Chairman and Chief Executive Officer of Wheat First Butcher Singer, Inc.
("Wheat"). 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 S&K Famous Brands, Inc. Wheat First provides investment management
and securities brokerage services to the Company. See "Underwriting."
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Class II (Term Expiring in 1999)
J. Garnett Nelson, 58, 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., 58, 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, 58, 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, 51, 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, 55, 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 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, 53, 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
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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.
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 and Chief
Financial and Administrative Officer of Financial Officer
Commonwealth and Transnation
G. William Evans Vice President and Treasurer of the Executive Vice President - Information
Company Technology
</TABLE>
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<PAGE>
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 February 24, 1998, there were
8,992,620 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.
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 "Preferred Stock Designation"), the complete text of which has been filed
with the Commission as part of the Proxy Statement and is incorporated by
reference into this Prospectus. See "Incorporation of Certain Documents by
Reference."
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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 7%
of the stated value of $50 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 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
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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 per share 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 per share or more, or the Company declares dividends
on the Common Stock, whether regular or non-regular, in an aggregate amount of
$1.60 per share or more during any calendar year. If the Company calls for
redemption of 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 shares of the Series B
Preferred Stock with respect to which full payment of the consideration has
been received.
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 premium
shall be 4.0% on the fifth anniversary of the Initial Issuance Date and decline
by 1.0% 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
date 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 per share 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 to the Company's Board of
Directors at a special meeting called by the holders of record of at
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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, which has been 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 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 on Current Reports on Form 8-K 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.
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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.
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.
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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.
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 1/3% 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
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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 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 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 February 24, 1998, 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.
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
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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 $15.0 million (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 February 24, 1998, the Company had outstanding 8,992,620 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 February 24, 1998, the Company had
outstanding options to purchase 730,997 shares of Common Stock, of which
548,285 were exercisable, at an average exercise price of $13.72 per share.
Approximately 9,433,124 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 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.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, dated
February 24, 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), Furman Selz LLC, Wheat First Union, a division of Wheat First
Securities, Inc., and Ferris, Baker Watts, Incorporated (the
"Representatives"), have severally agreed to purchase from the Company the
respective number of Shares set forth opposite their names below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation .......... 367,500
Furman Selz LLC .............................................. 367,500
Wheat, First Securities, Inc. ................................ 367,500
Ferris, Baker Watts, Incorporated ............................ 122,500
Advest, Inc. ................................................. 87,500
Branch, Cabell & Company ..................................... 87,500
Conning & Company ............................................ 87,500
Davenport & Co. of Virginia, Inc. ............................ 87,500
Dowling & Partners Securities Llc ............................ 87,500
Keefe, Bruyette & Woods, Inc ................................. 87,500
-------
Total ..................................................... 1,750,000
=========
</TABLE>
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 $1.32 per share.
The Underwriters may allow, and such dealers may reallow, to certain other
dealers, a concession not in excess of $0.10 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. In addition, the Underwriters
have agreed with the Company to reserve not more than 7,200 Shares,
representing less than 1.0% of the total offering, for sale to employees of
Commonwealth and Transnation.
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 including sales to affiliates and certain
private resales by RIC, 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
registration statements 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.
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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, Furman Selz LLC and Wheat First 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 is a director of the Company.
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., a limited
liability partnership including professional corporations, 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 February 24, 1998. Other attorneys of that
firm beneficially owned an aggregate of approximately 21,182 shares of Common
Stock as of that date.
EXPERTS
The consolidated financial statements and schedules 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 Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing 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 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
LAWYERS TITLE CORPORATION
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-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1996, 1995 and 1994 ........................................................ F-5
Consolidated Statements of Changes in Shareholders' Equity for the Three Years
Ended December 31, 1996, 1995 and 1994 .................................................. F-6
Notes to Consolidated Financial Statements for the Three Years Ended December 31, 1996,
1995 and 1994........................................................................... F-7
Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 (unaudited) ...... F-20
Consolidated Statements of Operations and Retained Earnings for the Quarter and
the Nine Months Ended September 30, 1997 and 1996 (unaudited) ........................... F-21
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) ................................................. F-22
Notes to Consolidated Financial Statements (unaudited) ................................... F-23
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
Independent Auditors' Report ............................................................. F-24
Combined Statement of Income for the Three Years Ended December 31, 1996, 1995 and 1994 .. F-25
Combined Balance Sheet at December 31, 1996 and 1995 ..................................... F-26
Combined Statement of Changes in Shareholder's Equity for the Three Years Ended
December 31, 1996, 1995 and 1994 ........................................................ F-27
Combined Statement of Cash Flows for the Three Years Ended
December 31, 1996, 1995 and 1994 ........................................................ F-28
Notes to Combined Financial Statements ................................................... F-29
Combined Statement of Income for the Quarter and the Nine Months Ended
September 30, 1997 and 1996 (unaudited) ................................................. F-38
Combined Balance Sheet at September 30, 1997 (unaudited) and December 31, 1996 ........... F-39
Combined Statement of Changes in Shareholder's Equity for the Nine Months
Ended September 30, 1997 (unaudited) .................................................... F-40
Combined Statement of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (unaudited) ........................................... F-41
Notes to Interim Combined Financial Statements (unaudited) ............................... F-42
</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.
ERNST & YOUNG LLP
Richmond, Virginia
February 19, 1997
F-2
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
(In thousands of dollars)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
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 amortization:
1996 - $44,670; 1995-$36,581) ....................................................... 21,959 20,850
TITLE PLANTS .......................................................................... 48,536 48,731
GOODWILL (less accumulated amortization: 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
-------- --------
TOTAL ASSETS ....................................................................... $520,968 $475,843
======== ========
LIABILITIES
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
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $520,968 $475,843
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
(In thousands of dollars except
per common share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
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
---------- ---------- ----------
TOTAL REVENUES ................................ 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
---------- ---------- ----------
TOTAL EXPENSES ................................ 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)
---------- ---------- ----------
TOTAL INCOME TAX EXPENSE ...................... 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-4
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In thousands of dollars)
<TABLE>
<CAPTION>
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-5
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
Common Stock Net
------------------------- Unrealized
Gains
Shares Amount (Losses)
------------- ----------- ------------
<S> <C> <C> <C>
BALANCE - December 31, 1993 ........................... 8,418,209 $162,879 $ 3,513
Net Income ............................................ -- -- --
Issuance of common stock .............................. 425,020 3,883 --
Adjustment to beginning balance for change in
accounting method, net of income taxes of $2,055 ..... -- -- 3,816
Exercise of stock options ............................. 41,282 229 --
Repayment from employee benefit plan .................. -- -- --
Net unrealized losses ................................. -- -- (12,227)
Dividends ($.12/share) ................................ -- -- --
--------- -------- ----------
BALANCE -- December 31, 1994 .......................... 8,884,511 166,991 (4,898)
Net Income ............................................ -- -- --
Exercise of stock options ............................. 1,500 15 --
Repayment from employee benefit plan .................. -- -- --
Net unrealized gains .................................. -- -- 18,743
Dividends ($.18/share) ................................ -- -- --
Other ................................................. (20) -- --
--------- -------- ----------
BALANCE -- December 31, 1995 .......................... 8,885,991 167,006 13,845
Net Income ............................................ -- -- --
Exercise of stock options ............................. 3,800 38 --
Repayment from employee benefit plan .................. -- -- --
Net unrealized losses ................................. -- -- (11,151)
Dividends ($.20/share) ................................ -- -- --
--------- -------- ----------
BALANCE -- December 31, 1996 .......................... 8,889,791 $167,044 $ 2,694
========= ======== ==========
<CAPTION>
Receivable
Retained from Total
Earnings Employee Shareholders'
(Deficit) Benefit Plan Equity
----------- ------------- --------------
<S> <C> <C> <C>
BALANCE - December 31, 1993 ........................... $ 36,448 $ (1,679) $ 201,161
Net Income ............................................ 6,814 -- 6,814
Issuance of common stock .............................. -- -- 3,883
Adjustment to beginning balance for change in
accounting method, net of income taxes of $2,055 ..... -- -- 3,816
Exercise of stock options ............................. -- -- 229
Repayment from employee benefit plan .................. -- 672 672
Net unrealized losses ................................. -- -- (12,227)
Dividends ($.12/share) ................................ (1,025) -- (1,025)
-------- -------- ---------
BALANCE -- December 31, 1994 .......................... 42,237 (1,007) 203,323
Net Income ............................................ 17,051 -- 17,051
Exercise of stock options ............................. -- -- 15
Repayment from employee benefit plan .................. -- 852 852
Net unrealized gains .................................. -- -- 18,743
Dividends ($.18/share) ................................ (1,599) -- (1,599)
Other ................................................. -- -- --
-------- -------- ---------
BALANCE -- December 31, 1995 .......................... 57,689 (155) 238,385
Net Income ............................................ 36,519 -- 36,519
Exercise of stock options ............................. -- -- 38
Repayment from employee benefit plan .................. -- 155 155
Net unrealized losses ................................. -- -- (11,151)
Dividends ($.20/share) ................................ (1,778) -- (1,778)
-------- -------- ---------
BALANCE -- December 31, 1996 .......................... $ 92,430 $ -- $ 262,168
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
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.
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.
F-7
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
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.
F-8
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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
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.
F-9
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
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
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............... $ 62,206 $1,709 $547 $ 63,368
Obligations of states and political subdivisions ..... 76,203 1,065 143 77,125
Fixed maturities issued by foreign governments ....... 345 38 -- 383
Public utilities ..................................... 4,550 24 17 4,557
Corporate securities ................................. 61,195 1,364 147 62,412
Mortgage backed securities ........................... 10,376 79 76 10,379
-------- ------ ---- --------
Fixed maturities available-for-sale .................. $214,875 $4,279 $930 $218,224
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 51,569 $3,881 $ 8 $ 55,442
Obligations of states and political subdivisions .. 57,783 1,286 13 59,056
Fixed maturities issued by foreign governments .... 344 24 2 366
Public utilities .................................. 1,997 58 -- 2,055
Corporate securities .............................. 67,489 2,865 3 70,351
-------- ------ --- --------
Fixed maturities available-for-sale ............... $179,182 $8,114 $26 $187,270
======== ====== === ========
</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.
<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 five years 63,499 64,315
Due after five years through ten years 72,090 73,423
Due after ten years ............... 61,113 62,268
Mortgage backed securities ........ 10,376 10,378
-------- --------
Total Fixed Maturity Investments .. $214,875 $218,224
======== ========
</TABLE>
F-10
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
3. INVESTMENTS - CONTINUED
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 short-term investments .......... 979 1,587 1,235
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:
<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-11
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
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 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
F-12
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY - CONTINUED
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" ("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.
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.
F-13
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY - CONTINUED
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):
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Pro forma net income .................. $ 36,187 $ 16,922
Pro forma earnings per share .......... $ 4.07 $ 1.90
</TABLE>
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise 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 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.
F-14
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
7. STATUTORY FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Policy and contract claims .......... $24,430 $23,021
Employee benefit plans ............... 6,235 7,195
Other ............................... 1,499 1,382
------- -------
Total deferred tax assets ............ 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
------- -------
Total deferred tax liabilities ....... 8,729 15,471
------- -------
Net deferred tax asset ............... $23,435 $16,127
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
Taxes (recovered) paid were $14,542 in 1996, $(252) in 1995 and $9,207 in
1994.
F-15
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
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>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------ -------------- ----------
<S> <C> <C> <C>
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
========= ========== ========
</TABLE>
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.
F-16
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
9. PENSION PLAN AND POSTRETIREMENT BENEFITS - CONTINUED
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet:
<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 obligation 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>
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.
F-17
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
10. LEASE COMMITMENTS - CONTINUED
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.
<TABLE>
<S> <C>
1997 ................ $18,593
1998 ................ 15,104
1999 ................ 11,521
2000 ................ 6,440
2001 ................ 2,732
2002 and subsequent . 1,365
-------
Total ............... $55,755
=======
</TABLE>
Rent expense was $22,551, $22,649 and $19,124 for the years ended December
31, 1996, 1995 and 1994, respectively.
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
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.
F-18
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands of dollars except per common share amounts)
13. ACQUISITIONS - CONTINUED
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.
<TABLE>
<CAPTION>
Unaudited
Year Ended
December 31, 1994
------------------
<S> <C>
Premium and title search and escrow revenue ... $ 545,748
=========
Net income .................................... $ 3,857
=========
Earnings per common share ..................... $ .43
=========
</TABLE>
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.
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 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-19
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS
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
-------- --------
TOTAL ASSETS .......................................................................... $540,944 $520,968
======== ========
LIABILITIES
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
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................ $540,944 $520,968
======== ========
</TABLE>
See Accompanying Notes.
F-20
<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,
------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
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
-------- -------- -------- --------
TOTAL REVENUES ................................. 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
-------- -------- -------- --------
TOTAL EXPENSES ................................. 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)
-------- -------- -------- --------
TOTAL INCOME TAX EXPENSE ....................... 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 DILUTIVE COMMON
EQUIVALENT SHARE ................................. $ 1.87 $ 2.21 $ 0.91 $ 0.68
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION .................................... $ 1.85 $ 2.14 $ 0.90 $ 0.66
AVERAGE NUMBER OF COMMON AND DILUTIVE COMMON
EQUIVALENT SHARES OUTSTANDING .................... 9,231 8,888 9,260 8,889
AVERAGE NUMBER OF SHARES OUTSTANDING
ASSUMING FULL DILUTION ........................... 9,332 9,158 9,340 9,159
</TABLE>
See Accompanying Notes.
F-21
<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-22
<PAGE>
LAWYERS TITLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except for per share amounts)
NOTE 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.
NOTE 2 - PENDING LEGAL PROCEEDINGS
For additional information, see Pending Legal Proceedings on page F-27 of
the December 31, 1996 Form 10-K.
NOTE 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-23
<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.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 12, 1997
(August 20, 1997 as to Note 10)
F-24
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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
------------ ------------- -------------
TOTAL REVENUES ............................... 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
------------ ------------- -------------
TOTAL EXPENSES ............................... 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-25
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
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
------------ ------------
TOTAL ASSETS .......................................................... $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 --
------------ ------------
TOTAL LIABILITIES ..................................................... 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
------------ ------------
TOTAL SHAREHOLDER'S EQUITY ............................................ 273,657,000 270,737,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ............................ $620,754,000 $573,820,000
============ ============
</TABLE>
See notes to combined financial statements.
F-26
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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-27
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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 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-28
<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 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, 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 $4,422,000, $4,292,000,
and $5,284,000 for 1996, 1995 and 1994, respectively, and are reflected in the
statements of income. These costs were allocated to the Companies either on a
direct basis or by 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 approximates their fair value.
Realized gains and losses, determined on a specific identification basis, are
included in income.
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.
F-29
<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 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.
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 --
------------ ------------ ---------- ----------
Fixed maturities held for investment ......... $139,798,000 $140,789,000 $2,649,000 $1,658,000
============ ============ ========== ==========
</TABLE>
F-30
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. INVESTMENTS -- Continued
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
------------ ------------ ---------- ----------
Fixed maturities available for sale ......... $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 --
------------ ------------ ---------- -------
Fixed maturities held for investment ......... $120,545,000 $126,623,000 $6,103,000 $25,000
============ ============ ========== =======
</TABLE>
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 --
------------ ------------ ----------- --------
Fixed maturities available for sale ......... $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.
F-31
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. INVESTMENTS -- Continued
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
------------ ------------ ------------ ------------
Total fixed maturity investments ................ $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
----------- ----------- -----------
Total investment income ......... 32,103,000 29,433,000 28,246,000
Investment expenses ............. 1,648,000 1,500,000 1,791,000
----------- ----------- -----------
Net investment income ........... $30,455,000 $27,933,000 $26,455,000
=========== =========== ===========
</TABLE>
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)
------------ ---------- ----------
Net realized gain on fixed maturities held for investment ............... 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)
------------ ---------- ----------
Net realized (loss) gain on fixed maturities available for sale ......... (39,000) 1,601,000 370,000
------------ ---------- ----------
Total gain on sales of investments ...................................... $ 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.
F-32
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
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)
------------ ---------- ------------
Total income tax provision from operations ......... $ 13,347,000 $4,755,000 $ 10,809,000
============ ========== ============
</TABLE>
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
------------ ------------ ------------
Total income tax provision from operations ......... $ 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
----------- -----------
Total deferred tax assets ..................... 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
----------- -----------
Total deferred tax liabilities ................ 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-33
<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
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-34
<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
-----------------------------------
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-35
<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
---------------------------------
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>
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> <C>
Cash ........................................... $263,348,000 $215,393,000
Investments held for specific accounts ......... 333,658,000 249,830,000
------------ ------------
Total .......................................... $597,006,000 $465,223,000
============ ============
</TABLE>
F-36
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
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:
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------
<S> <C>
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
-----------
Total .................. $59,735,000
===========
</TABLE>
10. SUBSEQUENT EVENT
On 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-37
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
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
------------ ------------ ------------ ------------
TOTAL REVENUES ....................................... 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
------------ ------------ ------------ ------------
TOTAL EXPENSES ....................................... 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-38
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
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
------------ ------------
TOTAL ASSETS ....................................................... $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
------------ ------------
TOTAL LIABILITIES .................................................. 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
------------ ------------
TOTAL SHAREHOLDER'S EQUITY ......................................... 284,116,000 273,657,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ......................... $626,532,000 $620,754,000
============ ============
</TABLE>
F-39
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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-40
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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)
------------- --------------
NET CASH FROM OPERATING ACTIVITIES .......................... 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)
------------- --------------
NET CASH FROM (USED IN) INVESTING ACTIVITIES ................ 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-41
<PAGE>
COMMONWEALTH LAND TITLE INSURANCE COMPANY AND
TRANSNATION TITLE INSURANCE COMPANY
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-42
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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 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 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 is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or Common Stock solicitation. Neither the delivery of this
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.
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TABLE OF CONTENTS
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Page
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Available Information ................................... 3
Incorporation of Certain Documents by Reference ......... 3
Forward-Looking and Cautionary Statements ............... 4
Prospectus Summary ...................................... 5
Risk Factors ............................................ 12
Use of Proceeds ......................................... 14
Price Range of Common Stock and Dividends ............... 15
Capitalization .......................................... 17
Dilution ................................................ 18
The Combined Company .................................... 19
Lawyers Title Corporation and Subsidiaries Pro Forma
Condensed Combined Financial Statements ............... 25
Lawyers Title Corporation Selected Consolidated
Financial and Other Data .............................. 32
Lawyers Title Corporation Management's Discussion and
Analysis of Financial Condition and Results of
Operations ............................................ 34
Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company Selected
Combined Financial and Other Data ..................... 40
Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company Management's
Discussion and Analysis of Financial Condition and
Results of Operations ................................. 42
Business ................................................ 46
The Acquisition ......................................... 56
Management of the Combined Company ...................... 63
Description of Capital Stock ............................ 66
Shares Eligible for Future Sale ......................... 73
Underwriting ............................................ 74
Legal Matters ........................................... 75
Experts ................................................. 75
Index to Financial Statements ........................... F-1
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1,750,000 Shares
Lawyers Title
Corporation
Common Stock
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PROSPECTUS
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Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz
Wheat First Union
Ferris, Baker Watts
Incorporated
February 24, 1998
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