-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYVZ0JSf17Ciio1Qtfw8+rPqfeor/XTyEYfxI9GHJCeEaTU5EB++73qGob4A43ZP aVenumno00qKXbPwOQfuyA== 0000950168-97-000705.txt : 19970328 0000950168-97-000705.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950168-97-000705 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTORS TITLE CO CENTRAL INDEX KEY: 0000720858 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 561110199 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11774 FILM NUMBER: 97564468 BUSINESS ADDRESS: STREET 1: 121 N COLUMBIA ST STREET 2: P O DRAWER 2687 CITY: CHAPEL HILL STATE: NC ZIP: 27514 BUSINESS PHONE: 9199682200 MAIL ADDRESS: STREET 1: 121 NORTH COLUMBIA STREET CITY: CHAPEL HILL STATE: NC ZIP: 27514 10-K405 1 INVESTORS TITLE COMPANY #48602.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-11774 INVESTORS TITLE COMPANY (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1110199 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 121 NORTH COLUMBIA STREET, CHAPEL HILL, NORTH CAROLINA 27514 (Address of principal executive offices) Registrant's telephone number, including area code: (919) 968-2200 Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, NO PAR VALUE NONE (Title of each class) (Name of the exchange on which registered) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X On February 15, 1997, the aggregate market value of the voting stock held by those other than executive officers and directors of the registrant was $33,780,013. On February 15, 1997, the number of common shares outstanding was 2,767,629. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - ---------- ------------------- Portions of Annual Report to Shareholders Part I, Items 1 and 2 for fiscal year ended December 31, 1996 Part II, Items 5 - 8 Part IV, Item 14 Portions of Proxy Statement (in connection with Annual Meeting to be held on May 13, 1997) Part III, Items 10 - 13 Location of Exhibit Index: The Index to Exhibits is contained in Part IV herein on page 14. 1 PART I ITEM 1. BUSINESS General Investors Title Company ("the Company") is a holding company which was incorporated in the State of North Carolina on February 13, 1973. The Company became operational June 24, 1976 when it acquired as a wholly owned subsidiary Investors Title Insurance Company, a North Carolina corporation ("ITIC"), under a plan of exchange of shares of common stock. On September 30, 1983, the Company acquired as a wholly owned subsidiary Investors Title Insurance Company of South Carolina, a South Carolina corporation, under a plan of exchange of shares of common stock. On June 12, 1985, its name was changed from Investors Title Insurance Company of South Carolina to Northeast Investors Title Insurance Company ("NE-ITIC"). The Company's executive offices are at 121 North Columbia Street, Chapel Hill, North Carolina 27514. The Company's telephone number is (919) 968-2200. Through its two wholly owned title insurance subsidiaries, ITIC and NE-ITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer and as a reinsurer for other title insurance companies. ITIC was incorporated in the State of North Carolina on January 28, 1972, and became licensed to write title insurance in the State of North Carolina on February 1, 1972. Since that date it has primarily written land title insurance as a primary insurer and as a reinsurer in the States of North Carolina and South Carolina. In addition, the Company currently writes title insurance through issuing agents or branch offices in the States of Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Pennsylvania, Tennessee and Virginia. Agents issue policies for ITIC and may also perform other services such as acting as escrow agents. ITIC is also licensed to write title insurance in the District of Columbia and the States of Alabama, Colorado, Connecticut, Delaware, Idaho, Kansas, Louisiana, Massachusetts, Missouri, Montana, Nevada, New Jersey, North Dakota, Oklahoma, Texas and West Virginia. NE-ITIC was incorporated in the State of South Carolina on February 23, 1973, and became licensed to write title insurance in that State on November 1, 1973. It also currently writes title insurance as a primary insurer and as a reinsurer in the State of New York. Title insurance guarantees owners, mortgagees, and others with a lawful interest in real property against loss by reason of encumbrances and defective title to such property. The commitments and policies issued are the standard American Land Title Association approved forms. Title insurance policies do not insure against future risks. Most other types of insurance protect against losses and events in the future. 2 In the State of North Carolina, title insurance commitments and policies are issued by the home office and branch offices. ITIC has 29 branch offices. In 1996, four offices were opened in North Carolina. In the ordinary course of business, ITIC and NE-ITIC reinsure certain risks with other title insurers for the purpose of limiting their exposure and also assume reinsurance for certain risks of other title insurers for which they receive additional income. Reinsurance activities account for less than 1% of total premium volume. ITIC currently assumes primary risks up to $500,000, reinsures the next $250,000 of risk with NE-ITIC, and all risks above $750,000 are then reinsured with a non-related reinsurer in the industry. NE-ITIC currently assumes primary risks up to $250,000, reinsures the next $500,000 of risk with ITIC, and reinsures all amounts above $750,000 with a non-related reinsurer in the industry. Each insurance subsidiaries' risk retention limits are self-imposed and more conservative than state insurance regulations. In 1984, ITIC became the leading title insurer of North Carolina property and has held this position in the marketplace since that time. ITIC's financial stability was recognized by a Fannie Mae and Freddie Mac approved actuarial firm with a rating of "A Double Prime - unsurpassed financial stability". NE-ITIC's financial stability was recognized by a Fannie Mae and Freddie Mac approved actuarial firm with a rating of "A - exceptional financial stability". In 1988, the Company established Investors Title Exchange Corporation, a wholly owned subsidiary ("ITEC"), to provide services in connection with tax-free exchanges of like-kind property. ITEC acts as an intermediary in tax-free exchanges of property held for productive use in a trade or business or for investments, and its income is derived from fees for handling exchange transactions. South Carolina Document Preparation Company, a wholly owned subsidiary ("SCDP"), purchased the net assets of a former agency to provide services and assistance to licensed members of the South Carolina Bar in the closing of real estate transactions. SCDP was unprofitable and ceased these operations in 1995. SCDP currently provides services in connection with tax-free exchanges of like-kind property. 3 Operations of Subsidiaries ITIC offers primary title insurance coverage to owners and mortgagees of real estate and reinsurance of title insurance risks to other title insurance companies. Title insurance premiums written are for a one-time initial payment, with no recurring premiums. Schedule A summarizes the insurance premiums written during the years 1994 through 1996 by this subsidiary. NE-ITIC offers primary title insurance coverage to owners and mortgagees of real estate and reinsurance of title insurance risks to other title insurance companies. Title insurance premiums written are for a one-time initial payment with no recurring premiums. Schedule A summarizes the insurance premiums written during the years 1994 through 1996 by this subsidiary. ITEC offers services in connection with tax-free exchanges. Schedule A summarizes the fees earned during the years 1994 through 1996. SCDP had revenues of $3,712, $40,926 and $97,924 in 1996, 1995 and 1994, respectively. For a description of Premiums Written geographically, see Management's Discussion and Analysis of Results of Operations and Financial Condition in the 1996 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. Seasonality Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include consumer confidence, economic conditions, supply and demand, mortgage interest rates and family income levels. Historically, the first quarter has had the least real estate activity, while the remaining quarters have been more active. Fluctuations in mortgage interest rates can cause shifts in real estate activity outside the normal seasonal pattern. Marketing ITIC's current and future marketing plan is to provide fast and efficient service in the delivery of title insurance coverage through a home office, branch offices, and issuing agents. In North Carolina, ITIC operates through a home office and 27 branch offices. In South Carolina, ITIC operates through a branch office and issuing agents located conveniently to customers throughout the State. ITIC also operates through issuing agents located in Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Pennsylvania, Tennessee and 4 SCHEDULE A INVESTORS TITLE INSURANCE COMPANY PREMIUMS WRITTEN For The Years Ended December 31 1996 1995 1994 $20,696,625 $15,547,967 $15,151,448 =========== =========== =========== NORTHEAST INVESTORS TITLE INSURANCE COMPANY PREMIUMS WRITTEN For The Years Ended December 31 1996 1995 1994 $535,623 $384,856 $496,301 ======== ======== ======== INVESTORS TITLE EXCHANGE CORPORATION FEES EARNED For The Years Ended December 31 1996 1995 1994 $272,998 $241,281 $153,144 ======== ======== ======= 5 Virginia. ITIC intends to establish branch and/or agency offices in the other states in which it is licensed. A time frame has not been determined for any additional expansion. NE-ITIC currently operates through two agency offices in the State of New York. ITIC and NE-ITIC strive to provide superior service to their customers and consider this an important factor in attracting and retaining customers. Branch and corporate personnel strive to develop new business relationships to increase market share. The Company's marketing efforts are also enhanced through advertising. Customers The Company is not dependent upon any single customer, the loss of which could have a material effect on the Company. Reserves The reserves for possible claims for financial reporting purposes are established based on criteria discussed in Notes 1 and 5 to Consolidated Financial Statements of the 1996 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report. Regulations The Company's two insurance subsidiaries are subject to examination at any time by the licensing states. Title insurance companies are extensively regulated under applicable state laws. The regulatory authorities possess broad powers with respect to the licensing of title insurers and agents, rates, investments, policy forms, financial reporting, reserve requirements, dividend restrictions as well as examinations and audits of title insurers. ITIC is domiciled in North Carolina and subject to North Carolina state insurance regulations. Examinations are scheduled every three years by the North Carolina Department of Insurance. ITIC was last examined by the North Carolina Department of Insurance commencing on May 15, 1995 for the period January 1, 1992 through December 31, 1994 with no material deficiencies noted. NE-ITIC is domiciled in South Carolina and subject to South Carolina state insurance regulations. NE-ITIC was last examined by the South Carolina Department of Insurance on November 14, 1994 for the period December 31, 1991 through December 31, 1993 with no material deficiencies noted. Examinations are scheduled periodically by the South Carolina Department of Insurance. In accordance with the insurance laws and regulations applicable to title insurance in the State of North Carolina, ITIC has established and maintains a statutory premium reserve for the protection of policyholders. ITIC reserves an amount equal to 10% of current year premiums written. This amount is then reduced annually by 5% and the net amount is accumulated in a statutory premium reserve. 6 NE-ITIC has established and maintains a statutory premium reserve as required by the insurance laws and regulations of the State of New York. A $1.50 for each risk assumed under a policy or commitment plus one-eightieth of one percent of the face amount of each commitment or policy, reduced by that portion of the reserve established 15 years earlier are accumulated in a statutory premium reserve for years up to 1985. In subsequent years the addition to the reserve is calculated in the same manner but is reduced annually by 5%. These statutory premium reserve additions are not charged to operations for financial reporting purposes and changes in the statutory premium reserve have no effect on net income of the companies for financial reporting purposes. The Company is an insurance holding company, and is also subject to regulation in the states in which its insurance subsidiaries do business. These regulations, among other things, require insurance holding companies to register and file certain reports and require prior regulatory approval of intercorporate transfers including, in some instances, the payment of shareholders' dividends by the insurance subsidiary. All states set requirements for admission to do business, including minimum levels of capital and surplus. State insurance departments have broad administrative powers and monitor the stability and service of insurance companies. In addition to the financial statements which are required to be filed as part of this report and are prepared on the basis of generally accepted accounting principles, the Company's insurance subsidiaries also prepare financial statements in accordance with statutory accounting principles prescribed or permitted by state regulations. Based upon the latter principles, as of December 31, 1996, ITIC reported $14,286,267 of capital and surplus, and net income of $2,957,206; and NE-ITIC reported $1,957,088 of capital and surplus, and net income of $160,882. ITIC and NE-ITIC both meet the minimum capital and surplus requirements of the states in which they are licensed. Competition ITIC currently operates primarily in the State of North Carolina. There are 19 title insurance companies operating in the State of North Carolina. In 1996 Investors Title had approximately 26% of the title insurance market in the State, and ranked first in the amount of premiums written among companies doing business in the State. 7 ITIC's major competitors in North Carolina are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company of Pennsylvania, First American Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic National Title Insurance Company and Stewart Title Guaranty Company. ITIC and NE-ITIC have a number of competitors in each state where they operate. The title insurance industry is highly competitive. Key elements which affect competition are price, expertise, service, financial strength and size of the insurer. Investments The Company and its subsidiaries derive a substantial portion of their income from investments in bonds (municipal and corporate), certificates of deposit, and equity securities. The investment policy is designed to maintain a high quality portfolio and maximize income. Some state laws impose certain restrictions upon the types and amounts of investments that can be made by the Company's insurance subsidiaries. The Company, ITIC, NE-ITIC, ITEC and SCDP had investment income as set out in the following table for the years 1992 through 1996: FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Company $ 67,162 $16,238 $12,225 $10,529 $ 11,755 ITIC 1,161,795 1,007,255 926,976 842,367 733,676 NE-ITIC 121,007 111,939 103,600 100,576 99,691 ITEC 2,708 3,457 3,911 968 357 SCDP 260 1,747 0 0 0 TOTAL $1,352,932 $1,140,636 $1046,712 $954,440 $845,479 ========== ========== ========= ======== ======== See Note 3 in the 1996 Annual Report to Shareholders incorporated herein by reference for the major categories of investments, earnings by investment categories, scheduled maturities, amortized cost, and market values of investment securities. 8 Employees The Company, ITEC, NE-ITIC and SCDP have no paid employees. Officers of the Company are full-time paid employees of ITIC, which had 132 full-time employees and 17 part-time employees as of December 31, 1996. Trademark The Company's subsidiary, ITIC, registered its logo with the U.S. Patent- Trademark Office in February, 1987. The loss of said registration, in the Company's opinion, would not materially affect its business. ITEM 2. PROPERTIES The Company owns property located at 135-137 East Rosemary Street, Chapel Hill, North Carolina. This property currently serves as a parking facility for employees and guests of the Company. The Company owns the office building and property located on the corner of North Columbia and West Rosemary Streets in Chapel Hill, North Carolina which serves as the Company's corporate headquarters. The building contains approximately 23,000 square feet. The Company's principal subsidiary, ITIC, leases office space in 30 locations throughout North Carolina, South Carolina, Michigan and Virginia. See Note 8 in the 1996 Annual Report to Shareholders incorporated herein by reference for the amounts of future minimum lease payments. Each of the office facilities occupied by the Company and its subsidiaries are in good condition and adequate for present operations. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in litigation on a number of claims which arise in the normal course of business, none of which, in the opinion of management are expected to have a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1996. 9 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY Identification of Executive Officers The following table sets forth the executive officers of the Company as of December 31, 1996. Each officer is appointed at the annual meeting of the Board of Directors to serve until the next annual meeting of the board or until his respective successor has been elected. Position with Officer Term to Name Age Registrant Since Expire J. Allen Fine 62 President 1973 1997 and Director Elizabeth P. Bryan 36 Vice President 1987 1997 and Assistant Secretary James A. Fine, Jr. 34 Vice President 1987 1997 W. Morris Fine 30 Vice President and 1992 1997 Treasurer L. Dawn Martin 31 Vice President 1993 1997 and Assistant Secretary Carl E. Wallace, Jr. 52 Vice President 1977 1997 and Secretary J. Allen Fine, President and Chairman of the Board of Directors, is the father of James A. Fine, Jr., Vice President of the Company, and W. Morris Fine, also a Vice President and Treasurer of the Company. The business experience of the Executive Officers of the Company is set forth below: J. Allen Fine was the principal organizer of ITIC and has been Chairman of the Board of that Company, the Registrant, and NE-ITIC since their incorporation. Mr. Fine served as President of ITIC until February, 1997 when he was named Chief Executive Officer. Additionally, Mr. Fine serves as President of the Company and President and Chief Executive Officer of NE-ITIC. Mr. Fine also serves as Chairman of the Board 10 of ITEC and SCDP. Mr. Fine is the father of James A. Fine, Jr., Vice President of the Company, and W. Morris Fine, Vice President and Treasurer of the Company. Elizabeth P. Bryan joined the Company in 1985 as Controller of the Company, ITIC and NE-ITIC. In 1987 she was named Vice President of the Company, Vice President- Accounting of ITIC and Vice President of NE-ITIC. In 1988, Ms. Bryan was named Vice President, Treasurer and Director of ITEC. In 1996, she was named Treasurer of NE-ITIC, and Vice President and Treasurer of SCDP. In 1997, Ms. Bryan was named Assistant Secretary of the Company. James A. Fine, Jr. joined the Company in 1986 as Investment Manager of ITIC and NE- ITIC. In 1987 he was named Vice President of the Company and Vice President-Finance of ITIC and Vice President of NE-ITIC. In 1988, he was named President and Director of ITEC. In 1990, he was appointed Director of ITIC and in 1991 was appointed Director of NE-ITIC. In 1994, Mr. Fine was named Vice President and Director of SCDP. In 1996, he was named Executive Vice President and Chief Financial Officer of NE-ITIC and President of SCDP. In 1997, Mr. Fine was named Executive Vice President and Chief Financial Officer of ITIC. James A. Fine, Jr. is the son of J. Allen Fine, President and Chairman of the Board of the Company, and brother of W. Morris Fine, Vice President and Treasurer of the Company. W. Morris Fine joined the Company in July, 1992, and was subsequently named Vice President of the Company, Vice President-Marketing of ITIC, and Vice President of ITEC. In 1993, Mr. Fine was named Treasurer of the Company and ITIC; Vice President and Director of NE-ITIC; and Director of ITIC and ITEC. In 1994, Mr. Fine was named Treasurer and Director of SCDP. In 1995, he was named Treasurer of NE- ITIC. In 1996, he was named Executive Vice President and Chief Operating Officer of NE-ITIC. In 1997, Mr. Fine was named President and Chief Operating Officer of ITIC. Mr. Fine graduated from the University of North Carolina at Chapel Hill in 1988 and, upon graduation, was employed by Ernst & Young as a Senior Auditor prior to joining Investors Title. W. Morris Fine is the son of J. Allen Fine, President and Chairman of the Board of the Company, and brother of James A. Fine, Jr., Vice President of the Company. L. Dawn Martin joined the Company in February, 1991, and was subsequently named Vice President, Assistant Secretary and Director of ITEC. In 1993, Ms. Martin was named Vice President of the Company and Vice President-Human Resources of ITIC. In 1994, Ms. Martin was named Assistant Secretary for both the Company and ITIC, and Secretary of ITEC and SCDP. In 1995, she was appointed as Director of ITIC and SCDP, and named Assistant Secretary of NE-ITIC. Ms. Martin was previously employed by Elite Personnel, Inc., as a Personnel Coordinator and by Judith Fox Temporaries, Inc., as a Senior Personnel Coordinator. Carl E. Wallace, Jr. is Vice President and Secretary of the Company. Since 1974, he has 11 also held the positions of Vice President and Secretary of NE-ITIC, as well as Vice President-Business Development, Secretary and Title Attorney for ITIC. In 1990, he was appointed Director of ITIC. In 1994, Mr. Wallace was named Vice President and Director of SCDP. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The high and low sales prices for the common stock on NASDAQ and the dividends paid per common share for each quarter in the last two fiscal years are indicated under "Operations Summaries" in the 1996 Annual Report to Shareholders and are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended December 31, 1996 is in the 1996 Annual Report to Shareholders under the caption "Financial Highlights" and is incorporated herein by reference. The information should be read in conjunction with the Financial Statements and Notes and the Management's Discussion and Analysis of Results of Operations and Financial Condition which are in the 1996 Annual Report to Shareholders and are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's Discussion and Analysis of Results of Operations and Financial Condition in the 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data in the 1996 Annual Report to Shareholders are incorporated herein by reference. The financial statement schedules meeting the requirements of Regulation S-X are shown as Schedules I, II, III, IV and V included on pages 19 through 26. The supplementary data (Selected Quarterly Operating Results) in the 1996 Annual Report to Shareholders is incorporated herein by reference. 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in, nor disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of Directors Information pertaining to Directors of the Company under the heading "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein by reference. Other information with respect to executive officers is contained in Part I - Item 4(a) under the caption "Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION Information pertaining to executive compensation under the heading "Executive Compensation" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to securities ownership of certain beneficial owners and management under the heading "Ownership of Stock by Executive Officers and Certain Beneficial Owners" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transactions under the heading "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) The following documents are filed as part of this report: 1. Financial Statements The following financial statements in the 1996 Annual Report to Shareholders are hereby incorporated by reference in Item 8: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996 & 1995 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 & 1994 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995, & 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 & 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following is a list of financial statement schedules and the Auditors' Report on such schedules filed as part of this report on Form 10-K: Investors Title Company and Subsidiaries: Independent Auditors' Report on Financial Statement Schedules Schedule Number Description I Summary of Investments- Other Than Investments in Related Parties II Condensed Financial Information of Registrant III Supplementary Insurance Information IV Reinsurance V Valuation and Qualifying Accounts All other schedules are omitted, as the required information is not applicable or required, or the information is presented in the consolidated financial statements or the notes thereto. 14 3. Exhibits Page Number or Exhibit Incorporation by Number Description Reference to (3)(i) Articles of Incorporation Exhibit 1 to Form 10, dated June 12, 1984 (3)(ii) By-Laws Exhibit 2 to Form 10, dated June 12, 1984 (3)(iii) Amendment to Bylaws adopted Page 27 of this report. March 10, 1997 Management contract of compensatory plan or arrangement (Exhibits (10)(i) - (10)(viii)) (10)(i) 1988 Incentive Stock Option Plan Exhibit 10 to Form 10-K, page 31, dated December 31, 1989 (10)(ii) 1993 Incentive Stock Option Plan Exhibit 10 to Form 10-K, page 32, dated December 31, 1993 (10)(iii) 1993 Incentive Stock Option Plan- Exhibit 10 to Form W. Morris Fine 10-K, page 33, dated December 31, 1993 (10)(iv) Employment Agreement dated Exhibit 10 to Form February 9, 1984 with 10-K, page 14, dated J. Allen Fine, President December 31, 1985 (10)(v) Form of Incentive Stock Option Exhibit 10(v) to Form Agreement under 1993 Incentive 10-K, page 29, dated Stock Option Plans December 31, 1994 (10)(vi) Form of Amendment dated Exhibit 10(vi) to Form November 8, 1994 to Stock Option 10-Q, page 11, dated Agreement dated as of November 13, March 31, 1995 1989 15 (10)(vii) Form of Stock Option Agreement Exhibit 10(vii) to Form dated November 13, 1989 10-Q, page 13, dated March 31, 1995 (10)(viii) 1997 Stock Option and Restricted Page 29 of this report. Stock Plan (13) Portions of 1996 Annual Included herewith Report to Shareholders incorporated by reference in this report as set forth in Part II hereof. (21) Subsidiaries of Registrant Exhibit 21 to Form 10-K, page 55, dated December 31, 1994 (27) Financial Data Schedule Included herewith (B) Reports on Form 8-K No reports were filed on Form 8-K for the fourth quarter. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INVESTORS TITLE COMPANY By:/s/J. Allen Fine J. Allen Fine President, Chairman Date March 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the 26th day of March, 1997. /s/J. Allen Fine /s/William J. Kennedy III J. Allen Fine, President, Chairman William J. Kennedy III, Director /s/Elizabeth P. Bryan /s/H. Joe King, Jr. Elizabeth P. Bryan, Vice President H. Joe King, Jr., Director (Principal Accounting Officer) /s/William Morris Fine William Morris Fine, Vice President Richard W. McEnally, Director and Treasurer (Principal Financial Officer) /s/Lillard H. Mount /s/James R. Morton Lillard H. Mount, Director and James R. Morton, Director General Counsel /s/David L. Francis /s/A. Scott Parker, Jr. David L. Francis, Director A. Scott Parker, Jr., Director Loren B. Harrell, Jr., Director 17 (Deloitte & Touche LLP Letterhead appears here) INDEPENDENT AUDITORS' REPORT Investors Title Company: We have audited the consolidated financial statements of Investors Title Company (the "Company") and its subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated January 29, 1997; such consolidated financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. (Deloitte & Touche LLP signature appears here) January 29, 1997 (Deloitte Touche Footer appears here) 18 SCHEDULE I INVESTORS TITLE COMPANY AND SUBSIDIARIES SUMMARY OF INVESTMENTS As of December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------- Amount at which shown in the Type of Investment Cost(1) Market Value Balance Sheet - --------------------------------------------------------------------------------------------------------------------------- Fixed Maturities: Bonds: States, municipalities and political subdivisions $15,595,059 $16,047,790 $15,892,518 Foreign governments 145,922 138,274 138,274 Public utilities 497,933 505,000 505,000 Convertibles and bonds with warrants attached 10,000 11,300 11,300 All other corporate bonds 1,367,998 1,384,000 1,384,000 Certificates of deposit 169,004 169,004 169,004 ------------------ -------------------- -------------------- Total fixed maturities 17,785,916 18,255,368 18,100,096 ------------------ -------------------- -------------------- Equity Securities: Common Stocks: Public utilities 279,864 447,988 447,988 Banks, trust and insurance companies 555,147 1,144,692 1,144,692 Industrial, miscellaneous and all other 2,018,799 3,232,749 3,232,749 Nonredeemable preferred stocks 631,117 648,138 648,138 ------------------ -------------------- -------------------- Total equity securities 3,484,927 5,473,567 5,473,567 ------------------ -------------------- -------------------- Total investments per the consolidated balance sheet 21,270,843 23,573,663 ------------------ -------------------- Short-term investments 3,833,153 3,833,153 ------------------ -------------------- Total investments $25,103,996 $27,406,816 ================== ====================
(1) Fixed maturities are shown at amortized cost and equity securities are shown at original cost. 19 SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
1996 1995 Assets Cash and Cash Equivalents $ 139,668 $ 41,370 ----------- ----------- Equity Securities 90,000 -- ----------- ----------- Investments in Affiliated Companies at Equity* 22,743,358 19,507,982 ----------- ----------- Receivables: Income taxes receivable 463,445 564,387 Other 45,232 58,839 ----------- ----------- Total receivables 508,677 623,226 ----------- ----------- Deferred Income Tax 25,688 18,572 ----------- ----------- Prepaid Expenses and Other Assets 218,122 218,122 ----------- ----------- Property-At Cost: Land 782,582 782,582 Office buildings and improvements 1,293,726 1,293,726 Furniture, fixtures and equipment 82,138 139,158 ----------- ----------- Total 2,158,446 2,215,466 Less accumulated depreciation 366,687 298,126 ----------- ----------- Property, net 1,791,759 1,917,340 ----------- ----------- Total Assets $25,517,272 $22,326,612 =========== =========== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 120,927 $ 140,507 Notes payable -- 362,000 ----------- ----------- Total liabilities 120,927 502,507 ----------- ----------- Stockholders' Equity: Common stock-No par (shares authorized, 6,000,000; 2,855,744 and 2,855,744 shares issued and 2,767,830 and 2,790,633 shares outstanding 1996 and 1995, respectively) 1,650,350 1,650,350 Retained earnings 23,745,995 20,173,755 ----------- ----------- Total stockholders' equity 25,396,345 21,824,105 ----------- ----------- Total Liabilities and Stockholders' Equity $25,517,272 $22,326,612 =========== ===========
*Eliminated in consolidation. See notes to condensed financial statements. 20 SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- REVENUES: Investment income-interest and dividends $ 67,163 $ 19,430 $ 16,311 Rental income 350,331 304,931 321,057 Miscellaneous income 1,000 -- -- ----------- ----------- ----------- Total 418,494 324,361 337,368 ----------- ----------- ----------- OPERATING EXPENSES: Office occupancy and operations 142,872 121,415 125,088 Business development 8,593 9,079 9,192 Taxes-other than payroll and income 49,579 47,032 39,632 Professional fees 33,684 18,251 8,864 Interest expense 7,692 43,191 76,633 Other expenses 36,231 92,769 33,324 ----------- ----------- ----------- Total 278,651 331,737 292,733 ----------- ----------- ----------- EQUITY IN NET INCOME OF AFFILIATED COS.* 3,745,375 3,138,446 3,103,224 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 3,885,218 3,131,070 3,147,859 ----------- ----------- ----------- INCOME TAX EXPENSE (BENEFIT): Current 48,797 (113,417) (108,656) Deferred (7,116) (6,171) 129,656 ----------- ----------- ----------- Total 41,681 (119,588) 21,000 ----------- ----------- ----------- NET INCOME $ 3,843,537 $ 3,250,658 $ 3,126,859 =========== =========== =========== EARNINGS PER COMMON SHARE $ 1.39 $ 1.16 $ 1.10 =========== =========== ===========
* ELIMINATED IN CONSOLIDATION SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 21 SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 3,843,537 $ 3,250,658 $ 3,126,859 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of subsidiaries less dividends received of $510,000, $856,828 and $772,774 in 1996, 1995 and 1994, respectively (3,235,375) (2,281,618) (2,350,450) Depreciation 68,560 67,793 58,821 Provision (benefit) for deferred income taxes (7,116) (6,171) 129,656 Decrease in receivables 13,607 1,216 68,987 (Increase) decrease in income taxes receivable-current 100,942 (311,222) 42,388 Decrease in prepaid expenses -- -- 860 Increase (decrease) in accounts payable and accrued liabilities (19,580) 39,861 (6,972) ----------- ----------- ----------- Net cash provided by operating activities 764,575 760,517 1,070,149 ----------- ----------- ----------- INVESTING ACTIVITIES: Purchases of securities (30,000) -- -- Purchases of furniture and equipment (2,980) (69,605) (53,424) ----------- ----------- ----------- Net cash used in investing activities (32,980) (69,605) (53,424) ----------- ----------- ----------- FINANCING ACTIVITIES: Payments on demand notes (362,000) (500,000) (1,000,000) Dividends paid (271,297) (228,460) (228,460) ----------- ----------- ----------- Net cash used in financing activities (633,297) (728,460) (1,228,460) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 98,298 (37,548) (211,735) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 41,370 78,918 290,653 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 139,668 $ 41,370 $ 78,918 =========== =========== =========== SUPPLEMENTAL DISCLOSURES: CASH PAID DURING THE YEAR FOR: Interest $ 15,837 $ 35,046 $ 70,054 =========== =========== =========== Income Taxes $ 371,193 $ 227,087 $ 149,372 =========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Net unrealized gains (losses) on investments in common stocks were $0 in 1996, 1995 and 1994. See notes to condensed financial statements. During 1996, the Company exchanged assets with a value of $60,000 for an equity investment.
22 SCHEDULE II INVESTORS TITLE COMPANY (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Investors Title Company and Subsidiaries. 2. Cash dividends paid to Investors Title Company by its wholly owned subsidiary, Investors Title Insurance Company, were $350,000, $836,828, and $732,774 in 1996, 1995 and 1994, respectively. Cash dividends paid to Investors Title Company by its wholly owned subsidiary, Investors Title Exchange Corporation were $160,000, $20,000, and $40,000 in 1996, 1995 and 1994, respectively. 3. Notes payable consists of one note payable totaling $362,000 to Investors Title Insurance Company. The note was paid off in March 1996. 4. Certain 1995 and 1994 amounts have been reclassified to conform with 1996 classifications. 23 SCHEDULE III INVESTORS TITLE COMPANY AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------------------ FUTURE POLICY OTHER BENEFITS, POLICY DEFERRED LOSSES, CLAIMS POLICY CLAIMS AND NET ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COST EXPENSES PREMIUMS PAYABLE REVENUE INCOME - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 TITLE --- 5,086,065 --- 60,902 21,111,155 1,352,932 YEAR ENDED DECEMBER 31, 1995 TITLE --- 3,836,065 --- 38,601 15,854,140 1,140,636 YEAR ENDED DECEMBER 31, 1994 TITLE --- 3,635,850 --- 52,848 15,596,643 1,046,712 -------------------------------------------------------------------- BENEFITS AMORTIZATION CLAIMS, OF DEFERRED LOSSES AND POLICY OTHER SETTLEMENT ACQUISITION OPERATING PREMIUMS EXPENSES COSTS EXPENSES WRITTEN -------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 TITLE 2,939,741 --- 14,629,904 N/A YEAR ENDED DECEMBER 31, 1995 TITLE 1,429,660 --- 11,532,632 N/A YEAR ENDED DECEMBER 31, 1994 TITLE 1,446,068 --- 11,062,998 N/A
24 SCHEDULE IV INVESTORS TITLE COMPANY AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------------------------------------------------- CEDED TO ASSUMED FROM PERCENTAGE OF GROSS OTHER OTHER NET AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 TITLE INSURANCE PREMIUMS $21,187,689 $121,093 $44,559 $21,111,155 0.2% YEAR ENDED DECEMBER 31, 1995 TITLE INSURANCE PREMIUMS 15,903,006 78,683 29,817 15,854,140 0.2% YEAR ENDED DECEMBER 31, 1994 TITLE INSURANCE PREMIUMS 15,579,517 51,106 68,232 15,596,643 0.4%
25 SCHEDULE V INVESTORS TITLE COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT ADDITIONS ADDITIONS CHARGED BEGINNING CHARGED TO TO OTHER DEDUCTIONS- BALANCE AT DESCRIPTION OF PERIOD COSTS AND EXPENSES ACCOUNTS - DESCRIBE DESCRIBE END OF PERIOD - ------------------------------------------------------------------------------------------------------------------------------ 1996 PREMIUMS RECEIVABLE VALUATION PROVISION $120,000 $80,000 $0 $0 $200,000 1995 PREMIUMS RECEIVABLE VALUATION PROVISION 120,000 0 0 0 120,000 1994 PREMIUMS RECEIVABLE VALUATION PROVISION 120,000 0 0 0 120,000
26 EX-3 2 EXHIBIT 3(III) EXHIBIT 3(iii) INVESTORS TITLE COMPANY RESOLUTIONS TO BE CONSIDERED BY THE BOARD OF DIRECTORS BYLAW AMENDMENTS MARCH 10, 1997 WHEREAS, the Board of Directors of Investors Title Company (the "Corporation") deems it to be in the best interest of the Corporation to amend certain provisions of the Bylaws of the Corporation to conform such provisions to, and to supply the Corporation with the flexibility afforded by, the North Carolina Business Corporation Act; now then it is RESOLVED, that the Bylaws of the Corporation be and hereby are amended as follows: A. Article I, Section 5 of the Bylaws is amended to delete said Section 5 in its entirety and to substitute in lieu thereof the following: 5. Notice of Meetings. Written or printed notice stating the time and place of the meeting shall be delivered no fewer than 10 nor more than 60 days before the date thereof, either personally or by mail, by or at the direction of the President or the other person calling the meeting, to each shareholder of record entitled to vote at such meeting and to each nonvoting shareholder entitled to notice of the meeting. If the corporation is required by law to give notice of proposed action to nonvoting shareholders and the action is to be taken without a meeting pursuant to Section 9 of this Article, written notice of such proposed action shall be delivered to such shareholders not less than 10 days before such action is taken. If notice is mailed, such notice shall be effective when deposited in the United States mail with postage thereon prepaid and correctly addressed to the shareholder's address shown in the corporation's current record of shareholders. In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat unless it is a matter with respect to which specific notice to the shareholders is expressly required by the provisions of the North Carolina Business Corporation Act. In the case of a special meeting, the notice of meeting shall specifically state the purpose or purposes for which the meeting is called. When a meeting is adjourned for more than 120 days after the date fixed for the original meeting or if a new record date for the adjourned meeting is fixed, notice of the 27 adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for 120 days or less and no new record date for the adjourned meeting is fixed, it is not necessary to give notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken. B. Article VII, Section 3 of the Bylaws is amended to delete said Section 3 in its entirety and to substitute in lieu thereof the following: 3. Fixing Record Date. For the purpose of determining the shareholders entitled to notice of a meeting of shareholders, to demand a special meeting, to vote, to take any other action, or to receive a dividend with respect to their shares, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders. Such record date fixed by the Board of Directors under this Section shall not be more than 70 days before the meeting or action requiring a determination of shareholders. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to a dividend, the close of the business day before the first notice is delivered to shareholders or the date on which the Board of Directors authorizes the dividend, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 28 EX-10 3 EXHIBIT 10(VIII) INVESTOR'S TITLE COMPANY EXHIBIT 10(viii) 1997 STOCK OPTION AND RESTRICTED STOCK PLAN ARTICLE I GENERAL PROVISIONS 1. Purpose. This 1997 Stock Option and Restricted Stock Plan (the "Plan") of Investor's Title Company and its subsidiaries (the "Company") is intended to induce those persons who are in a position to contribute materially to the success of the Company to remain with the Company, to offer them rewards in recognition of their contributions to the Company and to offer them incentives to continue to promote the Company's best interests. 2. Elements of the Plan. The Plan provides for the grant of stock options pursuant to Article II of the Plan ("Options") and restricted stock awards pursuant to Article III of the Plan ("Restricted Stock Awards"). Each Option granted pursuant to the Plan shall be designated as provided in Article II as either an Incentive Stock Option or a Nonqualified Stock Option. Incentive Stock Options granted under the Plan are intended to qualify as such under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed and interpreted to comply with the requirements of that section and any regulations promulgated thereunder. 3. Administration. The Plan shall be administered by an option committee (the "Committee") appointed by the Board of Directors of the Company (the "Board"). The Committee shall be comprised of at least two members of the Board, none of whom shall be a current employee of the Company, a former employee of the Company that receives compensation for prior services rendered during the taxable year, an individual receiving direct or indirect remuneration from the Company, within the meaning of Section 162(m) of the Code and any regulations promulgated thereunder, in any capacity other than as a director, or a former or current officer of the Company. The Board from time to time may appoint members of the Committee in substitution for or in addition to members previously appointed, and may fill vacancies in the Committee, however caused. Any action by the Committee shall be taken by majority vote at a meeting thereof called in accordance with procedures adopted thereby, or by unanimous written consent of the Committee. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option or Restricted Stock Award granted thereunder. In addition, directors or former directors of the Company, including members or former members of the Committee, shall be entitled to indemnification by the Company to the extent permitted by applicable law and by the Company's Articles of Incorporation or Bylaws with respect to any liability or expense arising out of such person's participation in the administration of this Plan. 29 4. Authority of Committee. (a) Subject to the other provisions of this Plan, the Committee shall have sole authority in its absolute discretion: to grant Options and Restricted Stock Awards under the Plan; to determine the number of shares subject to any Option or Restricted Stock Award under the Plan; to fix the option price and the duration of each Option; to establish corporate or individual performance or other vesting standards for Options or Restricted Stock Awards; to establish any other terms and conditions of Options and Restricted Stock Awards; and to accelerate the time at which any outstanding Option may be exercised or the time when restrictions and conditions on Restricted Stock Awards will lapse. (b) Subject to the other provisions of this Plan, and with a view to effecting its purpose, the Committee shall have sole authority in its absolute discretion: to construe and interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to make any other determinations relating to the Plan; and to do everything necessary or advisable to administer the Plan. (c) All decisions, determinations, and interpretations made by the Committee shall be binding and conclusive on all optionees and holders of Restricted Stock and on their legal representatives, heirs and beneficiaries. 5. Shares Subject to the Plan; Reservation of Shares. The maximum aggregate number of shares of common stock of the Company available pursuant to the Plan for the grant of Options and for Restricted Stock Awards, subject to adjustments as provided in Section 7 of this Article I, shall be 250,000 shares of the Company's common stock, no par value (the "Common Stock"). The total number of shares that may be issued to any one Optionee pursuant to options granted under the Plan shall not exceed an aggregate of 50,000 shares of Common Stock. If any Option granted pursuant to the Plan expires or terminates for any reason before it has been exercised in full, the unpurchased shares subject to that Option shall again be available for the purposes of the Plan. If any shares issued pursuant to a Restricted Stock Award are forfeited, they shall again be available for the purposes of the Plan. The Company shall at all times reserve and keep available such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of the Plan. 6. Eligibility. Options and Restricted Stock Awards may be granted under the Plan to such key employees (including statutory employees within the meaning of Section 3121(d)(3) of the Code), officers or directors of the Company, whether or not employees, as the Committee shall select from time to time in its discretion. Incentive Stock Options, however, may be granted under the Plan only to key employees of the Company who qualify for the grant of an Incentive Stock Option under Section 422 of the Code. 7. Adjustments. If the shares of Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, 30 recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the Company is the surviving entity, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which Options and Restricted Stock Awards may be granted under this Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options or unvested Restricted Stock Awards that shall have been granted prior to any such change shall likewise be made. Any such adjustment in outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of any such Option, but with a corresponding adjustment in the price for each share covered by the Option, and shall be made in a manner as not to constitute a modification, within the meaning of Section 424(h) of the Code, of outstanding Incentive Stock Options. In making any adjustment pursuant to this Section 7, any fractional shares shall be disregarded. In the event of a change in the Common Stock of the Company as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. The grant of an Option or a Restricted Stock Award under the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure. ARTICLE II STOCK OPTIONS Options granted pursuant to the Plan that are intended to qualify as "incentive stock options" under Section 422 of the Code shall be designated as such at the time of their grant and are referred to herein as Incentive Stock Options. Options not intended to qualify as Incentive Stock Options are referred to herein as Nonqualified Stock Options and shall be designated as such in the applicable option agreement. Options granted hereunder shall be subject to the terms, conditions and limitations set forth in Article I above and to the following: 1. Terms and Conditions of Options. Options granted under the Plan shall be evidenced by written agreements ("option agreements") in such form as the Committee may from time to time approve. The terms and conditions of Options granted under the Plan, including the satisfaction of corporate or individual performance or other vesting standards, may differ one from another as the Committee shall in its discretion determine, as long as all Options granted under the Plan satisfy the following terms and conditions: (a) Number of Shares; Designation. Each Option shall state the number of shares of Common Stock to which it pertains and that it is either an Incentive Stock Option or a Nonqualified Stock Option. 31 (b) Option Price. Each Option shall state the option price, which shall not be less than the fair market value (as hereinafter defined) per share of the Common Stock at the time the option is granted (except that for Incentive Stock Options granted to any employee who owns more than 10% of the combined voting power of all classes of stock of the Company, the option price shall not be less than 110% of fair market value). For the purpose of the Plan, the "fair market value" per share of Common Stock on any date of reference shall be the Closing Price of the Common Stock referred to in clauses (i), (ii) or (iii) below, whichever appropriate, on the business day immediately preceding such date. For this purpose, the Closing Price of the Common Stock on any business day shall be: (i) if the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or other consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system on which the Common Stock is principally traded, as reported in any newspaper of general circulation; (ii) if clause (i) is not applicable and the Common Stock is otherwise quoted on NASDAQ, or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for the Common Stock on such system for such day; or (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the preceding ten days. If neither clause (i) nor clauses (ii) or (iii) are applicable, "fair market value" per share of Common Stock shall be such value as shall be determined by the Committee in its sole discretion, unless the Committee shall identify a different method for determining fair market value in a fair and uniform manner. (c) Exercise of Options. Each Option shall be exercisable in one or more installments during its term, as provided in the applicable Stock Option agreement, and the right to exercise may be cumulative. No Option may be exercised for a fraction of a share of Common Stock. Unless otherwise provided in the option agreement, the purchase price of any shares purchased shall be paid in full in cash or by certified or official bank check payable to the order of the Company or, if permitted by the applicable option agreement, by shares of Common Stock, or by a combination of cash, check, and (if permitted) shares of Common Stock. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be valued at their fair market value as of the day of delivery, as determined in accordance with Section 1(b) of this Article II. No optionee, or optionee's executor, administrator, legatee, or distributee, shall be deemed to be a holder of any shares subject to an option unless and until a stock certificate or certificates for such are issued to such person(s) under the terms of the Plan. (d) Written Notice Required. An Option granted pursuant to the terms of this Plan shall be exercised when written notice of that exercise, stating the number of shares with respect to which the Option is being exercised, has been given to the Company at its principal office, from the person entitled to exercise the Option and full payment for the shares with respect to which the Option is exercised has been received by the Company. 32 (e) Options Not Transferable. Options granted pursuant to this Plan may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent or distribution and may be exercised during the lifetime of an optionee only by that optionee. (f) Duration of Options. Each Option and all rights thereunder granted pursuant to the terms of this Plan shall expire on the date specified in the applicable option agreement, but in no event shall any Option expire later than ten (10) years from the date on which the Option is granted; provided, however, that any Option granted to an employee who owns more than 10% of the combined voting power of all classes of stock of the Company may not be exercisable after the date five (5) years from the date the Option is granted. In addition, each Option shall be subject to early termination as provided in this Plan or the applicable option agreement. (g) Termination of Employment, Disability or Death. (i) If an optionee ceases to be employed by the Company, or any parent or subsidiary corporation, for any reason other than death or disability, any Option granted to such optionee that is unexercised shall be terminated and forfeited; provided, however, that the applicable option agreement may allow such Option to be exercised within a period not to exceed three months after the date of termination of employment. (ii) If an optionee becomes disabled within the meaning of Section 22(e)(3) of the Code while employed by the Company, or any parent or subsidiary corporation, the Option may be exercised at any time within three months after the date of termination of employment due to disability, unless a longer or shorter period is provided in the applicable option agreement. (iii) If an optionee dies while employed by the Company, its parent or any subsidiary corporation, his Option shall expire one year after the date of death, unless a longer or shorter period of exercise is provided in the applicable option agreement. During this period, the Option may be exercised, except as otherwise provided in the applicable option agreement, by the person or persons to whom the optionee's rights under the Option shall pass by will or by the laws of descent and distribution, but in no event may the Option be exercisable more than ten years from the date of grant. (iv) Unless otherwise provided in the applicable option agreement, any Option that may be exercised for a period following termination of the optionee's employment may be exercised only to the extent it was exercisable immediately before such termination and in no event after the Option would expire by its terms without regard to such termination. (h) Reorganizations. If the Company shall be a party to any merger or consolidation in which it is not the surviving entity or pursuant to which the shareholders of the Company exchange their Common Stock, or if the Company shall dissolve or liquidate or sell all or substantially all of its assets, all Options outstanding under this Plan, unless otherwise provided in the applicable option agreement, shall terminate on the effective date of such merger, consolidation, dissolution, liquidation or sale; provided, however, that prior to such 33 effective date, the Committee may, in its discretion, make any or all outstanding Options immediately exercisable, and may, with respect to Options that are terminated as provided in this Section (h), (i) authorize a payment to any optionee that approximates the economic benefit that he would realize if his option were exercised immediately before such effective date, (ii) authorize a payment in such other amount as it deems appropriate to compensate any optionee for the termination of his Option, or (iii) arrange for the granting of a substitute Option to any optionee. 2. Maximum Amount of Incentive Stock Options. The maximum aggregate fair market value of Common Stock, determined as of the time the Incentive Stock Option is granted, with respect to which Incentive Stock Options are exercisable by an Optionee for the first time during any calendar year, under this Plan and all other incentive stock option plans of the Company and any parent, subsidiary, and predecessor corporations, shall not exceed $100,000. ARTICLE III RESTRICTED STOCK AWARDS Restricted Stock Awards granted pursuant to this Article III shall be subject to those terms, conditions and limitations set forth in Article I above and to the following additional terms: 1. Grant of Restricted Shares. The Committee may cause the Company to grant Restricted Stock Awards to eligible participants in such amounts as the Committee, in its sole discretion, shall determine. Restricted Stock Awards may be issued either alone or in addition to Options granted under the Plan. 2. Agreement. Each Restricted Stock Award shall be evidenced by a written agreement in such form and containing such provisions not inconsistent with the Plan as the Committee may from time to time approve. Each Restricted Stock Award shall be effective as of the date so stated in the resolution of the Committee making the award. 3. Restrictions and Conditions. Shares of Common Stock awarded under this Article III shall be subject to such restrictions and conditions, if any, as may be imposed by the Committee at the time of making the award. Such restrictions and conditions may include, without limitation, the satisfaction of specified performance criteria by the Company or by the grantee of the Restricted Stock Award, or other vesting standards; provided, however, that no award shall require any payment of cash consideration by the grantee. Restrictions and conditions imposed on shares of Common Stock awarded under this Article III may differ from one award to another as the Committee shall, in its discretion, determine. Any restrictions and conditions shall lapse, in whole or in part, as provided in the agreement evidencing the Restricted Stock Award, but must lapse, if at all, not later than ten (10) years from the date of the award. Shares with respect to which no restrictions or conditions are imposed and shares with respect to which the restrictions and conditions imposed thereon have lapsed are hereinafter 34 referred to as "Unrestricted Shares." Shares with respect to which the restrictions and conditions imposed thereon have not lapsed are hereinafter referred to as "Restricted Shares." 4. Rights as a Shareholder. A holder of Unrestricted Shares shall have all of the rights of a shareholder of the Company with respect thereto and shall be entitled to receive a stock certificate evidencing such Unrestricted Shares. Such certificate shall be issued without legend, except to the extent that a legend may be necessary for compliance with applicable securities laws. A holder of Restricted Shares shall be the record owner thereof and shall, subject to the restrictions and conditions, have all of the rights of a shareholder with respect thereto, including, but not limited to, the right to receive all dividends paid on the Common Stock (ordinary or extraordinary, whether in cash, securities or other property) and the right to vote the Restricted Shares; provided, however, that each stock certificate evidencing Restricted Shares shall bear a conspicuous legend stating that the shares evidenced thereby are subject to restrictions as to transferability as provided in Section 6 of this Article III and to such other restrictions and conditions as have been imposed by the Committee, and each such certificate shall be deposited by the Holder with the Company or its designee together with a stock power endorsed in blank. 5. Forfeiture. Unless otherwise provided in the applicable Restricted Stock Award agreement, upon termination of the grantee's employment with the Company or any of its subsidiaries for any reason whatsoever (voluntarily or involuntarily, with or without cause), all Restricted Shares then owned by him shall automatically and without any action on his part be forfeited and transferred to the Company. 6. Transferability. Restricted Shares held by a grantee shall not be subject to alienation, sale, transfer, assignment, pledge, attachment or encumbrances of any kind, and any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any Restricted Shares shall be void. In addition, the Company may impose such restrictions on the transfer of Unrestricted Shares as it deems necessary or desirable to assure compliance with all applicable federal and state securities laws. 7. Adjustments. If there is a change in the Common Stock of the Company as described in Article I, Section 7 of this Plan, any stock or other securities or other property issued with respect to Restricted Shares shall be subject to the same restrictions and conditions as are applicable to such Restricted Shares, and the certificates or other evidence of such stock, securities or other property, together with an appropriate stock power or power of attorney, shall be delivered to the Company or its designee and held until such time as the restrictions and conditions applicable thereto lapse or until the stock, securities or other property is forfeited in accordance with the provisions of this Article III. If the Company shall be a party to any merger or consolidation in which it is not the surviving company or pursuant to which the shareholders of the Company exchange their Common Stock, or if the Company shall dissolve or liquidate or sell all or substantially all of its assets, the Committee may, in its discretion, cause all Restricted Stock Awards that are still subject to any restrictions and conditions to become immediately vested in full on the effective 35 date of any such transaction, unless otherwise provided in the applicable agreement evidencing such Restricted Stock Award. ARTICLE IV MISCELLANEOUS PROVISIONS 1. Tax Reimbursement Payments or Loans. In view of the federal and state income tax savings expected to be realized by the Company upon exercise of a Nonqualified Stock Option or the lapse of restrictions and conditions imposed upon Restricted Shares, the Committee may, in its discretion, provide that the Company will make a cash payment or a loan or a combination thereof to the grantee of a Nonqualified Stock Option or the recipient of a Restricted Stock Award (or his personal representatives or heirs) for the purpose of assisting such optionee or grantee in the payment of personal income taxes arising from such exercise or lapse of restrictions and conditions. The basis for determining the amount and conditions of such cash payment or loan or combination thereof and the terms and conditions of any such loan shall be specified in the agreement pursuant to which the grant or award is made or may be subsequently determined by the Committee. The Committee, in its discretion, may from time to time forgive any such loan in whole or in part. 2. Tax Withholding. No optionee shall be entitled to issuance of a stock certificate representing shares purchased upon exercise of a Nonqualified Stock Option, and no grantee of a Restricted Stock Award shall be entitled to issuance of a stock certificate evidencing Unrestricted Shares, until such optionee or grantee has paid, or made arrangements for payment, to the Company of an amount equal to the income and other taxes that the Company is required to withhold from such person as a result of his exercise of a Nonqualified Stock Option or his receipt of Unrestricted Shares. In addition, such amounts as the Company is required to withhold by reason of any tax reimbursement payments made pursuant to Section 1 of this Article IV may be deducted from such payments. 3. Employment. Nothing in the Plan or in any Option or Restricted Stock Award shall confer upon any eligible employee any right to continued employment by the Company, or limit in any way the right of the Company at any time to terminate or alter the terms of that employment. 4. Effective Date of Plan. This Plan shall be effective March 10, 1997, the date of adoption of the Plan by the Board of Directors of the Company, subject to approval of the Plan by the shareholders of the Company by the majority of the votes cast at a meeting in which a majority of the Company's Common Stock is present either in person or by proxy held within 12 months of the date of adoption of the Plan by the Board. 5. Termination and Amendment of Plan. The Plan may be terminated at any time by the Board of Directors. Unless sooner terminated, the Plan shall terminate on March 9, 2007. No Option or Restricted Stock Award shall be granted under the Plan after the Plan is terminated. Subject to the limitation contained in Section 7 of this Article IV, the Board of Directors may at any time amend or revise the terms of the Plan, provided, however, that no 36 amendment or revision shall (a) increase the maximum aggregate number of shares subject to this Plan, except as permitted under Section 7 of Article I; (b) change the minimum purchase price for shares subject to Options granted under the Plan; (c) extend the maximum duration established under the Plan for any Option or for a Restricted Stock Award; or (d) permit the granting of an Option or Restricted Stock Award to anyone other than those individuals described in Section 6 of Article I hereof. 6. Prior Rights and Obligations. No amendment, suspension, or termination of the Plan shall, without the consent of the person who has received an Option or Restricted Stock Award, alter or impair any of that person's rights or obligations under any Option or Restricted Stock Award granted under the Plan prior to such amendment, suspension, or termination. 37 EX-13 4 EXHIBIT 13 FINANCIAL HIGHLIGHTS
FOR THE YEAR 1996 1995 1994 1993 1992 Premiums written $21,232,248 $15,932,823 $15,647,749 $14,347,323 $13,321,104 Revenues 22,991,182 17,365,950 16,933,925 15,463,260 14,239,039 Investment income 1,352,932 1,140,636 1,046,712 954,440 845,479 Provision for possible claims 2,939,741 1,429,660 1,446,068 2,264,411 2,534,582 Income before extraordinary charge and cumulative effect of a change in accounting principle 3,843,537 3,250,658 3,126,859 2,313,014 1,511,859 Extraordinary charge related to settlement of lawsuit (2,706,565) Cumulative effect of a change in method of accounting for income taxes 141,125 Net income (loss) 3,843,537 3,250,658 3,126,859 2,313,014 (1,053,581)
PER SHARE DATA Income before extraordinary charge and cumulative effect of a change in accounting principle $1.39 $1.16 $1.10 $.81 $.53 Extraordinary charge related to settlement of lawsuit (.95) Cumulative effect of a change in method of accounting for income taxes .05 Net income (loss) 1.39 1.16 1.10 .81 (.37) Cash dividends $.095 $.08 $.08 $.055 $.04 Average number of common shares outstanding 2,772,286 2,804,632 2,833,778 2,855,744 2,855,744
AT YEAR END Assets $33,642,528 $28,224,276 $24,242,060 $22,589,386 $20,929,895 Liabilities 2,568,286 2,178,397 2,052,198 3,042,759 4,074,763 Investments in securities 23,573,663 19,742,639 16,362,082 14,914,140 14,468,853 Stockholders' equity 25,988,177 22,209,814 18,554,012 16,203,627 13,914,411 Book value/share 9.39 7.96 6.60 5.67 4.87
PERFORMANCE RATIOS Net income (loss) to: Average stockholders' equity 15.95% 15.95% 18.00% 15.36% (7.29%) Total revenues (profit margin) 16.72% 18.72% 18.47% 14.96% (7.40%) Provision for possible claims to premiums written 13.85% 8.97% 9.24% 15.78% 19.03%
1 OPERATIONS SUMMARIES STOCK PRICES AND DIVIDENDS On November 12, 1986, the common stock of Investors Title Company began trading on the NASDAQ National Market under the symbol ITIC. The Company has approximately 1,200 shareholders of record, including shareholders whose shares are held in street names. The following table shows the high and low sales prices reported on the NASDAQ National Market System and cash dividends declared per share for the indicated periods.
PRICES CASH DIVIDENDS (HIGH-LOW) DECLARED 1996 2(cents) - First Quarter 12 1/4 - 10 3/1/96 2.5(cents) - Second Quarter 13 - 11 1/4 6/1/96 2.5(cents) - Third Quarter 14 - 11 1/4 9/1/96 2.5(cents) - Fourth Quarter 16 3/4 - 12 3/4 12/12/96 1995 2(cents) - First Quarter 8 1/2 - 6 1/16 3/1/95 2(cents) - Second Quarter 9 1/4 - 7 6/1/95 2(cents) - Third Quarter 9 1/2 - 8 1/4 9/1/95 2(cents) - Fourth Quarter 11 - 8 3/4 12/1/95
The following firms currently make a market in Investors Title Company's common stock: Davenport & Co. of Virginia, Inc.; Ferris, Baker Watts, Inc.; Herzog, Heine, Geduld, Inc.; Interstate/Johnson Lane; and Scott & Stringfellow, Inc. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the consolidated financial statements and the related footnotes on pages 12-21 of this report. OVERVIEW The Company's primary business activity is the issuance of title insurance. Factors which influence the land title business include mortgage interest rates, availability of mortgage funds, level of real estate activity, cost of real estate, consumer confidence, supply and demand of real estate, inflation and general economic conditions. During the past three years, the Company's operating results improved significantly. These improvements are attributable to the Company's efforts to increase market share and to improve the efficiency of operations along with a strong real estate market. Monthly average 30-year fixed rate mortgages were 7.81% in 1996, 7.96% in 1995 and 8.36% in 1994. Housing starts were 1.48 million in 1996, 1.35 million in 1995, and 1.46 million in 1994. New and existing home sales were 4.84 million in 1996, 4.47 million in 1995, and 4.61 million in 1994. Beginning in 1994, the Federal Reserve Board began increasing short-term interest rates and thereafter tightened several additional times. This tightening significantly impacted mortgage rates and resulted in a decline in refinancing activity and residential home sales. Although real estate activity was fairly brisk at the beginning of the year, the pace of transactions declined steadily as mortgage rates rose. During 1995, fixed mortgage interest rates began to drop, declining to 7.2% by year-end for 30-year fixed rate mortgages. These lower rates contributed to an improved real estate market. The Company's operating results began to be positively impacted by a general increase in real estate activity in the second quarter of 1995. The improved real estate environment along with increases in market share combined to provide record quarterly earnings in the third and fourth quarters of 1995. During 1996, interest rates rose more than one percentage point through September, then began to decline, falling to 7.6% by year-end for 30-year fixed rate mortgages. Despite the increase in rates, the pace of real estate transactions increased. The strength in the real estate market since the latter part of 1995 and expansion into new operating territories contributed to record operating results in the second, third and fourth quarters of 1996. Management believes that the current low level of interest bodes well for activity in the real estate market. However, future trends in interest rates are extremely difficult to predict because of the variety of potential influences including U.S. monetary policy and inflationary pressures. The Company strives to offset the cyclical nature of the real estate market by increasing its market share. These efforts include developing new agent relationships and increasing the number of underwriting offices as well as improving market penetration with existing offices and agents. CREDIT RATING Investors Title Insurance Company's financial strength was recognized with a rating of "A Double Prime" (unsurpassed financial stability) by a Fannie Mae approved actuarial firm. Northeast Investors Title Insurance Company received a rating of "A" (exceptional financial stability) from the same firm. RESULTS OF OPERATIONS OPERATING REVENUES Total premiums written increased 33.3% in 1996 compared to 1995. Premiums written in 1995 increased 1.8% compared to 1994. Growth in sales has resulted from a combination of continued marketing efforts and a strong real estate market, despite a slight rise in mortgage interest rates since December 1995. The volume of business continued to increase in 1996 as the number of policies and commitments issued rose to 142,009, an increase of 29.1% compared to 110,036 in 1995. In addition to the improved real estate market and increases in the number of branch offices and issuing agents, management believes that other factors contributing to sales growth were (1) improved service provided through additions to the Company's legal department to provide technical support to branch offices, agents and customers, (2) establishment of a commercial department to provide services in connection with commercial transactions, and (3) establishments of employee incentives given as a motivating tool to achieve revenue targets. Shown below is a schedule of title premiums written for 1996, 1995 and 1994 in all states where our two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance:
1996 1995 1994 Florida $ 73,529 $ 128,124 $ 82,146 Georgia 192,731 31,812 -- Illinois -- -- 5,964 Indiana 91,417 47,342 77,795 Kentucky 239 -- 1,720 Maryland 69,346 6,499 -- Michigan 458,198 -- -- Nebraska 531,688 323,290 86,913 New York 535,952 385,258 494,697 North Carolina 12,492,684 10,254,900 10,375,988 Pennsylvania 2,321 25,276 1,433 South Carolina 2,906,361 1,974,607 2,467,470 Tennessee 109,679 37,992 267,225 Virginia 3,723,544 2,687,906 1,718,166 Direct Premiums 21,187,689 15,903,006 15,579,517 Reinsurance Assumed 44,559 29,817 68,232 Total Premiums Written $21,232,248 $15,932,823 $15,647,749
8 Shown below is a breakdown of branch and agency premiums:
1996 % 1995 % 1994 % Branch $12,670,101 59.8 $10,453,167 65.7 $10,551,332 67.7 Agency 8,517,588 40.2 5,449,839 34.3 5,028,185 32.3 Total $21,187,689 100.0 $15,903,006 100.0 $15,579,517 100.0
Premiums written from branch operations increased 21.2% in 1996 compared to 1995 and decreased 1% in 1995 compared to 1994. Agency premiums increased 56.3% in 1996 compared to 1995 and increased 8.4% in 1995 compared to 1994. In certain geographic areas, the primary distribution of our product is through an agency network. Our ability to increase this network with reputable and qualified agents directly affects our ability to grow our market share. SEASONALITY Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include consumer confidence, economic conditions, supply and demand, mortgage interest rates and family income levels. Generally the first quarter has the least real estate activity, while the remaining quarters are more active. Fluctuations in mortgage interest rates can cause shifts in real estate activity outside the normal seasonal pattern. INVESTMENT INCOME Investments are an integral part of the Company's business. In formulating its investment strategy, the Company has emphasized after-tax income on its investments. Investments in marketable securities have increased from funds retained in the Company. The investments are primarily in debt securities, and to a lesser extent, equity securities. The maturity schedule of investments has primarily remained within 15 years. In 1997, the Company intends to seek growth in investment income by increasing the average size of the investment portfolio. As new funds become available, they will be invested in accordance with the Company's strategy of emphasizing after-tax return, which may include a combination of taxable fixed income securities, tax exempt securities and equities. The Company strives to maintain a high quality investment portfolio. Investment income increased 18.6% in 1996 compared to 1995 and increased 9% in 1995 compared to 1994. These increases were primarily attributable to an increase in the average investment portfolio balance. EXPENSES Profit margins were 16.72% in 1996, 18.72% in 1995, and 18.47% in 1994. These profit margins were largely the result of steps taken to refine operating procedures to better support our branch offices and agents, tight monitoring of expenses, and higher operating leverage resulting from an increase in premiums written. In the fourth quarter of 1993, the Company began implementation of an automation system that computerized the underwriting process. Resulting benefits include a more streamlined and consistent underwriting process and greater efficiency per underwriter. Computer automation has favorably impacted our labor costs. Another step taken to streamline operations was the development of a training center for underwriters that standardizes our underwriting practices. As part of this effort, the Company developed a new underwriting manual to be used by both branch and agency underwriting personnel. In 1996, salaries as a percentage of our branch premiums written declined to 29.8% compared to 33.6% and 33.2% in 1995 and 1994, respectively. The number of branch offices increased from 25 in 1994 to 29 in 1996. Office occupancy and operations as a percentage of branch premiums improved over the three year period (17% in 1996, 17.5% in 1995, and 18% in 1994). Continued expense monitoring and increased automation have enabled the Company to improve margins. Commissions increased 57.5% in 1996 compared to 1995 and increased 11.8% in 1995 compared to 1994 due to increased business from agent sources. The overall commission rate has increased due to higher commission rates in certain new operating territories. Commission rates vary geographically and may be influenced by state regulators. In 1996, the provision for possible claims as a percentage of premiums written increased to 13.85% compared to 8.97% in 1995 and 9.24% in 1994. The increase in the 1996 claims provision is primarily due to increases in claims payments and the reserves for claims. Payments of claims, net of recoveries, were $1,689,741, $1,229,445 and $1,153,218 in 1996, 1995 and 1994, respectively. The Company has continued to strengthen its reserves for claims. At December 31, 1996, the total reserves for claims were $5,086,065. Of that total, $1,297,178 was reserved for specific claims and $3,788,887 was reserved for claims for which the Company had no notice. Management relies on actuarial techniques to estimate future claims by analyzing historical claim payment patterns. There are no known claims which are expected to have a material effect on the Company's financial position. Taxes consist primarily of personal and real property taxes and premium taxes. Premium taxes as a percentage of premiums written remained constant at 2% from 1994 to 1996. INCOME TAXES Income tax expense as a percentage of income before income taxes was 29.1%, 26.2%, and 29.3% in 1996, 1995 and 1994, respectively. The decrease in the percentage in 1995 was primarily due to a refund of taxes paid in prior years totaling $119,994. The deferred income tax liability and net unrealized gain on investments increased primarily due to an appreciation in investment securities. NET INCOME The Company reported an 18.2% increase in net income in 1996 compared to 1995 and a 4% increase in 1995 compared to 1994. These increases were primarily attributable to increased revenues and improved operating efficiencies resulting from expense control procedures. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operating activities were $5,397,301, $3,257,858 and $4,533,402 in 1996, 1995 and 1994, respectively. The increase in 1996 compared to 1995 is primarily attributable to the increase in net income and a number of other factors, including increases in the provision for 9 possible claims (net of payments) and the provision for losses on premiums receivable, a smaller increase in receivables, a decrease in property acquired in settlement of claims, partially offset by a decrease in the provision for deferred income taxes and a larger gain on sales of investments in 1996. Net cash used in investing activities was $3,092,349 in 1996. Net cash used in financing activities was $587,390 in 1996. The insurance subsidiaries are restricted by state regulations in their ability to pay dividends and to make distributions. A significant source of the Company's funds are dividends received from the insurance company subsidiaries. In 1997, the amount of dividends that can be paid without prior approval from the insurance commissioner is approximately $1,624,000. These funds should be adequate to cover the Company's operating needs. On December 9, 1996, the Board of Directors approved the repurchase by the Company of shares of the Company's common stock from time to time at prevailing market prices. The purpose of the repurchases is to avoid dilution to existing shareholders as a result of issuances of stock in connection with stock options and stock bonuses. Pursuant to this approval, the Company has repurchased 7,218 shares at an average price of $15.03 per share in 1997 as of March 7, 1997. During 1996, the Company also repurchased an additional 40,936 shares at an average purchase price of $11.85 per share under another plan approved by the Board of Directors. The Board has authorized management to repurchase up to an additional 142,782 shares. Management believes that funds generated from operations (primarily underwriting and investment income) will enable the Company to adequately meet its operating needs and is unaware of any trend likely to result in adverse liquidity changes. In addition to operational liquidity, the Company maintains a high degree of liquidity within the investment portfolio in the form of short-term investments and other readily marketable securities. Except for the historical information presented, the matters disclosed in the foregoing discussion and analysis and other parts of this report include forward-looking statements. These statements represent the Company's current judgment on the future and are subject to risks and uncertainties that could cause actual results to differ materially. Such factors include, without limitation: (i) the demand for title insurance will vary with factors beyond the control of the Company such as changes in mortgage interest rates, availability of mortgage funds, level of real estate activity, cost of real estate, consumer confidence, supply and demand for real estate, inflation and general economic conditions; (ii) the risk that losses from claims are greater than anticipated such that reserves for possible claims are inadequate; (iii) the risk that unanticipated adverse changes in securities markets could result in material losses on investments made by the Company; and (iv) the dependence of the Company on key management personnel the loss of whom could have a material adverse affect on the Company's business. Other risks and uncertainties may be described from time to time in the Company's other reports and filings with the Securities and Exchange Commission. SELECTED QUARTERLY OPERATING RESULTS
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Premiums written $4,452,889 $5,505,691 $5,604,538 $5,669,130 Investment income 294,791 314,286 329,113 414,742 Net income 747,719 978,782 1,072,350 1,044,686 Net income per share .27 .35 .39 .38 1995 Premiums written $3,121,311 $3,773,439 $4,443,282 $4,594,791 Investment income 266,947 268,484 284,699 320,506 Net income 607,174 756,406 913,731 973,347 Net income per share .22 .27 .32 .35
10 INDEPENDENT AUDITORS' REPORT Investors Title Company and Subsidiaries: We have audited the accompanying consolidated balance sheets of Investors Title Company and its subsidiaries as of December 31, 1996 and 1995, and the related statements of consolidated income, stockholders' 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1996 and 1995, and the 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. (Signature of Deloitte & Touche LLP) Raleigh, North Carolina January 29, 1997 11 INVESTORS TITLE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of December 31, 1996 and 1995
1996 1995 ASSETS CASH AND CASH EQUIVALENTS................................................................... $ 4,244,570 $ 2,527,008 INVESTMENTS IN SECURITIES (NOTES 2, 3 AND 7): Fixed maturities: Held-to-maturity, at amortized cost (fair value: 1996: $5,422,644; 1995: $5,372,464)... 5,267,372 5,147,479 Available-for-sale, at fair value (amortized cost: 1996: $12,518,544; 1995: $9,901,772)........................................................................... 12,832,724 10,310,737 Equity securities, at fair value (cost: 1996: $3,484,927; 1995: $3,181,613)............... 5,473,567 4,284,423 Total investments...................................................................... 23,573,663 19,742,639 RECEIVABLES: Premiums (less allowance for doubtful accounts: 1996: $200,000; 1995: $120,000) (Note 7)............................................................................... 2,016,122 1,703,395 Accrued interest and dividends............................................................ 321,634 299,159 Recoveries of claims previously paid...................................................... 69,334 426,056 Other..................................................................................... 35,663 34,159 Total receivables...................................................................... 2,442,753 2,462,769 PREPAID EXPENSES AND OTHER ASSETS........................................................... 451,972 378,191 PROPERTY ACQUIRED IN SETTLEMENT OF CLAIMS................................................... 165,500 250,500 PROPERTY-AT COST (NOTES 7 AND 8): Land...................................................................................... 782,582 782,582 Office buildings and improvements......................................................... 1,293,726 1,293,726 Furniture, fixtures and equipment......................................................... 1,843,636 1,694,657 Automobiles............................................................................... 169,423 151,374 Total.................................................................................. 4,089,367 3,922,339 Less accumulated depreciation............................................................. 1,325,297 1,059,170 Property, net.......................................................................... 2,764,070 2,863,169 TOTAL ASSETS................................................................................ $33,642,528 $28,224,276
See notes to consolidated financial statements. 12 INVESTORS TITLE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of December 31, 1996 and 1995
1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities.................................................. $ 997,759 $ 997,823 Commissions and reinsurance payables (Note 4)............................................. 60,902 38,601 Premium taxes payable..................................................................... 101,766 35,840 Income taxes payable: Current................................................................................ 175,143 119,500 Deferred (Note 7):..................................................................... 1,232,716 986,633 Total liabilities...................................................................... 2,568,286 2,178,397 RESERVES FOR POSSIBLE CLAIMS (NOTES 5 AND 7)................................................ 5,086,065 3,836,065 COMMITMENTS AND CONTINGENCIES (NOTES 4, 8 AND 10) STOCKHOLDERS' EQUITY (NOTES 2, 3, 6, 7 AND 11): Common stock-no par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares issued; and 2,767,830 and 2,790,633 shares outstanding 1996 and 1995, respectively).... 722,321 1,038,414 Retained earnings......................................................................... 23,745,995 20,173,755 Net unrealized gain on investments (net of deferred taxes: 1996: $782,959; 1995: $514,130)................................ 1,519,861 997,645 Total stockholders' equity............................................................. 25,988,177 22,209,814 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $33,642,528 $28,224,276
See notes to consolidated financial statements. 13 INVESTORS TITLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 REVENUES: Underwriting income: Premiums written (Note 4)............................................ $21,232,248 $15,932,823 $15,647,749 Less-premiums for reinsurance ceded (Note 4)......................... 121,093 78,683 51,106 Underwriting income................................................ 21,111,155 15,854,140 15,596,643 Investment income-interest and dividends (Note 3)....................... 1,352,932 1,140,636 1,046,712 Gain on sales of investments, net (Note 3).............................. 178,238 45,242 41,029 Other................................................................... 348,857 325,932 249,541 Total.............................................................. 22,991,182 17,365,950 16,933,925 OPERATING EXPENSES: Salaries................................................................ 3,773,550 3,515,480 3,498,794 Commissions to agents................................................... 5,780,048 3,669,995 3,283,210 Provision for possible claims (Note 5).................................. 2,939,741 1,429,660 1,446,068 Employee benefits and payroll taxes (Notes 6 and 9)..................... 1,224,659 1,107,465 1,099,148 Office occupancy and operations (Note 8)................................ 2,159,175 1,831,074 1,901,827 Business development.................................................... 665,705 573,874 541,953 Taxes, other than payroll and income.................................... 150,617 142,811 112,574 Premium taxes (Note 7).................................................. 420,963 328,791 318,153 Professional fees....................................................... 160,929 212,279 152,605 Other................................................................... 294,258 150,863 154,734 Total.............................................................. 17,569,645 12,962,292 12,509,066 INCOME BEFORE INCOME TAXES................................................ 5,421,537 4,403,658 4,424,859 PROVISION FOR INCOME TAXES (NOTE 7): Current: Federal.............................................................. 1,586,940 1,062,346 1,008,463 State................................................................ 14,000 16,000 8,000 Total.............................................................. 1,600,940 1,078,346 1,016,463 Deferred Federal........................................................ (22,940) 74,654 281,537 Total.............................................................. 1,578,000 1,153,000 1,298,000 NET INCOME................................................................ $ 3,843,537 $ 3,250,658 $ 3,126,859 EARNINGS PER COMMON SHARE................................................. $ 1.39 $ 1.16 $ 1.10 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 2,772,286 2,804,632 2,833,778
See notes to consolidated financial statements. 14 INVESTORS TITLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the Years Ended December 31, 1996, 1995 and 1994
NET UNREALIZED GAIN TOTAL COMMON STOCK RETAINED (LOSS) ON STOCKHOLDERS' SHARES AMOUNT EARNINGS INVESTMENTS EQUITY BALANCE, JANUARY 1, 1994.......................... 2,855,744 $1,650,350 $14,253,158 $ 300,119 $16,203,627 Net income............................... 3,126,859 3,126,859 Dividends ($.08 per share)............... (228,460) (228,460) Purchase of 43,682 shares of common stock (net).................... (43,682) (387,032) (387,032) Net unrealized loss on investments (net of deferred taxes of ($81,730))....... (160,982) (160,982) BALANCE, DECEMBER 31, 1994........................ 2,812,062 1,263,318 17,151,557 139,137 18,554,012 Net income............................... 3,250,658 3,250,658 Dividends ($.08 per share)............... (228,460) (228,460) Purchase of 21,429 shares of common stock (net).................... (21,429) (224,904) (224,904) Net unrealized gain on investments (net of deferred taxes of $441,254)........ 858,508 858,508 BALANCE, DECEMBER 31, 1995........................ 2,790,633 1,038,414 20,173,755 997,645 22,209,814 Net income............................... 3,843,537 3,843,537 Dividends ($.095 per share).............. (271,297) (271,297) Purchase of 22,803 shares of common stock (net)................................. (22,803) (316,093) (316,093) Net unrealized gain on investments (net of deferred taxes of $268,829)........ 522,216 522,216 BALANCE, DECEMBER 31, 1996........................ 2,767,830 $ 722,321 $23,745,995 $1,519,861 $25,988,177
See notes to consolidated financial statements. 15 INVESTORS TITLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 OPERATING ACTIVITIES: Net income............................................................... $ 3,843,537 $ 3,250,658 $ 3,126,859 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................................ 328,682 307,649 315,436 Amortization, net of accretion...................................... 11,114 50,369 45,990 Provision for losses on premiums receivable......................... 80,000 -- -- (Gain) loss on disposals of property................................ (9,895) 11,028 7,998 Gain on sales of investments........................................ (178,238) (45,242) (41,029) Provision (benefit) for deferred income taxes....................... (22,940) 74,654 281,537 Provision for possible claims....................................... 2,939,741 1,429,660 1,446,068 Payments of claims, net of recoveries............................... (1,689,741) (1,229,445) (1,153,218) Changes in assets and liabilities: (Increase) decrease in receivables.................................. (59,984) (495,063) 664,167 (Increase) decrease in prepaid expenses and other assets............ (73,781) (7,301) 110,462 (Increase) decrease in property acquired in settlement of claims.... 85,000 (79,900) (80,500) Decrease in accounts payable and accrued liabilities................ (64) (2,036) (90,534) Increase (decrease) in commissions and reinsurance payables......... 22,301 (14,247) (71,828) Increase (decrease) in premium taxes payable........................ 65,926 7,074 (28,006) Increase in income taxes payable.................................... 55,643 -- -- Net cash provided by operating activities........................... 5,397,301 3,257,858 4,533,402 INVESTING ACTIVITIES: Purchases of available-for-sale securities............................. (4,370,919) (4,419,434) (862,994) Purchases of held-to-maturity securities............................... (997,220) (415,000) (2,573,655) Proceeds from sales of available-for-sale securities................... 1,437,173 1,688,312 413,631 Proceeds from sales of held-to-maturity securities..................... 1,118,305 1,060,200 1,327,403 Purchases of property.................................................. (303,417) (315,763) (340,412) Proceeds from sales of property........................................ 23,729 34,128 6,402 Net cash used in investing activities............................... (3,092,349) (2,367,557) (2,029,625) FINANCING ACTIVITIES: Repayment of notes payable............................................. -- (500,000) (1,000,000) Repurchase of common stock............................................. (316,093) (224,904) (387,032) Dividends paid......................................................... (271,297) (228,460) (228,460) Net cash used in financing activities............................... (587,390) (953,364) (1,615,492) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 1,717,562 (63,063) 888,285 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................. 2,527,008 2,590,071 1,701,786 CASH AND CASH EQUIVALENTS, END OF YEAR................................... $ 4,244,570 $ 2,527,008 $ 2,590,071 SUPPLEMENTAL DISCLOSURES: CASH PAID DURING THE YEAR FOR: Interest............................................................ $ 33 $ 14,962 $ 54,854 Income taxes........................................................ $ 1,418,000 $ 897,000 $ 1,051,900
The change in unrealized gain (loss) on investments in securities (which is included in stockholders' equity, net of deferred income taxes) was $791,045, $1,299,762, and ($242,712), in 1996, 1995 and 1994, respectively. The change in the deferred income taxes (benefit) on the net unrealized gain and loss was $268,829, $441,254, and ($81,730) in 1996, 1995 and 1994, respectively. During 1996, the Company exchanged assets with a value of $60,000 for an equity investment. See notes to consolidated financial statements. 16 INVESTORS TITLE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - Investors Title Company (the "Company"), through its wholly owned subsidiaries, Investors Title Insurance Company ("ITIC") and Northeast Investors Title Insurance Company ("NE-ITIC"), is licensed to insure titles to residential, institutional, commercial, and industrial properties. The Company issues title insurance policies through approved attorneys from underwriting offices in North Carolina and South Carolina, and through independent issuing agents in Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New York, Pennsylvania, South Carolina, Tennessee, and Virginia. The majority of the Company's business is concentrated in North Carolina, South Carolina, and Virginia. Investors Title Exchange Corporation ("ITEC"), a wholly owned subsidiary, acts as an intermediary in tax-free exchanges of property held for productive use in a trade or business or for investments. ITEC's income is derived from fees for handling exchange transactions. Principles of Consolidation and Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and all its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Significant Accounting Policies - The significant accounting policies of the Company are summarized below: CASH AND CASH EQUIVALENTS For the purpose of presentation in the Company's statements of cash flows, cash equivalents are highly liquid investments with original maturities of three months or less. INVESTMENTS IN SECURITIES Securities for which the Company has the intent and ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for amortization of premiums or accretion of discounts and other-than-temporary declines in fair value. Securities held principally for resale in the near term are classified as trading securities and recorded at fair values. Realized and unrealized gains and losses on trading securities are included in other income. Securities not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value, adjusted for other-than-temporary declines in fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders' equity. Fair values of all investments are based on quoted market prices. Realized gains and losses are determined on the specific identification method. PROPERTY ACQUIRED IN SETTLEMENT OF CLAIMS Property acquired in settlement of claims is carried at estimated realizable value. Adjustments to reported estimated realizable values and realized gains or losses on dispositions are recorded as increases or decreases in claim costs. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and is depreciated principally under the straight-line method over the estimated useful lives (3 to 25 years) of the respective assets. RESERVES FOR POSSIBLE CLAIMS The reserves for possible claims and the annual provision for possible claims are established based on: (1) estimated amounts required to settle claims for which notice has been received (reported) and (2) the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Claims and losses paid are charged to the reserve for possible claims (see Note 5). DEFERRED INCOME TAXES The Company provides for deferred income taxes (benefits) on temporary differences between the financial statements' carrying values and the tax bases of assets and liabilities. PREMIUMS WRITTEN AND COMMISSIONS TO AGENTS Premiums are recorded and policies or commitments are issued upon receipt of final certificates or preliminary reports with respect to titles from approved attorneys who have examined such titles. Title insurance commissions earned by the Company's agents are recognized as expense concurrently with premium recognition. EARNINGS PER COMMON SHARE Earnings per common share is computed based on the weighted average number of common shares outstanding. The effect of stock options is not material to the computation of earnings per share. ESCROWS AND TRUST DEPOSITS As a service to its customers, the Company administers escrow and trust deposits 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. In administering exchanges, ITEC holds properties to be exchanged and cash received for such exchanges which are not considered assets and liabilities of the Company and, therefore, are excluded from the accompanying consolidated balance sheets. Cash held by ITEC for the purchase of exchange properties was approximately $14,016,000 and $12,267,000 as of December 31, 1996 and 1995, respectively. EFFECTS OF INFLATION The effect of inflation on the Company has not been material in recent years. USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at 17 the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain 1995 and 1994 amounts have been reclassified to conform with 1996 classifications. 2. STATUTORY RESTRICTIONS ON CONSOLIDATED STOCKHOLDERS' EQUITY AND INVESTMENTS The Company has designated approximately $10,909,000 and $9,476,000 of retained earnings as of December 31, 1996 and 1995, respectively, as appropriated to reflect the required statutory reserve for unearned premiums. See Note 7 for the tax treatment of the statutory unearned premium reserve. As of December 31, 1996 and 1995, approximately $22,550,000 and $19,085,000, respectively, of the consolidated stockholders' equity represents net assets of the Company's subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company under statutory regulations without prior insurance department approval. Bonds and certificates of deposit totaling approximately $2,290,000 and $2,495,000 at December 31, 1996 and 1995, respectively, are deposited with the insurance departments of the states in which business is conducted. These investments are restricted as to withdrawal as required by law. 3. INVESTMENTS IN SECURITIES The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for securities by major security type at December 31, 1996 and 1995 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES DECEMBER 31, 1996: Fixed maturities - Held-to-maturity, at amortized cost: Certificates of deposit............................. $ 169,004 $ -- $ -- Obligations of states and political subdivisions.... 5,098,368 157,719 2,447 Total................................................. $ 5,267,372 $ 157,719 $ 2,447 Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions.... $10,496,691 $ 329,912 $ 32,453 Corporate debt securities........................... 1,875,931 25,062 693 Debt securities issued by foreign governments....... 145,922 2,036 9,684 Total................................................. $12,518,544 $ 357,010 $ 42,830 Equity securities, at fair value - Common stocks and nonredeemable preferred stocks.............................................. $ 3,484,927 $2,095,430 $106,790 DECEMBER 31, 1995: Fixed maturities - Held-to-maturity, at amortized cost: Certificates of deposit............................. $ 399,203 $ -- $ -- Obligations of states and political subdivisions.... 4,748,276 225,545 560 Total................................................. $ 5,147,479 $ 225,545 $ 560 Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions.... $ 8,125,216 $ 378,218 $ 23,834 Corporate debt securities........................... 1,631,447 68,053 -- Debt securities issued by foreign governments....... 145,109 2,299 15,771 Total................................................. $ 9,901,772 $ 448,570 $ 39,605 Equity securities, at fair value - Common stocks and nonredeemable preferred stocks.............................................. $ 3,181,613 $1,184,673 $ 81,863 FAIR VALUE DECEMBER 31, 1996: Fixed maturities - Held-to-maturity, at amortized cost: Certificates of deposit............................. $ 169,004 Obligations of states and political subdivisions.... 5,253,640 Total................................................. $ 5,422,644 Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions.... $10,794,150 Corporate debt securities........................... 1,900,300 Debt securities issued by foreign governments....... 138,274 Total................................................. $12,832,724 Equity securities, at fair value - Common stocks and nonredeemable preferred stocks.............................................. $ 5,473,567 DECEMBER 31, 1995: Fixed maturities - Held-to-maturity, at amortized cost: Certificates of deposit............................. $ 399,203 Obligations of states and political subdivisions.... 4,973,261 Total................................................. $ 5,372,464 Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions.... $ 8,479,600 Corporate debt securities........................... 1,699,500 Debt securities issued by foreign governments....... 131,637 Total................................................. $10,310,737 Equity securities, at fair value - Common stocks and nonredeemable preferred stocks.............................................. $ 4,284,423
The scheduled maturities of fixed maturities at December 31, 1996 were as follows:
AVAILABLE-FOR-SALE HELD-TO-MATURITY AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE Due in one year or less............................... $ 446,615 $ 438,274 $ 499,880 $ 504,004 Due after one year through five years................. 3,558,172 3,637,850 1,140,430 1,191,350 Due after five years through ten years................ 2,599,679 2,691,600 764,665 798,500 Due after ten years................................... 5,914,078 6,065,000 2,862,397 2,928,790 Total............................................. $12,518,544 $12,832,724 $5,267,372 $5,422,644
18 Earnings on investments and net realized gains for the three years ended December 31 follow:
1996 1995 1994 Fixed maturities.......................................................... $1,026,010 $ 853,705 $ 823,493 Equity securities......................................................... 137,065 142,899 121,956 Invested cash and other short-term investments............................ 156,885 138,768 97,351 Miscellaneous interest.................................................... 32,972 5,264 3,912 Net realized gains........................................................ 178,238 45,242 41,029 Investment income......................................................... $1,531,170 $1,185,878 $1,087,741
Gross realized gains and losses on sales of available-for-sale securities were:
1996 1995 1994 Gross realized gains: U.S. Treasury securities and obligations of U.S. Government corporations and agencies........................... $ -- $ 3,937 $ -- Redeemable preferred stocks........................................... 11,274 -- 475 Obligations of states and political subdivisions...................... -- 727 2,000 Common stocks and nonredeemable preferred stocks...................... 233,129 67,590 78,210 Total............................................................... 244,403 72,254 80,685 Gross realized losses: Obligations of states and political subdivisions...................... (3,838) (500) -- Debt securities issued by foreign governments......................... -- (800) -- Common stocks and nonredeemable preferred stocks...................... (62,327) (25,712) (39,656) Total............................................................... (66,165) (27,012) (39,656) Net realized gain..................................................... $ 178,238 $ 45,242 $ 41,029
Concurrent with the adoption of the implementation guidance in Financial Accounting Standards Board Special Report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," the Company reassessed the appropriateness of the classifications of all securities held at that time and transferred held-to-maturity investments with amortized cost of $8,433,685 and fair value of $8,800,000 to available-for-sale effective December 31, 1995. The unrealized gain of $241,768, net of deferred taxes of $124,547, has been included in stockholders' equity. 4. REINSURANCE The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Premiums assumed and ceded were approximately $45,000 and $121,000, respectively for 1996, $30,000 and $79,000, respectively for 1995, and $68,000 and $51,000, respectively for 1994. Ceded reinsurance is comprised of excess of loss treaties, which protects against losses over certain amounts. In the event that the assuming insurance companies are unable to meet their obligations under these contracts, the Company is contingently liable. 5. RESERVES FOR POSSIBLE CLAIMS Changes in the reserves for possible claims for the years ended December 31 are summarized as follows:
1996 1995 1994 Balance, beginning of year.................. $ 3,836,065 $ 3,635,850 $ 3,343,000 Provision related to: Current year.............................. 1,143,070 1,050,005 1,036,848 Prior years............................... 1,796,671 379,655 409,220 Total provision charged to operations....... 2,939,741 1,429,660 1,446,068 Claims paid, net of recoveries, related to: Current year.............................. (64,582) (81,148) (95,503) Prior years............................... (1,625,159) (1,148,297) (1,057,715) Total claims paid, net of recoveries........ (1,689,741) (1,229,445) (1,153,218) Balance, end of year........................ $ 5,086,065 $ 3,836,065 $ 3,635,850
In management's opinion, the reserve is adequate to cover claim losses which might result from pending and possible claims. 6. COMMON STOCK AND STOCK OPTIONS The Company has adopted Employee Stock Option Purchase Plans (the "Plans") under which options to purchase shares (not to exceed 193,300 shares) of the Company's stock may be granted to key employees of the Company at a price not less than the market value on the date of grant. All options are exercisable at 20% per year one year from the date of grant and generally expire after five years. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its plans and accordingly, no compensation cost has been recognized. Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 Net income: As reported................................................ $3,843,537 $3,250,658 Pro forma.................................................. 3,767,770 3,217,552 Earnings per share: As reported................................................ $1.39 $1.16 Pro forma.................................................. 1.36 1.15
19 The estimated weighted average grant-date fair values of options granted in 1996 and 1995 were $4.35 and $2.28 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0.7% and 0.8%; expected volatility of 22% and 21%; risk-free interest rates of 6% and 5%; and expected lives of 5 years for both years. A summary of the status of the Company's Plans as of December 31, 1996, 1995 and 1994 and changes during the years ended on those dates is presented below:
1996 1995 1994 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year..................... 107,860 $ 7.79 99,400 $7.76 58,825 $6.31 Granted....................... 17,400 14.60 14,500 8.30 68,600 8.49 Exercised..................... (8,150) 7.41 (40) 8.50 (9,785) 6.50 Terminated.................... (3,100) 8.50 (6,000) 8.47 (18,240) 6.50 Outstanding at end of year.... 114,010 $ 8.84 107,860 $7.79 99,400 $7.76 Options exercisable at year end......................... 37,830 $ 7.48 25,640 $7.04 7,000 $6.00
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT YEAR-END YEAR-END WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE $ 4.25-$ 5.50............... 13,525 2 $ 4.71 8,525 $ 4.84 6.75- 9.75............... 83,085 3 8.30 29,305 8.25 10.00- 15.50............... 17,400 5 14.60 -- -- $ 4.25-$15.50............... 114,010 3 $ 8.84 37,830 $ 7.48
7. INCOME TAXES At December 31, 1996 and 1995, the approximate effect on each component of deferred income taxes and liabilities is summarized as follows:
1996 1995 Deferred income tax assets: Accrued vacation............................................... $ 82,426 $ 99,014 Reinsurance payable............................................ 14,875 15,584 Bad debt reserve............................................... 68,000 40,800 Net state operating loss carryforward.......................... 310,857 317,618 Total........................................................ 476,158 473,016 Less valuation allowance....................................... 310,857 317,618 Total........................................................ 165,301 155,398 Deferred income tax liabilities: Statutory unearned premiums reserve net of recorded reserve for possible claims.................................. 486,521 512,264 Unrealized net gain on investments............................. 782,959 514,130 Excess of tax over book depreciation........................... 109,314 103,614 Discount accretion on tax-exempt obligations................... 19,223 12,023 Total........................................................ 1,398,017 1,142,031 Net deferred income tax liabilities.............................. $1,232,716 $ 986,633
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 20 A reconciliation of income tax as computed for the years ended December 31 at the U.S. Federal Statutory income tax rate (34%) to income tax expense follows:
1996 1995 1994 Anticipated income tax expense................................... $1,843,323 $1,497,244 $1,504,452 Increase (reduction) related to: State income taxes, net of the federal income tax benefit...... 9,240 10,560 5,280 Tax exempt interest income (net of amortization)............... (276,678) (227,206) (210,788) Dividends received (nontaxable portion)........................ (31,132) (28,426) (24,288) Refund of taxes paid in prior years............................ -- (119,994) -- Other, net..................................................... 33,247 20,822 23,344 Provision for income taxes....................................... $1,578,000 $1,153,000 $1,298,000
For state income tax purposes, ITIC and NE-ITIC must pay only a gross premium tax. At December 31, 1996 and 1995, the Company has available state net operating loss carryforwards of approximately $3,900,000 and $4,100,000, respectively, that originated in 1992 and will expire in 1997. 8. LEASES Rent expense totaled $400,000, $373,000 and $335,000 in 1996, 1995 and 1994, respectively. The future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996 are summarized as follows: Year End: 1997 $170,221 1998 130,635 1999 56,974 2000 34,587 2001 11,528 Total $403,945
9. EMPLOYEE BENEFIT PLAN After three years of service, employees are eligible to participate in a Simplified Employee Pension Plan. Contributions, which are made at the discretion of the Company, are based on the employee's salary, but in no case will such contribution exceed $22,500 per employee. All contributions are deposited in Individual Retirement Accounts for participants. Contributions under the plan were approximately $216,000, $193,000, and $177,000 for 1996, 1995 and 1994, respectively. 10. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are involved in litigation on a number of claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company's consolidated financial position. 11. STATUTORY ACCOUNTING The consolidated financial statements have been prepared in conformity with generally accepted accounting principles which differ in some respects from statutory accounting practices prescribed or permitted in the preparation of financial statements for submission to insurance regulatory authorities. Stockholders' equity on a statutory basis was $18,985,205 and $15,237,402 as of December 31, 1996 and 1995, respectively. Net income on a statutory basis was $3,322,356 $3,377,015 and $2,406,575 for the twelve months ended December 31, 1996, 1995 and 1994, respectively. 21 EX-27 5 EXHIBIT 27
7 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 11,122,024 10,247,774 11,239,947 12,832,724 4,773,802 5,385,784 5,579,075 5,118,367 0 0 0 5,273,639 3,923,286 4,908,399 5,275,938 5,473,567 0 0 0 0 0 0 0 0 19,943,423 20,675,968 22,240,439 23,573,663 3,111,968 3,029,399 3,577,290 4,244,570 0 0 0 0 0 0 0 0 29,028,800 30,141,064 31,846,199 33,642,528 4,186,065 4,486,065 4,786,065 5,086,065 0 0 0 0 30,682 36,063 44,115 60,902 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 910,970 783,200 746,424 722,321 21,882,473 22,853,262 24,071,109 25,265,856 29,028,800 30,141,064 31,846,199 33,642,528 4,434,799 9,916,291 15,490,534 21,111,155 294,791 609,077 938,190 1,352,932 (40,052) 8,604 46,810 178,238 69,710 141,906 224,896 348,857 681,333 1,512,145 2,226,658 2,939,741 0 0 0 0 3,031,212 6,765,641 10,597,816 14,629,904 1,046,703 2,398,092 3,875,956 5,421,537 298,984 671,591 1,077,105 1,578,000 747,719 1,726,501 2,798,851 3,843,537 0 0 0 0 0 0 0 0 0 0 0 0 747,719 1,726,501 2,798,851 3,843,537 .27 .62 1.01 1.39 .27 .62 1.01 1.39 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Not disclosed on a quarterly basis.
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