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 September 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 13,986,431 November 9, 1999
------------------ ----------------------
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
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..............................11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................17
Item 6. Exhibits and Reports on Form 8-K..........................17
Signatures................................................18
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
INVESTMENTS:
Fixed maturities available-for-sale - at fair value
(amortized cost: 1999 - $761,089; 1998 - $756,608) $ 742,410 $ 774,856
Equity securities - at fair value (cost: 1999 - $3,172; 1998
- $3,426) 1,561 4,204
Mortgage loans (less allowance for doubtful accounts:
1999 - $71; 1998 - $155) 9,437 11,613
Invested cash 66,614 104,792
------------- -------------
Total investments 820,022 895,465
CASH 57,857 69,235
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts: 1999 -
$2,093; 1998 - $2,054) 12,748 7,340
Premiums (less allowance for doubtful accounts: 1999 -
$11,866; 1998 - $8,179) 43,527 61,203
Income tax recoverable 12,330 -
------------- -------------
Total notes and accounts receivable 68,605 68,543
PROPERTY AND EQUIPMENT - at cost (less accumulated
depreciation and amortization: 1999 - $102,233; 1998 -
$86,767) 97,742 76,420
TITLE PLANTS 93,656 95,358
GOODWILL (less accumulated amortization: 1999 -
$32,677; 1998 - $24,630) 340,548 348,595
DEFERRED INCOME TAXES 90,032 80,557
OTHER ASSETS 93,720 58,185
------------- -------------
Total assets $ 1,662,182 $ 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>
September 30, December 31,
LIABILITIES 1999 1998
- ----------- ---- -----
<S> <C> <C>
POLICY AND CONTRACT CLAIMS $ 549,276 $ 521,894
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 142,583 181,452
FEDERAL INCOME TAXES - 841
NOTES PAYABLE 207,675 207,792
OTHER 15,380 9,190
-------------- --------------
Total liabilities 914,914 921,169
-------------- --------------
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 -
14,172,711; 1998 - 15,242,007 350,835 382,828
Accumulated other comprehensive (loss) income (12,783) 12,367
Retained earnings 233,516 200,294
-------------- --------------
Total Shareholders' Equity 747,268 771,189
-------------- --------------
Total Liabilities and Shareholders' Equity $ 1,662,182 $ 1,692,358
============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Title and other operating revenues:
Direct operations $ 211,922 $ 243,018 $ 659,402 $ 627,599
Agency operations 289,891 255,969 852,956 613,653
---------- ---------- ----------- -----------
501,813 498,987 1,512,358 1,241,252
Investment income 12,135 13,456 37,051 33,442
Gain (loss) on sales of investments (150) 2,806 (1,563) 3,176
---------- ---------- ----------- -----------
513,798 515,249 1,547,846 1,277,870
---------- ---------- ----------- -----------
EXPENSES
Salaries and employee benefits 140,700 142,245 432,595 375,732
Agents' commissions 225,407 199,444 663,813 475,386
Provision for policy and contract claims 24,460 25,923 74,197 64,545
Assimilation costs - - - 11,517
Interest expense 2,968 3,287 8,748 7,479
General, administrative and other 106,114 95,867 303,589 243,232
---------- ---------- ----------- -----------
499,649 466,766 1,482,942 1,177,891
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 14,149 48,483 64,904 99,979
INCOME TAX EXPENSE (BENEFIT)
Current (4,102) 19,816 18,998 43,647
Deferred 9,038 (1,972) 4,692 (7,790)
---------- ----------- ----------- -----------
4,936 17,844 23,690 35,857
---------- ---------- ----------- -----------
9,213 30,639 41,214 64,122
DIVIDENDS - PREFERRED STOCK (1,925) (1,925) (5,775) (4,577)
---------- ---------- ----------- -----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 7,288 $ 28,714 $ 35,439 $ 59,545
========== ========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.51 $ 1.89 $ 2.39 $ 4.33
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,247 15,168 14,800 13,753
NET INCOME PER COMMON SHARE ASSUMING
DILUTION $ 0.48 $ 1.51 $ 2.08 $ 3.61
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ASSUMING DILUTION 19,190 20,296 19,794 17,786
</TABLE>
See accompanying notes.
5
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,214 $ 64,122
Depreciation and amortization 27,200 17,328
Amortization of bond premium 2,052 193
Realized investment losses (gains) 1,563 (3,056)
Deferred income tax 4,692 (7,790)
Change in assets and liabilities, net of businesses acquired:
Notes receivable (5,408) (2,057)
Premiums receivable 17,676 (2,437)
Income taxes receivable/payable (13,171) 17,416
Policy and contract claims 27,382 26,074
Accounts payable and accrued expenses (38,869) (5,700)
Other (22,726) (19,305)
----------- -----------
Net cash provided by operating activities 41,605 84,788
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net (38,773) (8,712)
Purchase of business, net of cash acquired - (126,346)
Cost of investments acquired:
Fixed maturities - available-for-sale (500,826) (163,302)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 492,811 94,012
Mortgage loans - net 2,176 10
----------- -----------
Net cash used in investing activities (44,612) (204,338)
Cash flows from financing activities:
Proceeds from the sale of common shares 2,404 80,866
Common shares retired (34,397) -
Cash surrender value increase (6,447) (1,319)
Dividends paid (7,992) (6,849)
Proceeds from issuance of notes payable - 207,394
Payments on notes payable (117) (56,758)
----------- -----------
Net cash (used in) provided by financing activities (46,549) 223,334
Net (decrease) increase in cash and invested cash (49,556) 103,784
Cash and invested cash at beginning of period (12/31) 174,027 70,049
----------- -----------
Cash and invested cash at end of period $ 124,471 $ 173,833
=========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 - - - - - 64,122 64,122
Net unrealized gains on securities,
net of tax of $649 - - - - 1,205 - 1,205
---------
Comprehensive income 65,327
Stock option and incentive plans - - 159,401 4,992 - - 4,992
Common and preferred stock issued 2,200,000 175,700 6,117,973 206,975 - - 382,675
Preferred dividends (7%) - - - - - (4,577) (4,577)
Common dividends ($0.15/share) - - - - - (2,272) (2,272)
--------- -------- ---------- -------- -------- -------- ---------
Balance - September 30, 1998 2,200,000 $175,700 15,242,007 $380,033 $ 8,741 $174,075 $ 738,549
========= ======== ========== ======== ======== ======== =========
Balance - December 31, 1998 2,200,000 $175,700 15,294,572 $382,828 $ 12,367 $200,294 $ 771,189
Net income - - - - - 41,214 41,214
Net unrealized loss on securities,
net of tax benefit of $(14,166) - - - - (25,150) - (25,150)
---------
Comprehensive income 16,064
---------
Common stock retired - - (1,211,200) (34,397) - - (34,397)
Stock option and incentive plans - - 89,339 2,404 - - 2,404
Preferred dividends (7%) - - - - - (5,775) (5,775)
Common dividends ($0.15/share) - - - - - (2,217) (2,217)
--------- -------- ---------- -------- -------- -------- ---------
Balance - September 30, 1999 2,200,000 $175,700 14,172,711 $350,835 $(12,783) $233,516 $ 747,268
========= ======== ========== ======== ======== ======== =========
</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 recorded assimilation costs in 1998
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 September 30, 1999 were
$0.5 million and the total paid to date
8
<PAGE>
was $11.2 million. Exit 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.
Nine Months Ended
September 30, 1998
------------------
Direct operations $ 694,165
Agency operations 686,219
Investment income 42,199
-----------
Gross revenues 1,422,583
Expenses 1,303,013
-----------
Income before income taxes 119,570
Income tax expense 42,756
-----------
Net income 76,814
Less: preferred dividends 5,775
-----------
Net income available to common
shareholders $ 71,039
===========
Net income per common share $4.71
=====
Net income per common share assuming
dilution $3.80
=====
Weighted number of average common
shares outstanding 15,098
===========
Weighted number of average common
shares outstanding assuming dilution 20,203
===========
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income - numerator for diluted
earnings per share $ 9,213 $ 30,639 $ 41,214 $ 64,122
Less preferred dividends 1,925 1,925 5,775 4,577
---------- --------- --------- ----------
Numerator for basic earnings per share $ 7,288 $ 28,714 $ 35,439 $ 59,545
========== ========= ========= ==========
Denominator:
Weighted average shares - denominator
for basic earnings per share 14,247 15,168 14,800 13,753
Effect of dilutive securities:
Assumed weighted average conversion of
preferred stock 4,824 4,824 4,824 3,752
Employee stock options 118 304 170 281
---------- --------- --------- ----------
Denominator for diluted earnings per
share 19,190 20,296 19,794 17,786
========== ========= ========= ==========
Basic earnings per common share $0.51 $1.89 $2.39 $4.33
===== ===== ===== =====
Diluted earnings per common share $0.48 $1.51 $2.08 $3.61
===== ===== ===== =====
</TABLE>
4. Commitments and Contingencies
For additional information, see Pending Legal Proceedings on page F-28
and Legal Proceedings on pages 12 and 13 of the Form 10-K for the year
ended December 31, 1998, Commitments and Contingencies on pages 10 and
11 and Legal Proceedings on page 18 of the Form 10-Q for the quarter
ended June 30, 1999, and Legal Proceedings on page 17 of this Form
10-Q.
10
<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 three quarters of 1998.
Operating Revenues
Operating revenues for the third quarter of 1999 were $501.8 million, compared
to $499.0 million in the third quarter of 1998. Revenues from direct operations
declined approximately 13% in the third quarter of 1999 compared to the same
period of 1998. This decline was a reaction to an increase in mortgage interest
rates in 1999, which caused a drop in the level of refinancing transactions.
Agency revenue increased approximately 13% in the third quarter of 1999 compared
to the same period in 1998, reflecting efforts to grow the agency business and
reflecting the effects of the industry-typical time lag in business reported
through independent agents.
For the first nine months of 1999, operating revenues were $1.51 billion,
compared to $1.24 billion 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 nine months of 1998,
operating revenues would have been $1.38 billion in that period.
Expenses
Operating expenses for the third quarter of 1999 were $499.6 million compared to
$466.8 million in the third quarter of 1998. The increase resulted principally
from an increase in agents' commissions related to the increase in agency
revenues. 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. Total personnel costs were $140.7 million in the
third quarter of 1999, down from $142.2 million in the third quarter of 1998 and
down from $149.0 million in the second quarter of this year. Staffing levels
peaked at 10,700 in December 1998, were 10,260 by June of 1999, and during the
third quarter of 1999 were reduced by almost 1,000 to 9,270.
11
<PAGE>
Management's efforts to aggressively manage the staffing level down to the level
of available business are continuing in the fourth quarter of 1999.
Operating expenses for the first nine months of 1999 were $1.5 billion compared
to $1.2 billion for the comparable period of 1998. On a pro forma basis, the
first nine months of 1998 included operating expenses of $1.3 billion. The
increase in the 1999 nine-month period compared to the pro forma nine-month 1998
period was related principally to an increase in agents' commissions related to
the increase 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 third quarter of 1998, necessary to service increased
business volumes. As discussed above, management has implemented plans to reduce
staffing levels in line with current business volumes.
Net Income
LandAmerica reported net income of $9.2 million, or $0.48 per share on a diluted
basis, for the third quarter of 1999, compared to net income of $30.6 million,
or $1.51 per share on a diluted basis, for the third quarter of 1998. The 1999
quarter included after tax charges of $1.5 million, or $0.08 per diluted share,
for severance related to a reduction in staffing, and other one-time charges
including the loss on sale of a branch office of the Company. The third quarter
of 1998 included after tax gains on the sale of investments of $1.8 million or
$0.09 per diluted share, while there was a negligible capital loss in the third
quarter of 1999.
For the nine months ended September 30, 1999, net income was $41.2 million, or
$2.08 per share on a diluted basis, compared to $64.1 million, or $3.61 per
share on a diluted basis, for the first nine months of 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30,
1999 was $41.6 million. As of September 30, 1999, the Company held cash and
invested cash of $124.5 million and fixed maturity securities of $742.4 million.
In addition, the Company has a bank credit facility of which $30.0 million was
unused at September 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 open market over the ensuing 12
months. To date, approximately 211,000 shares have been repurchased under this
program. 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 cash flow.
12
<PAGE>
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 September 30, 1999, all headquarters' mission-critical applications
had been fully remediated, tested, upgraded, and integrated. Testing was
completed for all essential systems used in the Company's field offices. Over
95% of the local office upgrades have been completed. The remaining upgrades are
scheduled to be completed in early November. The assessment of vendors and
service providers is completed and mission critical providers are continuing to
be monitored and replaced as necessary.
Although the Company has developed a Year 2000 compliance program, there is no
guarantee
13
<PAGE>
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 revised its budgets to allocate approximately $12.7 million in
the aggregate from its general operating funds to the Year 2000 issue; this is a
$1.4 million decrease from the June 30, 1999 budgeted amount based on the
progress of the Y2K Project to date. 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, $4.2 million for remediation and
replacement, $3.2 million for testing, $1.1 million for integration, and $0.2
million for contingencies. Through September 30, 1999, approximately $10.9
million has been spent in the assessment, remediation, testing, integration, 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 assessed the costs and benefits of alternatives in an effort to
select and implement the best contingency strategy for the Company's mission
critical systems. Any necessary training will occur throughout the remainder of
the year. Agreements for backup services are currently being negotiated.
14
<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.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
2004 and
1999 2000 2001 2002 2003 after Total Fair Value
---- ---- ---- ---- ---- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Taxable
available-for-sale
securities:
Book value $ 9,347 $11,645 $43,457 $41,484 $45,950 $333,008 $484,891 $472,416
Average yield 6.0% 7.4% 6.1% 6.2% 6.2% 6.9%
Non-taxable
available-for-sale
securities:
Book value 188 670 3,344 7,554 11,943 193,965 217,664 212,348
Average yield 8.0% 6.3% 3.9% 4.4% 4.1% 4.8%
Preferred stock:
Book value - - - - - 58,534 58,534 57,646
Average yield - - - - - 7.3%
Total $ 9,535 $12,315 $46,801 $49,038 $57,893 $585,507 $761,089 $742,410
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
The Company also has variable rate long-term debt of $207.7 million bearing
interest at 5.74% at September 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, performance or achievements expressed or implied by such
forward-looking
15
<PAGE>
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.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
With respect to the Fleet Litigation as reported in the Company's Form 10-K for
the year ended December 31, 1998 and the Company's Form 10-Q for the quarter
ended June 30, 1999, Commonwealth has settled this case with a payment of
$175,000 to Fleet, an amount substantially less than Commonwealth's estimated
costs of continuing defense of the action.
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 September 21, 1999. The Form 8-K, which was dated
September 15, 1999, reported under Item 5 that G. William Evans had been
elected as Executive Vice President and Chief Financial Officer of the
Company. Mr. Evans replaced Jeffrey A. Tischler who resigned to pursue
other interests.
17
<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: November 11, 1999 /s/ Charles Henry Foster, Jr.
------------------------- --------------------------------------
Charles Henry Foster, Jr.
Chairman and Chief Executive Officer
Date: November 11, 1999 /s/ G. William Evans
-------------------------- --------------------------------------
G. William Evans
Executive Vice President and Chief
Financial Officer
18
<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 September 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 SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 742,410
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,561
<MORTGAGE> 9,437
<REAL-ESTATE> 0
<TOTAL-INVEST> 820,022
<CASH> 57,857
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,662,182
<POLICY-LOSSES> 549,276
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 207,675
0
175,700
<COMMON> 350,835
<OTHER-SE> 220,733
<TOTAL-LIABILITY-AND-EQUITY> 1,662,182
1,512,358
<INVESTMENT-INCOME> 37,051
<INVESTMENT-GAINS> (1,563)
<OTHER-INCOME> 0
<BENEFITS> 74,197
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,408,745
<INCOME-PRETAX> 64,904
<INCOME-TAX> 23,690
<INCOME-CONTINUING> 41,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,214
<EPS-BASIC> 2.39
<EPS-DILUTED> 2.08
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
