SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999 Commission File No. 1-13990
--------------- ---------
LANDAMERICA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1589611
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Gateway Centre Parkway
Richmond, Virginia 23235-5153
(Address of principal executive offices) (Zip Code)
(804) 267-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, No Par Value 14,353,911 August 6, 1999
---------------- ----------------
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets.................................................3
Consolidated Statements of Operations ......................................5
Consolidated Statements of Cash Flows.......................................6
Consolidated Statements of Changes in
Shareholders' Equity.....................................................7
Notes to Consolidated Financial Statements..................................8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...............................................12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.......................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................18
Item 4. Submission of Matters to a Vote of Security Holders........................18
Item 5. Other Information..........................................................19
Item 6. Exhibits and Reports on Form 8-K...........................................20
Signatures.................................................................22
</TABLE>
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
INVESTMENTS:
Fixed maturities available-for-sale - at fair value
(amortized cost: 1999 - $757,546; 1998 - $756,608) $ 747,203 $ 774,856
Equity securities - at fair value (cost: 1999 - $3,220; 1998
- $3,426) 1,754 4,204
Mortgage loans (less allowance for doubtful accounts:
1999 - $71; 1998 - $155) 16,367 11,613
Invested cash 71,266 104,792
------------- -------------
Total investments 836,590 895,465
CASH 65,922 69,235
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts: 1999 -
$2,083; 1998 - $2,054) 11,430 7,340
Premiums (less allowance for doubtful accounts: 1999 -
$10,764; 1998 - $8,179) 55,479 61,203
Income tax recoverable 6,712 -
------------- -------------
Total notes and accounts receivable 73,621 68,543
PROPERTY AND EQUIPMENT - at cost (less accumulated
depreciation and amortization: 1999 - $96,243; 1998 -
$86,767) 93,656 76,420
TITLE PLANTS 93,141 95,358
GOODWILL (less accumulated amortization: 1999 -
$29,661; 1998 - $24,630) 345,098 348,595
DEFERRED INCOME TAXES 95,508 80,557
OTHER ASSETS 78,068 58,185
------------- -------------
Total assets $ 1,681,604 $ 1,692,358
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES 1999 1998
- ----------- ---- ----
<S> <C> <C>
POLICY AND CONTRACT CLAIMS $ 540,630 $ 521,894
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 166,233 181,452
FEDERAL INCOME TAXES - 841
NOTES PAYABLE 207,715 207,792
OTHER 14,551 9,190
-------------- --------------
Total liabilities 929,129 921,169
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized 5,000,000
shares, no shares of Series A Junior Participating
Preferred Stock issued or outstanding; 2,200,000
shares of 7% Series B Cumulative Convertible
Preferred Stock issued and outstanding 175,700 175,700
Common stock, no par value, 45,000,000 shares
authorized, shares issued and outstanding: 1999 -
14,415,451; 1998 - 15,294,572 357,552 382,828
Accumulated other comprehensive (loss) income (7,716) 12,367
Retained earnings 226,939 200,294
-------------- --------------
Total Shareholders' Equity 752,475 771,189
-------------- --------------
Total Liabilities and Shareholders' Equity $ 1,681,604 $ 1,692,358
============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Title and other operating revenues:
Direct operations $ 230,768 $ 245,736 $ 447,480 $ 384,557
Agency operations 301,616 246,950 563,065 357,708
---------- ---------- ----------- ----------
532,384 492,686 1,010,545 742,265
Investment income 12,539 13,063 24,916 19,986
Gain (loss) on sales of investments (778) (116) (1,413) 370
---------- ---------- ----------- ----------
544,145 505,633 1,034,048 762,621
---------- ---------- ----------- ----------
EXPENSES
Salaries and employee benefits 148,984 147,317 291,895 233,487
Agents' commissions 235,626 191,176 438,406 275,942
Provision for policy and contract claims 26,242 25,644 49,737 38,622
Assimilation costs - 1,556 - 11,517
Interest expense 2,885 3,186 5,780 4,192
General, administrative and other 103,238 92,508 197,475 147,365
---------- ---------- ----------- ----------
516,975 461,387 983,293 711,125
---------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES 27,170 44,246 50,755 51,496
INCOME TAX EXPENSE (BENEFIT)
Current 9,997 14,905 23,101 23,831
Deferred 42 610 (4,347) (5,818)
---------- ---------- ----------- ----------
10,039 15,515 18,754 18,013
---------- ---------- ----------- ----------
NET INCOME 17,131 28,731 32,001 33,483
DIVIDENDS - PREFERRED STOCK (1,925) (1,925) (3,850) (2,652)
---------- ---------- ----------- ----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 15,206 $ 26,806 $ 28,151 $ 30,831
========== ========== =========== ==========
NET INCOME PER COMMON SHARE $ 1.01 $ 1.78 $ 1.86 $ 2.36
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,987 15,080 15,152 13,042
NET INCOME PER COMMON SHARE ASSUMING
DILUTION $ 0.86 $ 1.42 $ 1.59 $ 2.02
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ASSUMING DILUTION 19,978 20,221 20,179 16,549
</TABLE>
See accompanying notes.
5
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,001 $ 33,483
Depreciation and amortization 17,076 11,441
Amortization of bond premium 924 2
Realized investment losses (gains) 1,413 (370)
Deferred income tax (4,347) (5,818)
Change in assets and liabilities, net of businesses acquired:
Notes receivable (4,090) (4,797)
Premiums receivable 5,724 (2,237)
Income taxes receivable/payable (3,617) 3,831
Policy and contract claims 18,736 15,356
Accounts payable and accrued expenses (15,219) (1,442)
Other (12,940) (12,169)
----------- ----------
Net cash provided by operating activities 35,661 37,280
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment, net (27,064) (1,555)
Purchase of business, net of cash acquired - (126,346)
Cost of investments acquired:
Fixed maturities - available-for-sale (424,730) (115,564)
Mortgage loans - net (4,754) (4,621)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 420,324 31,822
----------- ----------
Net cash used in investing activities (36,224) (216,264)
----------- ----------
Cash flows from financing activities:
Proceeds from the sale of common shares 1,727 78,080
Common shares retired (27,003) -
Cash surrender value increase (5,567) (480)
Dividends paid (5,356) (4,162)
Proceeds from issuance of notes payable - 207,500
Payments on notes payable (77) (56,758)
----------- ----------
Net cash (used in) provided by financing activities (36,276) 224,180
Net (decrease) increase in cash and invested cash (36,839) 45,196
Cash and invested cash at beginning of period 174,027 70,049
----------- ----------
Cash and invested cash at end of period $ 137,188 $ 115,245
=========== ==========
</TABLE>
See accompanying notes.
6
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Preferred Stock Common Stock Comprehensive Retained Shareholders'
Shares Amounts Shares Amounts Income (Loss) Earnings Equity
---------- --------- ---------- --------- ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 - $ - 8,964,633 $ 168,066 $ 7,536 $ 116,802 $ 292,404
Net income - - - - - 33,483 33,483
Net unrealized loss on securities,
net of tax benefit of $(1,455) - - - - (2,701) - (2,701)
---------
Comprehensive income 30,782
Common and preferred stock issued 2,200,000 175,700 6,051,973 206,603 - - 382,303
Stock option and incentive plans - - 181,862 3,329 - - 3,329
Preferred dividends (7%) - - - - - (2,652) (2,652)
Common dividends ($0.10/share) - - - - - (1,510) (1,510)
---------- --------- ---------- --------- ------------- --------- ---------
Balance - June 30, 1998 2,200,000 $ 175,700 15,198,468 $ 377,998 $ 4,835 $ 146,123 $ 704,656
========== ========= ========== ========= ============= ========= =========
Balance - December 31, 1998 2,200,000 $ 175,700 15,294,572 $ 382,828 $ 12,367 $200,294 $ 771,189
Net income - - - - - 32,001 32,001
Net unrealized loss on securities,
net of tax benefit of $(11,190) - - - - (20,083) - (20,083)
---------
Comprehensive income 11,918
---------
Stock option and incentive plans - - 58,379 1,727 - - 1,727
Common stock retired - - (937,500) (27,003) - - (27,003)
Preferred dividends (7%) - - - - - (3,850) (3,850)
Common dividends ($0.10/share) - - - - - (1,506) (1,506)
---------- --------- ---------- --------- ------------- --------- ---------
Balance - June 30, 1999 2,200,000 $ 175,700 14,415,451 $ 357,552 $ (7,716) $ 226,939 $ 752,475
========== ========= ========== ========= ============= ========= =========
</TABLE>
See accompanying notes
7
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except per share amounts)
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, 1998 filed
with the Securities and Exchange 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 1998 amounts have been reclassified to conform to the 1999
presentation.
2. Acquisition
On February 27, 1998, the Company acquired all of the issued and
outstanding shares of capital stock of Commonwealth Land Title
Insurance Company and Transnation Title Insurance Company
(Commonwealth/Transnation) from Reliance Insurance Company, a
subsidiary of Reliance Group Holdings, Inc. (the "Acquisition"). The
shares were acquired in exchange for 4,039,473 shares of the Company's
common stock (book value, net of offering costs - $130,728); 2,200,000
shares of the Company's 7% Series B Cumulative Convertible Preferred
Stock, which are the equivalent of 4,824,561 shares of common stock
(book value - $175,700); the net proceeds of an offering of 1,750,000
shares of common stock ($65,921); and cash financed with bank debt
($200,681). The Acquisition has been accounted for by the Company using
the "purchase" method of accounting. The assets and liabilities of
Commonwealth/Transnation have been revalued to their respective fair
market values. The financial statements of the Company reflect the
combined operations of the Company and Commonwealth/Transnation from
the closing date of the Acquisition.
Pursuant to EITF 94-3, the Company has recorded assimilation costs of
approximately $11.5 million on a pre-tax basis related to exit and
termination costs incurred in connection with the acquisition of
Commonwealth/Transnation. Costs incurred to exit certain leases and to
dispose of certain title plants comprised $9.4 million of this amount.
The remaining $2.1 million primarily relates to the termination of
employees for which employee severance benefits have been accrued.
Assimilation costs paid in the quarter ended June 30, 1999 were $0.6
million and the total paid to date was $10.7 million. Exit
8
<PAGE>
and termination costs of Commonwealth/Transnation leases and employees
necessary to assimilate the operations of Commonwealth/Transnation with
the Company have been capitalized as part of the purchase price.
The following unaudited pro forma results of operations of the Company
give effect to the acquisition of Commonwealth/Transnation as though
the transaction had occurred on January 1, 1998. These operating
results exclude the effect of assimilation charges.
Six Months Ended
June 30, 1998
-------------
Operating revenues $ 881,397
Investment income 25,937
-----------
Gross revenues 907,334
Expenses 836,247
-----------
Income before income taxes 71,087
Income tax expense 24,912
-----------
Net income 46,175
Less: preferred dividends 3,850
-----------
Net income available to common
shareholders $ 42,325
===========
Net income per common share $2.81
=====
Net income per common share assuming
dilution $2.29
=====
Weighted number of average common
shares outstanding 15,059
======
Weighted number of average common
shares outstanding assuming dilution 20,174
======
9
<PAGE>
3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income - numerator for
diluted earnings per share $ 17,131 $ 28,731 $ 32,001 $ 33,483
Less preferred dividends 1,925 1,925 3,850 2,652
---------- --------- --------- ---------
Numerator for basic earnings per
share $ 15,206 $ 26,806 $ 28,151 $ 30,831
========== ========= ========= =========
Denominator:
Weighted average shares -
denominator for basic earnings
per share 14,987 15,080 15,152 13,042
Effect of dilutive securities:
Assumed weighted average
conversion of preferred stock 4,825 4,825 4,825 3,216
Employee stock options 166 316 202 291
---------- --------- --------- ---------
Denominator for diluted earnings
per share 19,978 20,221 20,179 16,549
========== ========= ========= =========
Basic earnings per common share $1.01 $1.78 $1.86 $2.36
===== ===== ===== =====
Diluted earnings per common share $0.86 $1.42 $1.59 $2.02
===== ===== ===== =====
</TABLE>
4. Commitments and Contingencies
With respect to the Norwest and Fleet suits reported on page F-28 of
the Company's Form 10-K for the year ended December 31, 1998, the Court
has entered orders in favor of Commonwealth Land Title Insurance
Company ("Commonwealth") sustaining without leave to amend
Commonwealth's and the other defendants demurrers to certain of
plaintiffs' causes of action. Commonwealth is continuing to investigate
the plaintiffs' factual allegations in both suits as to the remaining
causes of action. Management is unable at this time to make a
meaningful estimate of the amount or range of loss that could result
from an unfavorable outcome on the remaining causes of action or
determine the amount of any potential offsetting recoveries that may be
available. Commonwealth intends to vigorously defend the remaining
causes of action and any attempt to shift to it
10
<PAGE>
mortgage lending business risks or responsibilities outside the scope
of the title insurance policy.
The People of the State of California, the Controller of the State of
California and the Insurance Commissioner of the State of California
have filed a putative defendant class action suit in the Sacramento
Superior Court. While the subsidiaries of LandAmerica Financial Group,
Inc. that do business in California (the "LandAmerica California
Subsidiaries") were not named in the suit, they fall within the
putative defendant class definition. The suit alleges that the
defendants (i) failed to escheat unclaimed property to the Controller
of the State of California on a timely basis, (ii) charged California
home buyers and other escrow customers fees for services which were
never performed, or which cost less than the amount charged, and (iii)
devised and carried out schemes with financial institutions to receive
interest, or monies in lieu of interest, on escrow funds deposited by
defendants with financial institutions in demand deposits.
The LandAmerica California Subsidiaries are cooperating with the
Controller's Office in the conduct of unclaimed property audits, and
with the Department of Insurance in a limited examination with respect
to banking relationships. Management will continue to monitor
developments in the lawsuit.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
General
On February 27, 1998, the Company acquired all of the issued and outstanding
shares of capital stock of Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company ("Commonwealth/Transnation") as described in
Note 2 of the Notes to Consolidated Financial Statements set forth elsewhere in
this report. The assets and liabilities of Commonwealth/Transnation have been
revalued to their respective fair market values. The financial statements of the
Company reflect the combined operations of the Company and
Commonwealth/Transnation from the closing date of the acquisition.
The following discussion includes information on pro forma results of operations
that assumes that the Commonwealth/Transnation operations were included for the
entire first half of 1998.
Operating Revenues
Operating revenues for the second quarter of 1999 were $532.4 million, compared
to $492.7 million in the second quarter of 1998. The increase is the result of
very strong agency revenue, reflecting high volumes of refinancing transactions
in the first quarter of 1999 not recorded until remitted to LandAmerica in the
second quarter. This increase was offset by a comparative-period decline in
direct revenues, which was principally the result of a lower level of
refinancing transactions in the second quarter of 1999 attributable to increased
mortgage interest rates in the period.
For the first six months of 1999, operating revenues were $1.01 billion,
compared to $742.3 million in the corresponding 1998 period. On a pro forma
basis, assuming the inclusion of Commonwealth and Transnation (which were
acquired on February 27, 1998) for the entire first six months of 1998,
operating revenues would have been $881.4 million in that period.
Investment Income
Investment income in the first six months of 1999 was $24.9 million compared to
$20.0 million in the first six months of 1998. This increase principally
reflects the inclusion of Commonwealth/Transnation for the full six months of
1999 versus only four months of 1998.
12
<PAGE>
Expenses
Operating expenses for the second quarter of 1999 were $517.0 million compared
to $461.4 million in the second quarter of 1998. The increase resulted
principally from an increase in agents' commissions reflecting the increased mix
in agency revenues previously discussed. Other expense increases were
principally in the technology area associated with the Company's Year 2000
remediation efforts and preparation for the installation of TitleQuest 2000(TM),
its internet based title production, escrow and closing system.
Operating expenses for the first six months of 1999 were $983.3 million compared
to $711.1 million for the comparable period of 1998. On a pro forma basis, the
first six months of 1998 included operating expenses of $836.2 million. The
increase in the 1999 six-month period compared to the pro forma six month 1998
period was related principally to an increase in agents' commissions related to
the increased mix in agency revenues. The increase was also due to the increase
in the technology area discussed above and an increase in personnel related
expenses. The increase in personnel expenses reflects the increase in staffing
levels, subsequent to the second quarter of 1998, necessary to service increased
business volumes. Management has implemented plans to reduce staffing levels in
line with current business volumes.
Net Income
LandAmerica reported net income of $17.1 million, or $0.86 per share on a
diluted basis, for the second quarter of 1999, compared to net income of $28.7
million, or $1.42 per share on a diluted basis, for the second quarter of 1998.
The 1999 quarter included an after-tax loss on sales of investments of $506,000,
or $0.02 per diluted share, compared to an after-tax loss of $75,000 in the
corresponding quarter of 1998, which had no effect on a per diluted share basis.
For the six months ended June 30, 1999, net income was $32.0 million, or $1.59
per share on a diluted basis, compared to $33.5 million, or $2.02 per share on a
diluted basis, for the first six months of 1998. The first half of 1999 included
an after-tax loss on sales of investments of $918,000, or $0.04 per diluted
share, compared to a first half 1998 after-tax gain on sales of investments of
$241,000, or $0.01 per diluted share.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended June 30, 1999 was
$35.7 million. As of June 30, 1999, the Company held cash and invested cash of
$137.2 million and fixed maturity securities of $747.2 million.
In addition, the Company has a working capital line of credit in the amount of
$30.0 million which was unused at June 30, 1999.
On July 28, 1999, the Company announced that the Board of Directors had approved
a stock repurchase program pursuant to which the Company is authorized to
purchase up to an additional one million shares, or approximately 6.9%, of its
issued and outstanding Common Stock on the
13
<PAGE>
open market over the ensuing 12 months. Under a previous program announced April
14, 1999, the Company completed the repurchase of one million common shares on
July 1, 1999. Repurchases are expected to be funded from available corporate
funds, an existing credit facility and future excess cash flow.
The Company believes that it will have sufficient liquidity and capital
resources to meet both its short and long term capital needs.
Year 2000 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 change in the century. If not corrected, many date-sensitive
applications could fail or create erroneous results by or in the year 2000. The
Company understands the importance of having systems and equipment operational
through the year 2000 and beyond and is committed to addressing these challenges
while continuing to fulfill its business obligations to its clients and business
partners.
Year 2000 readiness is a major undertaking involving the review and modification
of multiple, interacting information technology systems, including the Company's
systems, equipment, facilities, services and products as well as those of third
party business partners (essential suppliers, vendors, service contractors,
distributors, joint venturers, creditors, borrowers, financial service
organizations, etc.). Certain equipment and facilities (such as telephones,
voicemail, elevators) may contain embedded chips or microcontrollers that will
need to be replaced.
The Company began its formal Year 2000 compliance program in 1996. The Year 2000
Project Team was appointed to assess the Year 2000 vulnerability of the
Company's significant systems, equipment, facilities, services and products. The
Year 2000 Project Team is comprised of internal and external personnel. Several
Company executives, including the Company's President, serve as Project Team
Sponsors. The Year 2000 Project Team is separate and distinct from the Company's
information and technology department. Through the Year 2000 Project Team, the
Company undertook an internal quality assurance program to evaluate and test its
significant systems, equipment, facilities, services and products. The internal
and external assessments were the basis of a full remediation and testing
process. In addition to the Project Team Sponsors, the Year 2000 compliance
program is subject to the independent review of a Corporate Steering Committee.
Both the Project Team Sponsors and Corporate Steering Committee review the Year
2000 compliance program for its impact (and the impact of the Year 2000 issues)
on all phases of the Company's business.
The Year 2000 Project Team has divided its Year 2000 compliance program into
four (4) phases with estimated completion deadlines: assessment (internal fourth
quarter 1998, external first quarter 1999), remediation/replacement (second
quarter 1999), testing (second quarter 1999), and integration (third quarter
1999). As of June 30, 1999, all headquarters mission-critical applications had
been fully remediated, tested, and upgraded. Testing was completed for all
essential systems used in the Company's field offices. Some remaining local
office upgrades wil1
14
<PAGE>
continue into the third quarter. The assessment of vendors and service providers
was substantially completed.
Although the Company has developed a Year 2000 compliance program, there is no
guarantee that the systems of other companies, upon which the Company's systems
rely, will be properly converted in a timely manner or will not have an adverse
effect on the Company's systems. Thus, the Company has surveyed and continues to
monitor its important business partners to analyze and report any Year
2000-related issues that might impact the Company. The Company considers the
Year 2000 readiness of its business partners as an important factor in its
business dealings and relationships. Of course, notwithstanding the Company's
efforts or results, the actions or omissions of third parties beyond the
Company's knowledge or control may adversely affect its ability to function
unaffected to and through the Year 2000, including the possibility of lost
revenues or lawsuits by third parties.
The Company has budgeted approximately $14.1 million in the aggregate from its
general operating funds to the Year 2000 issue. Although significant, this
amount is not material to the Company's operational budget. An approximate
allocation of the budgeted amount is $4.0 million for assessment, $5.0 million
for remediation/ replacement, $2.5 million for testing, $1.3 million for
integration, and $1.3 million for contingencies. Through June 30, 1999,
approximately $8.6 million has been spent in the assessment, remediation and
testing, and contingency planning phases. Since the Year 2000 Project Team is
separate from the Company's information and technology department and the amount
allocated to the Year 2000 issue is specifically allocated for that purpose, the
allocation has not resulted in the delay of any other non-Year 2000 related
information and technology projects.
The Company believes that it has identified all of the business systems vital to
its operations and that its Year 2000 compliance program will result in the
continuation of the Company's operations to and through the Year 2000 and
beyond. However, the Year 2000 issue, and its resolution, is complex and
multifaceted. The success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems and
equipment address Year 2000 date data prior to year 2000). Even with appropriate
and diligent pursuit of a well-conceived response plan, including testing
procedures, there is no certainty that any company will achieve complete
success. However, the Company is diligently trying to ensure that its
significant systems, equipment, facilities, services and products will not be
adversely affected by the Year 2000 problem. As such, the Company has engaged a
Corporate Contingency Planner to develop a contingency plan to address the worst
case scenario if the Company's Year 2000 compliance program should fail to
address the Year 2000. A comprehensive approach to the Contingency Plan has been
developed. The Contingency Planner has implemented a risk management process,
defined Year 2000 failure scenarios, and assessed existing business continuity,
contingency, and disaster recovery plans and capabilities. The Contingency
Planner has also begun assessing the costs and benefits of alternatives in an
effort to select and implement the best contingency strategy for the Company's
mission critical systems. All contingency strategies are scheduled for testing
during the third quarter. Training is scheduled for later in the year.
Agreements for backup services are currently being negotiated.
15
<PAGE>
Interest Rate Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted
interest rates by expected maturity dates. Actual cash flows could differ from
the expected amounts.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
<TABLE>
<CAPTION>
2004 and Fair
1999 2000 2001 2002 2003 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Taxable
available-for-sale
securities:
Book value $ 9,363 $20,806 $42,884 $35,957 $47,553 $316,242 $472,805 $466,056
Average yield 6.0% 6.8% 6.0% 6.1% 6.2% 6.9%
Non-taxable
available-for-sale
securities:
Book value 584 1,748 6,482 11,174 12,994 193,121 226,103 222,509
Average yield 7.5% 4.5% 3.7% 4.7% 4.1% 4.8%
Preferred stock:
Book value - - - - - 58,638 58,638 58,638
Average yield - - - - - 7.3%
</TABLE>
The Company also has variable rate long-term debt of $207.7 million bearing
interest at 5.30% at June 30, 1999. A .25% change in the interest rate would
affect income before income taxes by approximately $0.5 million annually.
Forward-Looking and Cautionary Statements
Certain information contained in this Quarterly Report on Form 10-Q includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other
things, these statements relate to the financial condition, results of operation
and business of the Company. In addition, the Company and its representatives
may from time to time make written or oral forward-looking statements, including
statements contained in other filings with the Securities and Exchange
Commission and in its reports to shareholders. 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,
16
<PAGE>
performance or achievements expressed or implied by such forward-looking
statements. Further, any such statement is specifically qualified in its
entirety by the following cautionary statements.
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) real estate activity levels have
historically been cyclical and are influenced by such factors as interest rates
and the condition of the overall economy; (iii) the value of the Company's
investment portfolio is subject to fluctuation based on similar factors; (iv)
the title insurance industry may be exposed to substantial claims by large
classes of claimants; (v) 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; and (vi) the risks and uncertainties
associated with the Year 2000 readiness of third parties with whom the Company
does business.
The Company cautions that the foregoing list of important factors is 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.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
The information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk" in Item 2 of this report.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
With respect to the Norwest Litigation and the Fleet Litigation as reported in
the Company's Form 10-K for the period ending December 31, 1998, the following
has occurred since that report:
On April 6, 1999, the court entered an order consolidating the case of Norwest
Mortgage, Inc., et al. v. Commonwealth Land Title Ins. Co., et al., Superior
Court for the County of Los Angeles, California Case No. VC028084, with the case
of Norwest Mortgage, Inc. et al. v. Allstate Mortgage Co., Inc., Los Angeles
Superior Court Case No. VC025404 (the "Norwest Litigation").
On March 12, 1999, the court entered an order in favor of Commonwealth
sustaining without leave to amend Commonwealth's demurrer to Norwest's cause of
action for breach of fiduciary duty. On June 15, 1999, the court entered an
order in favor of Commonwealth sustaining without leave to amend Commonwealth's
and the other defendants' demurrers to Norwest's causes of action for negligent
misrepresentation and negligence.
On May 7, 1999, the court entered an order in favor of Commonwealth sustaining
without leave to amend Commonwealth's demurrer to Fleet's cause of action for
breach of fiduciary duty. On July 14, 1999, the court entered an order in favor
of Commonwealth sustaining without leave to amend Commonwealth's and the other
defendants' demurrers to Fleet's causes of action for negligent
misrepresentation and negligence.
Commonwealth is continuing to investigate the plaintiffs' factual allegations in
both the Norwest Litigation and the Fleet Litigation as to the remaining causes
of action. Management is unable at this time to make a meaningful estimate of
the amount or range of loss that could result from an unfavorable outcome on the
remaining causes of action or determine the amount of any potential offsetting
recoveries that may be available. The Company intends to vigorously defend the
remaining causes of action and any attempt to shift to it mortgage lending
business risks or responsibilities outside the scope of the title insurance
policy.
Item 4. Submission of Matters to a Vote of Security Holders
a) An Annual Meeting of Shareholders (the "Meeting") was held by
the Company on May 18, 1999.
18
<PAGE>
c) At the Meeting, the shareholders elected four directors to serve
three-year terms. The voting with respect to each nominee was as
follows:
Broker
Nominee Votes For Votes Withheld Non-Votes
------- --------- -------------- ---------
J. Garnett Nelson 13,561,974 320,262 0
Robert F. Norfleet, Jr. 13,560,674 321,562 0
Robert M. Steinberg 13,545,755 336,481 0
Eugene P. Trani 13,557,707 324,529 0
The shareholders at the Meeting also considered a proposal to
approve certain amendments to the LandAmerica Financial Group,
Inc. 1991 Stock Incentive Plan as described in the Proxy
Statement for such Meeting. The voting with respect to such
matter was as follows:
For Against Abstain
--- ------- -------
13,321,050 518,642 42,544
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
Item 5. Other Information
On May 19, 1999, The People of the State of California, Kathleen Connell,
Controller of the State of California, and Chuck Quackenbush, Insurance
Commissioner of the State of California (collectively, the "Plaintiffs") filed a
putative defendant class action suit in the Sacramento Superior Court
(hereafter, the "Complaint").
The Complaint seeks to certify as a class of defendants all "title insurers,"
all "underwritten title companies" and all "controlled escrow companies" (as
those terms are defined in the California Insurance Code) and all "independent
escrow companies" (as that term is defined in the California Financial Code)
doing business in the State of California from 1970 to the present who (i) hold
or held dormant, unclaimed escrow funds; (ii) charged California home buyers and
other escrow customers $10.00 or more for delivery services or administrative
fees; (iii) charged California home buyers and other escrow customers
reconveyance fees and/or (iv) earned interest (or its equivalent) from financial
institutions on customers' deposited escrow funds. Fidelity National Title
Insurance Company, Spring Mountain Escrow Corporation and West Coast Escrow
Company were named as defendant class representatives in the suit. Commonwealth
Land Title Insurance Company and Lawyers Title Insurance Corporation, both
subsidiaries of the Company, do business in California through branch operations
and through their wholly owned subsidiaries, Commonwealth Land Title Company and
Lawyers Title Company, respectively. While neither
19
<PAGE>
Commonwealth Land Title Company nor Lawyers Title Company was specifically named
in the suit, those companies fall within the putative defendant class
definition.
Plaintiffs allege that the defendants unlawfully (i) failed to escheat unclaimed
property to the Controller of the State of California on a timely basis; (ii)
charged California home buyers and other escrow customers fees for services
which were never performed, or which cost less than the amount charged; and
(iii) devised and carried out schemes with financial institutions to receive
interest, or monies in lieu of interest, on escrow funds deposited by defendants
with financial institutions in demand deposits.
On or about July 19, 1999, Plaintiffs filed a First Amended Complaint. The First
Amended Complaint added as a Complainant, on behalf of The People of the State
of California, the District and City Attorneys for the City and County of San
Francisco. So far as the Company is aware, neither the Complaint nor the First
Amended Complaint has been served on any named or unnamed party.
Based upon public comments made by the Controller of the State of California,
Plaintiffs intend to pursue this action against all title insurance and escrow
companies operating in the State of California. Commonwealth Land Title Company
and Lawyers Title Company are cooperating with the Controller's office in the
conduct of unclaimed property audits, and with the Department of Insurance in a
limited examination with respect to banking relationships.
The Company will continue to monitor developments in the lawsuit.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Document
----------- --------
11 Statement re: Computation of Earnings Per Share.
27 Financial Data Schedule (electronic copy only).
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on June 7, 1999. The Form 8-K, which was dated June 1,
1999, reported under Items 5 and 7 that in connection with the withdrawal
of Wachovia Bank, N.A. as the Company's transfer agent, registrar,
dividend paying agent and rights agent, the Company had (i) appointed
EquiServe Trust Company, N.A. to serve as the Company's transfer agent,
registrar and dividend paying agent and (ii) entered into an agreement
appointing State Street Bank and Trust Company as successor rights agent
under the
20
<PAGE>
Company's Amended and Restated Rights Agreement, dated August 20, 1997, as
amended on December 11, 1997.
21
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANDAMERICA FINANCIAL GROUP, INC.
---------------------------------------
(Registrant)
Date: August 12, 1999 /s/ Charles Henry Foster, Jr.
----------------------- ---------------------------------------
Charles Henry Foster, Jr.
Chairman and Chief Executive Officer
Date: August 12, 1999 /s/ Jeffrey Alan Tischler
------------------------ ---------------------------------------
Jeffrey Alan Tischler
Executive Vice President and Chief
Financial Officer
22
<PAGE>
EXHIBIT INDEX
No. Description
- --- -----------
11 Statement Re: Computation of Earnings Per Share
27 Financial Data Schedule (electronic copy only)
Exhibit 11
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Statement Re: Computation of Earnings Per Share
The information required by this Exhibit is contained in Note 3 to the
Consolidated Financial Statements of LandAmerica Financial Group, Inc. and its
subsidiaries for the quarter ended June 30, 1999 set forth on page 10 of this
report.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR LANDAMERICA FINANCIAL GROUP, INC. FOR THE QUARTER ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 747,203
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,754
<MORTGAGE> 16,367
<REAL-ESTATE> 0
<TOTAL-INVEST> 836,590
<CASH> 65,922
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,681,604
<POLICY-LOSSES> 540,630
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 207,715
0
175,700
<COMMON> 357,552
<OTHER-SE> 219,223
<TOTAL-LIABILITY-AND-EQUITY> 1,681,604
1,010,545
<INVESTMENT-INCOME> 24,916
<INVESTMENT-GAINS> (1,413)
<OTHER-INCOME> 0
<BENEFITS> 49,737
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 933,556
<INCOME-PRETAX> 50,755
<INCOME-TAX> 18,754
<INCOME-CONTINUING> 32,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,001
<EPS-BASIC> 1.86
<EPS-DILUTED> 1.59
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
