-----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, UVmeIwyqrSjsHp9QxLrzpjvwGk4fZsNUmhffWheWvHOlZtF2xKv8UjhG/PSvRcdM BOdXoIIi3pJ1cZbpoLyGGw== 0000950168-98-000886.txt : 19980327 0000950168-98-000886.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950168-98-000886 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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: SEC FILE NUMBER: 000-11774 FILM NUMBER: 98574780 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 ANNUAL REPORT 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, 1997 [ ] 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 17, 1998, the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant was $63,184,292. On February 17, 1998, the number of common shares outstanding was 2,803,915. 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, 1997 Part II, Items 5 - 8 Part IV, Item 14 Portions of Proxy Statement (in connection with Part III, Items 10 - 13 Annual Meeting to be held on May 12, 1998) 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, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Pennsylvania, Tennessee, Virginia and West 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, Arizona, Colorado, Connecticut, Delaware, Idaho, Illinois, Kansas, Louisiana, Massachusetts, Missouri, Montana, Nevada, New Jersey, North Dakota, Ohio, Oklahoma, Texas, Utah and Wisconsin. 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 2 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. In the State of North Carolina, title insurance commitments and policies are issued by the home office and branch offices. ITIC has 27 branch offices 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 $1,500,000, reinsures the next $250,000 of risk with NE-ITIC, and all risks above $1,750,000 are then reinsured with a non-related reinsurer. NE-ITIC currently assumes primary risks up to $250,000, reinsures the next $1,500,000 of risk with ITIC, and reinsures all amounts above $1,750,000 with a non-related reinsurer. Each insurance subsidiaries' risk retention limits are self-imposed and more conservative than state insurance regulations. ITIC is the leading title insurer of North Carolina property and has held this position fourteen years. 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 Prime - unsurpassed 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 1995 through 1997 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 1995 through 1997 by this subsidiary. ITEC offers services in connection with tax-free exchanges. Schedule A summarizes total revenues during the years 1995 through 1997. SCDP had revenues of $4,186, $3,712 and $40,926 in 1997, 1996 and 1995, respectively. For a description of Premiums Written geographically, refer to the Management's Discussion and Analysis of Results of Operations and Financial Condition in the 1997 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 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 of 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 in Arkansas, Florida, Georgia, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, Pennsylvania, Tennessee, Virginia and West Virginia. ITIC intends 4 ================================================================================ SCHEDULE A INVESTORS TITLE INSURANCE COMPANY NET PREMIUMS WRITTEN For The Years Ended December 31 1997 1996 1995 $29,434,155 $20,577,779 $15,469,394 =========== =========== =========== NORTHEAST INVESTORS TITLE INSURANCE COMPANY NET PREMIUMS WRITTEN For The Years Ended December 31 1997 1996 1995 $441,195 $533,376 $384,746 ======== ======== ======== INVESTORS TITLE EXCHANGE CORPORATION FEES EARNED For The Years Ended December 31 1997 1996 1995 $542,688 $272,998 $241,281 ======== ======== ======== ================================================================================ 5 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 claims for financial reporting purposes are established based on criteria discussed in Notes 1 and 6 to the Financial Statements 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 6 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. 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, 1997, ITIC reported $18,779,979 of capital and surplus, and net income of $4,148,233; and NE-ITIC reported $2,121,078 of capital and surplus, and net income of $166,303. 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 Michigan, North Carolina, South Carolina and Virginia. ITIC's major competitors are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company, 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 7 operate. The title insurance industry is highly competitive. Key elements which affect competition are price, expertise, timeliness and quality of 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) 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 1993 through 1997: FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Company $ 15,295 $ 67,162 $ 16,238 $ 12,225 $ 10,529 ITIC 1,476,807 1,161,795 1,007,255 926,976 842,367 NE-ITIC 126,426 121,007 111,939 103,600 100,576 ITEC 9,616 2,708 3,457 3,911 968 SCDP 44 260 1,747 0 0 ---------- ---------- ---------- ---------- ---------- TOTAL $1,628,188 $1,352,932 $1,140,636 $1,046,712 $ 954,440 ========== ========== ========== ========== ========== See Note 3 to the Financial Statements incorporated herein by reference for the major categories of investments, earnings by investment categories, scheduled maturities, amortized cost, and market values of investment securities. 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 153 full-time employees and 29 part-time employees as of December 31, 1997. 8 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. 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 9 to the Financial Statements 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, 1997. 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, 1997. 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. 9 Position with Officer Term to Name Age Registrant Since Expire - ---- --- ---------- ----- ------ J. Allen Fine 63 Chairman, 1973 1998 Director and CEO James A. Fine, Jr. 35 President, Director and 1987 1998 Treasurer W. Morris Fine 31 Executive Vice 1992 1998 President and Secretary Elizabeth P. Bryan 37 Vice President 1987 1998 and Assistant Secretary L. Dawn Martin 32 Vice President 1993 1998 and Assistant Secretary J. Allen Fine, Chief Executive Officer and Chairman of the Board of Directors, is the father of James A. Fine, Jr., President, Director and Treasurer of the Company, and W. Morris Fine, Executive Vice President and Secretary 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 and Chief Executive Officer of that Company, the Registrant, and NE-ITIC since their incorporation. Mr. Fine also served as President of ITIC until February, 1997. Mr. Fine also serves as Chairman of the Board of ITEC and as a Director of SCDP. Mr. Fine is the father of James A. Fine, Jr., President, Director and Treasurer of the Company, and W. Morris Fine, Executive Vice President and 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 President and Treasurer and appointed a Director of the Company, named Executive Vice President, Treasurer and Chief Financial Officer of ITIC and named Chairman of SCDP. James A. Fine, Jr. 10 is the son of J. Allen Fine, Chief Executive Officer and Chairman of the Board of the Company, and brother of W. Morris Fine, Executive Vice President and Secretary 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 Executive Vice President and Secretary of the Company, and President and Chief Operating Officer of ITIC. In 1998, Mr. Fine was named President and Chief Operating Officer of NE-ITIC. Morris Fine is the son of J. Allen Fine, Chairman and Chief Executive Officer of the Company, and brother of James A. Fine, Jr., President, Director 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 and Assistant Treasurer of ITIC. 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 for both ITEC and SCDP. In 1995, she was appointed Director of ITIC and SCDP, and named Assistant Secretary of NE-ITIC. In 1997, Ms. Martin was named Secretary of NE-ITIC. In 1998, Ms. Martin was named Vice President of NE-ITIC. 11 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 "Shareholder Information" in the 1997 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, 1997 is in the 1997 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 1997 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 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data in the 1997 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 1997 Annual Report to Shareholders is incorporated herein by reference. 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. 12 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 12, 1998 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 12, 1998 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 12, 1998 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 12, 1998 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 1997 Annual Report to Shareholders are hereby incorporated by reference: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 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 Exhibit 3(iii) to Form March 10, 1997 10-K, page 27, dated December 31, 1996 Management contract of compensatory plan or arrangement (Exhibits (10)(i) - (10)(xi)) (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, Chairman 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 Exhibit 10(viii) to Form Stock Plan 10-K, page 29, dated December 31, 1996 (10)(ix) Form of Nonqualified Stock Option Exhibit 10(ix) to Form Agreement to Nonemployee Directors 10-Q, page 13, dated dated May 13, 1997 under the 1997 June 30, 1997 Stock Option and Restricted Stock Plan (10)(x) Form of Nonqualified Stock Option Page 27 of this report Agreement under 1997 Stock Option and Restricted Stock Plan (10)(xi) Form of Incentive Stock Option Page 34 of this report Agreement under 1997 Stock Option and Restricted Stock Plan (13) Portions of 1997 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)(i) Financial Data Schedule - 1996 Included herewith Restated (27)(ii) Financial Data Schedule - First Included herewith Three Quarters 1997 Restated (27)(iii) Financial Data Schedule - Fourth Included herewith Quarter 1997 (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 Chairman and Chief Executive Officer Date March 26, 1998 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, 1998. /s/J. Allen Fine /s/Loren B. Harrell, Jr. - -------------------------------------------- -------------------------------- J. Allen Fine, Chairman and Chief Loren B. Harrell, Jr., Director Executive Officer /s/James A. Fine, Jr. /s/William J. Kennedy III - -------------------------------------------- -------------------------------- James A. Fine, Jr., President, Treasurer and William J. Kennedy III, Director Director (Principal Financial Officer) /s/Elizabeth P. Bryan /s/H. Joe King, Jr. - -------------------------------------------- -------------------------------- Elizabeth P. Bryan, Vice President and Asst. H. Joe King, Jr., Director Secretary (Principal Accounting Officer) /s/James R. Morton - -------------------------------------------- -------------------------------- Lillard H. Mount, General Counsel and James R. Morton, Director Director /s/David L. Francis /s/A. Scott Parker, Jr. - -------------------------------------------- -------------------------------- David L. Francis, Director A. Scott Parker, Jr., Director 17 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, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated January 30, 1998; such consolidated financial statements and report are included in your 1997 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. /s/ DELOITTE & TOUCHE L.L.P. Raleigh, North Carolina January 30, 1998 18 SCHEDULE I INVESTORS TITLE COMPANY AND SUBSIDIARIES SUMMARY OF INVESTMENTS As of December 31, 1997
- ----------------------------------------------------------------------------------------------------- Amount at which shown in the Type of Investment Cost(1) Market Value Balance Sheet - ----------------------------------------------------------------------------------------------------- Fixed Maturities: Bonds: States, municipalities and political subdivisions $22,176,247 $23,172,050 $22,960,031 Public utilities 599,003 619,000 619,000 All other corporate bonds 864,179 884,000 884,000 Certificates of deposit 130,985 130,985 130,985 ----------- ----------- ----------- Total fixed maturities 23,770,414 24,806,035 24,594,016 ----------- ----------- ----------- Equity Securities: Common Stocks: Public utilities 425,433 692,803 692,803 Banks, trust and insurance companies 495,684 1,613,832 1,613,832 Industrial, miscellaneous and all other 2,315,693 3,587,421 3,587,421 Nonredeemable preferred stocks 608,117 636,338 636,338 ----------- ----------- ----------- Total equity securities 3,844,927 6,530,394 6,530,394 ----------- ----------- ----------- Total investments per the consolidated balance sheet 27,615,341 31,124,410 ----------- ----------- Short-term investments 2,523,114 2,523,114 ----------- ----------- Total investments $30,138,455 $33,647,524 =========== ===========
(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, 1997 AND 1996
1997 1996 Assets Cash and Cash Equivalents $ 535,565 $ 139,668 Investments in equity securities 75,000 90,000 Investments in affiliated companies at equity* 26,685,072 22,743,358 Income taxes receivable 392,531 463,445 Other receivables 116,039 45,232 Deferred income tax 94,571 25,688 Prepaid expenses and other assets 68,645 218,122 Property, net 1,765,509 1,791,759 ----------- ----------- Total Assets $29,732,932 $25,517,272 =========== =========== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 148,894 $ 120,927 ----------- ----------- Stockholders' Equity: Common stock-No par (shares authorized, 6,000,000; 2,855,744 and 2,855,744 shares issued and 2,800,240 and 2,767,830 shares outstanding 1997 and 1996, respectively) 1,650,350 1,650,350 Retained earnings 27,933,688 23,745,995 ----------- ----------- Total stockholders' equity 29,584,038 25,396,345 ----------- ----------- Total Liabilities and Stockholders' Equity $29,732,932 $25,517,272 =========== ===========
*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, 1997, 1996 and 1995
1997 1996 1995 Revenues: Investment income-interest and dividends $ 15,295 $ 67,163 $ 19,430 Rental income 362,889 350,331 304,931 Miscellaneous income 1,000 ----------- ----------- ----------- Total 378,184 418,494 324,361 ----------- ----------- ----------- Operating Expenses: Office occupancy and operations 133,283 142,872 121,415 Business development 10,927 8,593 9,079 Taxes-other than payroll and income 30,499 49,579 47,032 Professional fees 43,516 33,684 18,251 Interest expense 7,692 43,191 Other expenses 184,492 36,231 92,769 ----------- ----------- ----------- Total 402,717 278,651 331,737 ----------- ----------- ----------- Equity in Net Income of Affiliated Cos.* 4,536,715 3,745,375 3,138,446 ----------- ----------- ----------- Income Before Income Taxes 4,512,182 3,885,218 3,131,070 ----------- ----------- ----------- Provision for Income Taxes (18,200) 41,681 (119,588) ----------- ----------- ----------- Net Income $ 4,530,382 $ 3,843,537 $ 3,250,658 =========== =========== =========== Basic Earnings per Common Share $ 1.63 $ 1.39 $ 1.16 =========== =========== =========== Weighted Average Shares Outstanding-Basic 2,782,449 2,772,286 2,804,632 =========== =========== =========== Diluted Earnings Per Common Share $ 1.60 $ 1.37 $ 1.15 =========== =========== =========== Weighted Average Shares Outstanding-Diluted 2,826,730 2,813,001 2,816,544 =========== =========== ===========
* 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, 1997, 1996 AND 1995
1997 1996 1995 Operating Activities: Net income $4,530,382 $3,843,537 $3,250,658 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of subsidiaries less dividends received of $595,000, $510,000 and $856,828 in 1997, 1996 and 1995, respectively (3,941,715) (3,235,375) (2,281,618) Provision for building impairment 150,000 Depreciation 62,362 68,560 67,793 Benefit for deferred income taxes (68,883) (7,116) (6,171) (Increase) decrease in receivables (70,806) 13,607 1,216 (Increase) decrease in income taxes receivable-current 70,914 100,942 (311,222) Increase in prepaid expenses (523) Increase (decrease) in accounts payable and accrued liabilities 27,967 (19,580) 39,861 ----------- ----------- ----------- Net cash provided by operating activities 759,698 764,575 760,517 ----------- ----------- ----------- Investing Activities: Purchases of securities (30,000) Proceeds from sales of securities 15,000 Purchases of furniture and equipment and building (36,112) (2,980) (69,605) ----------- ----------- ----------- Net cash used in investing activities (21,112) (32,980) (69,605) ----------- ----------- ----------- Financing Activities: Payments on demand notes (362,000) (500,000) Dividends paid (342,689) (271,297) (228,460) ----------- ----------- ----------- Net cash used in financing activities (342,689) (633,297) (728,460) ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 395,897 98,298 (37,548) Cash and Cash Equivalents, Beginning of Year 139,668 41,370 78,918 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year $535,565 $139,668 $41,370 =========== =========== =========== Supplemental Disclosures: Cash Paid During the Year For: Interest 0 $15,837 $35,046 =========== =========== =========== Income Taxes ($20,231) ($48,801) $203,253 =========== =========== ===========
Supplemental Schedule of Noncash Investing Activities: Net unrealized gains (losses) on investments in common stocks were $0 in 1997, 1996 and 1995. 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, $350,000, and $836,828 in 1997, 1996 and 1995, respectively. Cash dividends paid to Investors Title Company by its wholly owned subsidiary, Investors Title Exchange Corporation were $245,000, $160,000, and $20,000 in 1997, 1996 and 1995, respectively. 3. Certain 1995 amounts have been reclassified to conform with 1997 classifications. 23 SCHEDULE III INVESTORS TITLE COMPANY AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION For the Years Ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------------ Future Policy Other Benefits, Policy Benefits Amortization Deferred Losses, Claims Claims, of Deferred Policy Claims and Net Losses and Policy Other Acquisition and Loss Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums Segment Cost Expenses Premiums Payable Revenue Income Expenses Costs Expenses Written - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1997 Title -- 7,622,140 -- 96,241 29,875,350 1,628,188 4,679,353 -- 21,260,381 N/A Year Ended December 31, 1996 Title -- 5,086,065 -- 60,902 21,111,155 1,352,932 2,939,741 -- 14,629,904 N/A Year Ended December 31, 1995 Title -- 3,836,065 -- 38,601 15,854,140 1,140,636 1,429,660 -- 11,532,632 N/A
24 SCHEDULE IV INVESTORS TITLE COMPANY AND SUBSIDIARIES REINSURANCE For the Years Ended December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------------------------------------------------- Ceded to Assumed from Percentage of Gross Other Other Net Amount Amount Companies Companies Amount Assumed to Net - -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 Title Insurance Premiums $30,058,724 $241,821 $58,447 $29,875,350 0.2% 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%
25 SCHEDULE V INVESTORS TITLE COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------ 1997 Premiums Receivable Valuation Provision $200,000 $150,000 $0 $0 $350,000 Impairment of Building Plans 0 150,000 0 0 150,000 Reserves for Claims 5,086,065 4,679,353 0 (2,143,278) 7,622,140 1996 Premiums Receivable Valuation Provision 120,000 80,000 0 0 200,000 Reserves for Claims 3,836,065 2,939,741 0 (1,689,741) 5,086,065 1995 Premiums Receivable Valuation Provision 120,000 0 0 0 120,000 Reserves for Claims 3,635,850 1,429,660 0 (1,229,445) 3,836,065
*Payments of claims 26 EX-10.(X) 2 NONQUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10(x) INVESTORS TITLE COMPANY 1997 STOCK OPTION AND RESTRICTED STOCK PLAN NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of ________________ by and between Investors Title Company, a North Carolina corporation (the "Company") and _________________, a key employee of the Company (the "Optionee"). W I T N E S S E T H: WHEREAS, the Company recognizes the value to it of the services of the Optionee and desires to provide the Optionee with an incentive to remain in the employment of the Company and an opportunity to purchase common stock of the Company, so that the Optionee may acquire or increase a proprietary interest in the Company's success, and WHEREAS, the Company desires to grant the Optionee a nonqualified stock option under Article II of the Company's 1997 Stock Option and Restricted Stock Plan (the "Plan"), and the Optionee desires to accept such option in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and intending to be legally bound hereby, the parties agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee an option (the "Option") to purchase all or any portion of _________ (_________) shares (the "Shares") of the Company's common stock, no par value ("Common Stock"), at an exercise price of _____ Dollars ($_____) per Share (the "Exercise Price"). This Option is intended to be a "Nonqualified Stock Option" within the meaning specified in the Plan and is hereby designated as such pursuant to Article II, Section 1(a) of the Plan. The grant of this Option has been duly authorized by the Committee that administers the Plan, as established by the Board of Directors of the Company pursuant to Article I, Section 3 of the Plan (the "Committee"). 2. Term of Option. Subject to the further restrictions and provisions of the Plan and this Agreement, the Option shall become exercisable in installments, with the Optionee having the right to purchase from the Company the following number of Shares subject to this Option, on and after the following dates, in cumulative fashion: 27 (a) At any time after _______________ and prior to _______________ up to _______________ of the Shares subject to this Option; (b) At any time after _______________ and prior to _______________ up to _______________ of the Shares subject to this Option; (c) At any time after ________________ and prior to its expiration, this Option shall be exercisable in full, to the extent it has not previously been exercised. No fractional shares of Common Stock shall be issued upon any exercise of this Option. Notwithstanding the provisions of paragraph 5 hereof, this Option, or any unexercised portion thereof, shall expire and no longer be exercisable on the date that is ten (10) years from the date hereof. 3. Transfer of Option. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or by the laws of descent or distribution. 4. Adjustments. If the shares of Common Stock 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, recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the Company is the surviving entity, the aggregate number of Shares subject to the Option and the Exercise Price per Share subject to the Option shall be appropriately and proportionately adjusted in the manner provided in the Plan, provided, however, that the aggregate purchase price applicable to the unexercised portion of the Option shall not be affected by such adjustment. 5. Termination of Option. The Option hereby granted shall terminate and be of no force or effect upon the happening of the first to occur of the following events: (a) except as provided in subparagraphs 5(b) and 5(c) hereof, expiration of the Optionee's employment with the Company for any reason; (b) expiration of three months after the date of termination of the Optionee's employment with the Company because Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code; (c) expiration of one year after the death of the Optionee while employed by the Company; (d) occurrence of any event described in paragraph 10 hereof that causes a termination of the Option; or 28 (e) expiration of the term of this Option as provided in paragraph 2 above. 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. 6. Method of Exercise. The Option shall be exercised by tender of payment of the Exercise Price and delivery to the Company at its principal office of a written notice, at least three business days prior to the proposed date of exercise, which notice shall: (a) state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and the name, address, and social security number of the person in whose name the stock certificate or certificates for such Shares is to be registered; (b) contain any such representations and agreements as to Optionee's investment intent with respect to such Shares as shall be reasonably required by the Committee pursuant to paragraph 8 hereof; and (c) be signed by the person entitled to exercise the Option, and if the Option is being exercised by any person or persons other than the Optionee, be accompanied by proof, satisfactory to the Committee, of the right of such person or persons to exercise the Option. Payment of the Exercise Price may be made in cash or by certified or official bank check payable to the order of the Company. Payment may also be made by surrendering shares of Common Stock (including any Shares received upon a prior or simultaneous exercise of the Option) at the then fair market value of such Common Stock, as determined pursuant to Section 1(b) of Article II of the Plan, as of the date of surrender. Payment may also be made by combining cash, check or Common Stock. After receipt of such notice in a form satisfactory to the Committee and the acceptance of payment, the Company shall deliver to the Optionee a certificate or certificates representing the Shares purchased hereunder, provided, that if any law or regulation requires the Company to take action with respect to the Shares specified in such notice before the issuance thereof, the date of delivery of such Shares shall be extended for the period necessary to take such action. 7. Rights of a Shareholder. The Optionee shall not be deemed for any purpose to be a shareholder of the Company with respect to any Shares covered by this Option unless this Option shall have been exercised and the Exercise Price paid in the manner provided herein. 29 No adjustment will be made for dividends or other rights where the record date is prior to the date of exercise and payment. Upon the exercise of the Option as provided herein and the issuance of the certificate or certificates evidencing the Shares covered thereby, except as otherwise provided herein, the Optionee shall have all the rights of a shareholder of the Company, including the right to receive all dividends or other distributions paid or made with respect to such Shares. 8. Compliance with Securities Laws. The Optionee recognizes that any registration of the shares of Common Stock issuable pursuant to this Option under applicable federal and state securities laws, or actions to qualify for applicable exemptions from such registrations, shall be at the option of the Company. The Optionee acknowledges that, in the event that no such registrations are undertaken and the Company relies on exemptions from such registrations, the shares shall be issued only if the Optionee qualifies to receive such shares in accordance with the exemptions from registration on which the Company relies and that, in connection with any issuance of certificates evidencing such shares, the Board of Directors may require appropriate representations from the Optionee and take such other action as the Board of Directors may deem necessary, including but not limited to placing restrictive legends on such certificates and placing stop transfer instructions in the Company's stock transfer records, or delivering such instructions to the Company's transfer agent, in order to assure compliance with any such exemptions. Notwithstanding any other provision of the Plan or this Agreement (i) no shares will be issued upon any exercise of the Option unless and until such shares have been registered under all applicable federal and state securities laws or unless, in the opinion of counsel satisfactory to the Company, all actions necessary to qualify for exemptions from such registrations shall have been taken and (ii) the Company shall have no obligation to undertake such registrations or such actions necessary to qualify for exemptions from registrations and shall have no liability whatsoever for not doing so except to refund any Exercise Price tendered to the Company. 9. Rule 144. The Optionee acknowledges that, notwithstanding the registration of the Option and the Shares issuable upon its exercise under the Securities Act of 1933 or under the securities laws of any state, if, at the time of exercise of the Option, he is deemed to be an "affiliate" of the Company as defined in Rule 144 of the Securities and Exchange Commission, any shares purchased thereunder will nevertheless be subject to sale only in compliance with Rule 144 (but without any holding period), and that the Company shall take such action as it deems necessary or appropriate to assure such compliance, including placing restrictive legends on certificates evidencing such shares and delivering stop transfer instructions to the Company's transfer agent. 10. 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, the Option granted hereunder shall terminate on 30 the effective date of such merger, consolidation, dissolution, liquidation or sale; provided, however, that prior to such effective date, the Committee may, in its discretion, cause the Option to become immediately exercisable, and may, to the extent the Option is terminated as provided in this paragraph 10, authorize a payment to the Optionee that approximates the economic benefit that he would realize if the Option were exercised immediately before such effective date, or authorize a payment in such other amount as it deems appropriate to compensate the Optionee for the termination of the unexercised portion of the Option, or arrange for the granting of a substitute option to the Optionee. This Agreement shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 11. Tax Matters. The Optionee acknowledges that, upon exercise of the Option, the Optionee will recognize taxable income generally in an amount equal to the excess of the fair market value of the purchased Shares over the Exercise Price paid therefor, and the Company will have certain withholding obligations for income and other taxes. It shall be a condition to the Optionee's receipt of a stock certificate covering Shares purchased pursuant to the Option that the Optionee pay to the Company such amounts as it is required to withhold or, with the consent of the Company, that the Optionee otherwise provide for the discharge of the Company's withholding obligation. If any such payment is not made by the Optionee, the Company may deduct the amounts required to be withheld from payments of any kind to which the Optionee would otherwise be entitled from the Company. 12. No Right to Continued Employment. This Agreement does not confer upon the Optionee any right to continued employment by the Company, nor shall it interfere in any way with the right of the Company to terminate or alter the terms of that employment. 13. Construction. This Agreement shall be construed so as to be consistent with the Plan and the provisions of the Plan shall be deemed to be controlling in the event that any provision hereof should be inconsistent therewith. The Optionee hereby acknowledges receipt of a copy of the Plan from the Company and agrees to be bound by all of the terms and provisions of the Plan. Whenever the word "Optionee" is used in any provision of this Agreement under circumstances where the provision should logically be construed to apply to (i) the estate, personal representative, or beneficiary to whom this Option may be transferred by will or by the laws of descent and distribution or (ii) the guardian or legal representative of the Optionee acting pursuant to a valid power of attorney or the decree of a court of competent jurisdiction, then the term "Optionee" shall be construed to include such estate, personal representative, beneficiary, guardian or legal representative. 31 14. Severability. The provisions of this Agreement shall be severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereto. 15. Successor and Assigns. The terms of this Agreement shall be binding upon and shall enure to the benefit of any successors or assigns of the Company and of the Optionee. 16. Notices. Notices under this Agreement shall be in writing and shall be deemed to have been duly given (i) when personally delivered, (ii) when forwarded by Federal Express, Airborne, or another private carrier which maintains records showing delivery information, (iii) when sent via facsimile but only if a written facsimile acknowledgment of receipt is received by the sending party, or (iv) when placed in the United States Mail and forwarded by registered or certified mail, return receipt requested, postage prepaid, addressed to the party to whom such notice is being given or such other address as furnished to the Company from time to time for this purpose. 17. Entire Agreement; Modification. This Agreement is the entire agreement and understanding of the parties hereto with respect to the Option granted herein and supersedes any and all prior and contemporaneous negotiations, understandings and agreements with regard to the Option and the matters set forth herein, whether oral or written. No representation, inducement, agreement, promise or understanding altering, modifying, taking from or adding to the terms and conditions hereof shall have any force or effect unless the same is in writing and validly executed by the parties hereto. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 32 IN WITNESS WHEREOF, the Optionee has executed this Agreement and the Company has caused this Agreement to be executed by its duly authorized officer, effective as of the day and year first above written. INVESTORS TITLE COMPANY By: ----------------------------------- ATTEST: - ----------------------------------- Secretary (Corporate Seal) ----------------------------------- Optionee 33 EX-10.(XI) 3 INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10(xi) INVESTORS TITLE COMPANY 1997 STOCK OPTION AND RESTRICTED STOCK PLAN INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of __________, 199__, by and between Investors Title Company, a North Carolina corporation (the "Company") and ______________, a key employee of the Company (the "Optionee"). W I T N E S S E T H: WHEREAS, the Company recognizes the value to it of the services of the Optionee and desires to provide the Optionee with an incentive to remain in the employment of the Company and an opportunity to purchase common stock of the Company, so that the Optionee may acquire or increase a proprietary interest in the Company's success, and WHEREAS, the Company desires to grant the Optionee an incentive stock option under Article II of the Company's 1997 Stock Option and Restricted Stock Plan (the "Plan"), and the Optionee desires to accept such options in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and intending to be legally bound hereby, the parties agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to the Optionee an option (the "Option") to purchase all or any portion of _________________ (____) shares (the "Shares") of the Company's common stock, no par value ("Common Stock"), at an exercise price of ______ ($___) per Share (the "Exercise Price"). This Option is intended to be an "Incentive Stock Option" within the meaning specified in the Plan and as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and is hereby designated as such pursuant to Article II, Section 1(a) of the Plan. The grant of the Option has been duly authorized by the Committee that administers the Plan, as established by the Board of Directors of the Company pursuant to Article I, Section 3 of the Plan (the "Committee"). 2. Term of Option. Subject to the further restrictions and provisions of the Plan and this Agreement, the Option shall become exercisable in installments, with the Optionee having the right to purchase from the Company the following number of Shares subject to this Option, on and after the following dates, in cumulative fashion: 34 [(a) At any time after ________, 199__ and prior to _________, 199__, up to _____ of the Shares subject to this Option; (b) At any time after ________, 199__ and prior to ________, 199__, this Option shall be exercisable in full, to the extent it has not previously been exercised.] No fractional shares of Common Stock shall be issued upon any exercise of this Option. Notwithstanding the provisions of paragraph 5 hereof, this Option, or any unexercised portion thereof, shall expire and no longer be exercisable on the date that is ten (10) years from the date hereof. 3. Transfer of Option. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or by the laws of descent or distribution. 4. Adjustments. If the shares of Common Stock 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, recapitalization, reclassification, stock dividend, stock split or reverse stock split in which the Company is the surviving entity, the aggregate number of Shares subject to the Option and the Exercise Price per Share subject to the Option shall be appropriately and proportionately adjusted in the manner provided in the Plan, provided, however, that the aggregate purchase price applicable to the unexercised portion of the Option shall not be affected by such adjustment. 5. Termination of Option. The Option hereby granted shall terminate and be of no force or effect upon the happening of the first to occur of the following events: (a) except as provided in subparagraphs 5(b) and 5(c) hereof, the date of termination [or a stated period of up to three months] of the Optionee's employment with the Company for any reason; (b) expiration of [three months] after the date of termination of the Optionee's employment with the Company because Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code; (c) expiration of [one year] after the death of the Optionee while employed by the Company; (d) occurrence of any event described in paragraph 10 hereof that causes a termination of the Option; or (e) expiration of the term of this Option as provided in paragraph 2 above. 35 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. 6. Method of Exercise. The Option shall be exercised by tender of payment of the Exercise Price and delivery to the Company at least three business days prior to the proposed date of exercise at its principal office of a written notice, which notice shall: (a) state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and the name, address, and social security number of the person in whose name the stock certificate or certificates for such Shares is to be registered; (b) contain any such representations and agreements as to Optionee's investment intent with respect to such Shares as shall be reasonably required by the Committee pursuant to paragraph 8; and (c) be signed by the person entitled to exercise the Option, and if the Option is being exercised by any person or persons other than the Optionee, be accompanied by proof, satisfactory to the Committee, of the right of such person or persons to exercise the Option. Payment of the Exercise Price may be made in cash or by certified or official bank check payable to the order of the Company. [Optional: Payment may also be made by surrendering shares of Common Stock (including any Shares received upon a prior or simultaneous exercise of the Option) at the fair market value of such Common Stock, as determined pursuant to Section 1(b) of Article II of the Plan, as of the date of surrender. Payment may also be made by combining cash, check or Common Stock.] After receipt of such notice in a form satisfactory to the Committee and the acceptance of payment, the Company shall deliver to the Optionee a certificate or certificates representing the Shares purchased hereunder, provided, that if any law or regulation requires the Company to take any action with respect to the Shares specified in such notice before the issuance thereof, the date of delivery of such Shares shall be extended for the period necessary to take such action. 7. Rights of a Shareholder. The Optionee shall not be deemed for any purpose to be a shareholder of the Company with respect to any shares covered by this Option unless this Option shall have been exercised and the Exercise Price paid in the manner provided herein. No adjustment will be made for dividends or other rights where the record date is prior to 36 the date of exercise and payment. Upon the exercise of the Option and the issuance of the certificate or certificates evidencing the shares of Common Stock received, except as otherwise provided herein, the Optionee shall have all the rights of a shareholder of the Company including the rights to receive all dividends or other distributions paid or made with respect to such shares. 8. Compliance with Securities Laws. The Optionee recognizes that any registration of the shares of Common Stock issuable pursuant to this Option under applicable federal and state securities laws, or actions to qualify for applicable exemptions from such registrations, shall be at the option of the Company. The Optionee acknowledges that, in the event that no such registrations are undertaken and the Company relies on exemptions from such registrations, the shares shall be issued only if the Optionee qualifies to receive such shares in accordance with the exemptions from registration on which the Company relies and that, in connection with any issuance of certificates evidencing such shares, the Board of Directors may require appropriate representations from the Optionee and take such other action as the Board of Directors may deem necessary, including but not limited to placing restrictive legends on such certificates and placing stop transfer instructions in the Company's stock transfer records, or delivering such instructions to the Company's transfer agent, in order to assure compliance with any such exemptions. Notwithstanding any other provision of the Plan or this Agreement (i) no shares will be issued upon any exercise of the Option unless and until such shares have been registered under all applicable federal and state securities laws or unless, in the opinion of counsel satisfactory to the Company, all actions necessary to qualify for exemptions from such registrations shall have been taken and (ii) the Company shall have no obligation to undertake such registrations or such actions necessary to qualify for exemptions from registrations and shall have no liability whatsoever for not doing so except to refund any option price tendered to the Company. 9. Rule 144. The Optionee acknowledges that, notwithstanding the registration of the Option and the shares of Common Stock issuable upon its exercise under the Securities Act of 1933 or under the securities laws of any state, if, at the time of exercise of the Option, he is deemed to be an "affiliate" of the Company as defined in Rule 144 of the Securities and Exchange Commission, any shares purchased thereunder will nevertheless be subject to sale only in compliance with Rule 144 (but without any holding period), and that the Company shall take such action as it deems necessary or appropriate to assure such compliance, including placing restrictive legends on certificates evidencing such shares and delivering stop transfer instructions to the Company's transfer agent. 10. 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, the Option granted hereunder shall terminate on the effective date of such merger, consolidation, dissolution, liquidation or sale; provided, 37 however, that prior to such effective date, the Committee may, in its discretion, cause the Option to become immediately exercisable, and may, to the extent the Option is terminated as provided in this paragraph 10, authorize a payment to the Optionee that approximates the economic benefit that he would realize if the Option were exercised immediately before such effective date, or authorize a payment in such other amount as it deems appropriate to compensate the Optionee for the termination of the unexercised portion of the Option, or arrange for the granting of a substitute option to the Optionee. This Agreement shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 11. No Right to Continued Employment. This Agreement does not confer upon the Optionee any right to continued employment by the Company, nor shall it interfere in any way with the right of the Company to terminate or alter the terms of that employment. 12. Construction. This Agreement shall be construed so as to be consistent with the Plan and the provisions of the Plan shall be deemed to be controlling in the event that any provision hereof should be inconsistent therewith. The Optionee hereby acknowledges receipt of a copy of the Plan from the Company and agrees to be bound by all of the terms and provisions of the Plan. Whenever the word "Optionee" is used in any provision of this Agreement under circumstances where the provision should logically be construed to apply to (i) the estate, personal representative, or beneficiary to whom this Option may be transferred by will or by the laws of descent and distribution or (ii) the guardian or legal representative of the Optionee acting pursuant to a valid power of attorney or the decree of a court of competent jurisdiction, then the term "Optionee" shall be construed to include such estate, personal representative, beneficiary, guardian or legal representative. 13. Severability. The provisions of this Agreement shall be severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereto. 14. Successor and Assigns. The terms of this Agreement shall be binding upon and shall enure to the benefit of any successors or assigns of the Company and of the Optionee. 15. Notices. Notices under this Agreement shall be in writing and shall be deemed to have been duly given (i) when personally delivered, (ii) when forwarded by Federal Express, Airborne, or another private carrier which maintains records showing delivery 38 information, (iii) when sent via facsimile but only if a written facsimile acknowledgment of receipt is received by the sending party, or (iv) when placed in the United States Mail and forwarded by registered or certified mail, return receipt requested, postage prepaid, addressed to the party to whom such notice is being given or such other address as furnished to the Company from time to time for this purpose. 16. Entire Agreement; Modification. This Agreement is the entire agreement and understanding of the parties hereto with respect to the Option granted herein and supersedes any and all prior and contemporaneous negotiations, understandings and agreements with regard to the Option and the matters set forth herein, whether oral or written. No representation, inducement, agreement, promise or understanding altering, modifying, taking from or adding to the terms and conditions hereof shall have any force or effect unless the same is in writing and validly executed by the parties hereto. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the Optionee has executed this Agreement and the Company has caused this Agreement to be executed by its duly authorized officer, effective as of the day and year first written above . INVESTORS TITLE COMPANY By: ----------------------------------- ATTEST: - ----------------------------------- Secretary (Corporate Seal) ----------------------------------- Optionee 39 EX-13 4 INVESTORS TITLE EXHIBIT 13 FINANCIAL HIGHLIGHTS
For the Year 1997 1996 Net premiums written $ 29,875,350 $ 21,111,155 Revenues 32,390,516 22,991,182 Investment income 1,628,188 1,352,932 Net income 4,530,382 3,843,537 Per Share Data Basic earnings per common share $ 1.63 $ 1.39 Weighted average shares outstanding - Basic 2,782,449 2,772,286 Diluted earnings per common share $ 1.60 $ 1.37 Weighted average shares outstanding - Diluted 2,826,730 2,813,001 Cash dividends per share $ .12 $ .095 At Year End Assets $ 41,293,007 $ 33,642,528 Investments in securities 31,124,410 23,573,663 Stockholders' equity 31,128,908 25,988,177 Book value/share 11.12 9.39 Performance Ratios Net income to: Average stockholders' equity 15.86% 15.95 % Total revenues (profit margin) 13.99% 16.72 % For the Year 1995 1994 1993 Net premiums written $ 15,854,140 $ 15,596,643 $ 14,300,622 Revenues 17,365,950 16,933,925 15,463,260 Investment income 1,140,636 1,046,712 954,440 Net income 3,250,658 3,126,859 2,313,014 Per Share Data Basic earnings per common share $ 1.16 $ 1.10 $ .81 Weighted average shares outstanding - Basic 2,804,632 2,833,778 2,855,744 Diluted earnings per common share $ 1.15 $ 1.10 $ .81 Weighted average shares outstanding - Diluted 2,816,544 2,845,199 2,864,912 Cash dividends per share $ .08 $ .08 $ .055 At Year End Assets $ 28,224,276 $ 24,242,060 $ 22,589,386 Investments in securities 19,742,639 16,362,082 14,914,140 Stockholders' equity 22,209,814 18,554,012 16,203,627 Book value/share 7.96 6.60 5.67 Performance Ratios Net income to: Average stockholders' equity 15.95% 17.99% 15.36% Total revenues (profit margin) 18.72% 18.47% 14.96%
[Line graph appears here with the following plot points] Five Year Stockholder's Equity History (in thousands) 1993 1994 1995 1996 1997 $16,204 $18,554 $22,210 $25,988 $31,129 Since January 1, 1993, stockholders' equity has grown at an annual compounded rate of 17.47% SHAREHOLDER INFORMATION 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 1997 First Quarter $15 3/4 - $14 1/4 3 cents - 3/24/97 Second Quarter 15 3/4 - 14 3 cents - 6/1/97 Third Quarter 20 3/4 - 15 1/2 3 cents - 9/1/97 Fourth Quarter 24 1/4 - 19 5/8 3 cents - 12/15/97 1996 First Quarter $12 1/4 - $10 2 cents - 3/1/96 Second Quarter 13 - 11 1/4 2.5 cents - 6/1/96 Third Quarter 14 - 11 1/4 2.5 cents - 9/1/96 Fourth Quarter 16 3/4 - 12 3/4 2.5 cents - 12/12/96
Market Makers Davenport & Co. of Virginia, Inc. Herzog, Heine, Geduld, Inc. Interstate/Johnson Lane Scott & Stringfellow, Inc. [Line graph appears here with the following plot points] Five-Year Stock Price History 1993 1994 1995 1996 1997 $8.50 $6.75 $10.50 $15.75 $21.25 Since inception of the Company, the compounded appreciation of the common stock has been 16.3%. 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, the availability of mortgage funds, the level of real estate activity, the cost of real estate, consumer confidence, the 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 a strong real estate market and the Company's efforts to increase market share and to improve the efficiency of operations. According to the Mortgage Bankers Association of America, the monthly average 30-year fixed mortgage interest rates were reported to be 7.6% in 1997, 7.81% in 1996 and 7.96% in 1995. Housing starts were 1.47 million in 1997, 1.48 million in 1996, and 1.35 million in 1995. New and existing home sales were 5.02 million in 1997, 4.84 million in 1996, and 4.47 million in 1995. During 1995, 30-year fixed mortgage interest rates began to drop, declining from 9.15% in January to 7.2% by year-end. 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. In 1996, 30-year fixed mortgage interest rates rose more than one percentage point through September, then began to decline, falling to 7.6% by year-end. Despite the increase in rates, the pace of real estate transactions increased. In January of 1997, 30-year fixed mortgage interest rates were 7.82%, then rose to 8.14% in April, and finally began a steady decline to end up the year at 7.1%. Over the course of the year this .72% overall decline contributed to an increase in real estate sales, which is reflected in an increase of $8,884,923 in the Company's 1997 premiums compared with 1996 premiums. The strength in the real estate market since the latter part of 1995 coupled with expansion into new operating territories contributed to the Company's record operating results for the past four years. Management believes that the current low level of interest bodes well for activity in the real estate market. A further decline in 30-year fixed mortgage interest rates in January of 1998 to 6.99% increases management's optimism for 1998, although 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 Prime" (unsurpassed financial stability) from the same firm. Results of Operations Operating Revenues Total premiums written increased 41.8% in 1997 compared with 1996. Premiums written in 1996 increased 33.3% compared with 1995. Growth in sales has resulted from a combination of continued marketing efforts and a strong real estate market. The volume of business continued to increase in 1997 as the number of policies and commitments issued rose to 184,237, an increase of 29.7% compared with 142,009 in 1996. In 1996, policies and commitments issued rose to 142,009, an increase of 29.1% compared with 110,036 in 1995. In addition to an 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) enhanced customer services provided through additions to the Company's legal department, (2) the establishment of a Commercial Real Estate Transactions Department to offer assistance in connection with commercial transactions, (3) the establishment of Agent Training and Support Departments to instruct and advise agents, (4) employee incentives to achieve revenue targets, and (5) increased revenues related to tax-deferred exchanges of real property. Shown below is a schedule of title premiums written for 1997, 1996 and 1995 in all states where our two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance:
1997 1996 1995 -------------- --------------- --------------- Florida $ 95,790 $ 73,529 $ 128,124 Georgia 558,988 192,731 31,812 Indiana 111,131 91,417 47,342 Kentucky 265 239 - Maryland 94,253 69,346 6,499 Michigan 4,796,435 458,198 - Minnesota 198,728 - - Mississippi 29,183 - - Nebraska 572,685 531,688 323,290 New York 441,479 535,952 385,258 North Carolina 15,368,830 12,492,684 10,254,900 Pennsylvania 1,019 2,321 25,276 South Carolina 3,006,167 2,906,361 1,974,607 Tennessee 140,937 109,679 37,992 Virginia 4,642,834 3,723,544 2,687,906 ----------- ----------- ----------- Direct Premiums 30,058,724 21,187,689 15,903,006 Reinsurance Assumed 58,447 44,559 29,817 Reinsurance Ceded (241,821) (121,093) (78,683) ----------- ----------- ----------- Net Premiums Written $29,875,350 $21,111,155 $15,854,140 =========== =========== ===========
Shown below is a breakdown of branch and agency premiums: [Bar Graph appears here with the following plot points] Branch vs. Agency Premiums (in thousands)
1997 % 1996 % 1995 % -------------- --------- -------------- --------- -------------- --------- Branch $15,676,780 52.2 $12,670,101 59.8 $10,453,167 65.7 Agency 14,381,944 47.8 8,517,588 40.2 5,449,839 34.3 ----------- ----- ----------- ----- ----------- ----- Total $30,058,724 100.0 $21,187,689 100.0 $15,903,006 100.0 =========== ===== =========== ===== =========== =====
Premiums written from branch operations increased 23.7% in 1997 compared with 1996 and increased 21.2% in 1996 compared with 1995. Due to the Company's efforts to increase the distribution of its products through an agency network, agency premiums increased 68.8% in 1997 compared with 1996 and increased 56.3% in 1996 compared with 1995. The Company's ability to increase this agency network with qualified agents, primarily in Michigan and Virginia, directly affects its market share in these states. 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 of 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 20 years. In 1998, 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 20.3% in 1997 compared with 1996 and increased 18.6% in 1996 compared with 1995. These increases were primarily attributable to increases in the average investment portfolio balances. Expenses Profit margins were 13.99% in 1997, 16.72% in 1996, and 18.72% in 1995. In 1997 and 1996, the profit margins declined primarily due to increased commissions paid to agents coupled with a rise in the claims provision. Margins from agent business are typically lower than those from branch business since agent commissions are generally higher than the operating expenses incurred for direct business. The Company's profit margins continued to exceed industry averages principally due to steps taken to refine operating procedures to better support its branch offices and agents, tight monitoring of expenses, and increased operating leverage resulting from a rise in premiums written. The Company maintains an automated system that computerizes underwriting. Resulting benefits include a more streamlined and consistent underwriting process and greater efficiency per underwriter. Computer automation has favorably impacted our labor costs and future improvements should continue to increase productivity and efficiency. The underwriting system is Year 2000 compliant. The Company does not expect the expenses related to converting the other systems to materially affect its financial position. Another step taken to streamline operations was the development of a training center for underwriters that standardizes underwriting practices. As part of this effort, the Company developed underwriting manuals to be used by branch and agency underwriting personnel. In 1997, salaries as a percentage of branch premiums written declined to 29% compared with 29.8% and 33.6% in 1996 and 1995, respectively. The number of branch offices increased from 26 in 1995 to 29 in 1997. Office occupancy and operations as a percentage of branch premiums improved over the three- year period (16% in 1997, 17% in 1996, and 17.5% in 1995). Continued expense monitoring and increased automation have enabled the Company to reduce these operating expenses. Commissions increased 74.1% in 1997 compared with 1996 and increased 57.5% in 1996 compared with 1995 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 1997, the provision for claims as a percentage of net premiums written increased to 15.7% compared with 13.9% in 1996 and 9% in 1995. The increase in the 1997 claims provision is primarily due to increases in claims payments and the reserves for claims. Payments of claims, net of recoveries, were $2,143,278, $1,689,741 and $1,229,445 in 1997, 1996 and 1995, respectively. The Company has continued to strengthen its reserves for claims. At December 31, 1997, the total reserves for claims were $7,622,140. Of that total, $1,346,423 was reserved for specific claims, and $6,275,717 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 net premiums written remained constant at 2% from 1995 to 1997. Income Taxes Income tax expense as a percentage of income before income taxes was 29.8%, 29.1% and 26.2% in 1997, 1996 and 1995, respectively. The lower percentage in 1995 was primarily due to a refund of taxes paid in prior years totaling $119,994. Net Income The Company reported a 17.9% increase in net income in 1997 compared with 1996, and an 18.2% increase in 1996 compared with 1995. These increases were primarily attributable to increased revenues and improved operating efficiencies resulting from expense control procedures, partially offset by increased commissions and claims expense. Liquidity and Capital Resources Cash flows provided by operating activities were $5,233,328, $5,397,301 and $3,257,858 in 1997, 1996 and 1995, respectively. In addition to operational liquidity, the Company has no long-term debt. Nonoperating funds were primarily used to purchase investments. 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 1998, the amount of dividends that can be paid without prior approval from the insurance commissioner is approximately $2,090,000. 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 22,134 shares at an average purchase price of $17.10 per share as of December 31, 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 127,866 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. Safe Harbor Statement 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 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
1997 March 31 June 30 September 30 December 31 Net premiums written $5,418,788 $7,661,689 $8,106,160 $8,688,713 Investment income 398,113 385,606 412,742 431,727 Net income 861,054 1,145,474 1,328,572 1,195,282 Basic earnings per common share .31 .41 .48 .43 Diluted earnings per common share .30 .41 .47 .42 1996 Net premiums written $4,434,799 $5,481,492 $5,574,243 $5,620,621 Investment income 294,791 314,286 329,113 414,742 Net income 747,719 978,782 1,072,350 1,044,686 Basic earnings per common share .27 .35 .39 .38 Diluted earnings per common share .27 .35 .38 .37
Investors Title Company and Subsidiaries CONSOLIDATED BALANCE SHEETS as of December 31, 1997 and 1996
1997 1996 Assets Cash and cash equivalents ........................................................... $ 2,823,177 $ 4,244,570 Investments in securities (Notes 2 and 3): Fixed maturities: Held-to-maturity, at amortized cost (fair value: 1997: $5,053,485; 1996: $5,422,644)................................................................ 4,841,466 5,267,372 Available-for-sale, at fair value (amortized cost: 1997: $18,928,948; 1996: $12,518,544)............................................................... 19,752,550 12,832,724 Equity securities, at fair value (cost: 1997: $3,844,927; 1996: $3,484,927)........ 6,530,394 5,473,567 ----------- ----------- Total investments ................................................................ 31,124,410 23,573,663 Premiums (less allowance for doubtful accounts: 1997: $350,000; 1996: $200,000) ..... 3,372,751 2,016,122 Accrued interest and dividends ...................................................... 429,064 321,634 Prepaid expenses and other assets ................................................... 462,801 556,969 Property acquired in settlement of claims ........................................... 280,725 165,500 Property, net (Notes 4 and 9) ....................................................... 2,800,079 2,764,070 ----------- ----------- Total Assets ........................................................................ $41,293,007 $33,642,528 =========== =========== Liabilities and Stockholders' Equity Liabilities: Reserves for claims (Notes 6 and 8) ................................................. $ 7,622,140 $ 5,086,065 Accounts payable and accrued liabilities ............................................ 1,069,372 997,759 Commissions and reinsurance payables (Note 5) ....................................... 96,241 60,902 Premium taxes payable ............................................................... 153,857 101,766 Current income taxes payable ........................................................ 25,081 175,143 Deferred income taxes, net (Note 8) ................................................. 1,197,408 1,232,716 ----------- ----------- Total liabilities ................................................................. 10,164,099 7,654,351 ----------- ----------- Commitments and Contingencies (Notes 5, 9 and 11) Stockholders' Equity (Notes 2, 3, 7 and 12): Common stock-no par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares issued; and 2,800,240 and 2,767,830 shares outstanding 1997 and 1996, respectively) .......................................... 879,612 722,321 Retained earnings ................................................................... 27,933,688 23,745,995 Net unrealized gain on investments (net of deferred taxes: 1997: $1,193,461; 1996: $782,959).......................... 2,315,608 1,519,861 ----------- ----------- Total stockholders' equity ........................................................ 31,128,908 25,988,177 ----------- ----------- Total Liabilities and Stockholders' Equity ........................................... $41,293,007 $33,642,528 =========== ===========
See notes to consolidated financial statements. Investors Title Company and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME for the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 Revenues: Underwriting income: Premiums written (Note 5) ............................... $ 30,117,171 $ 21,232,248 $ 15,932,823 Less-premiums for reinsurance ceded (Note 5) ............ 241,821 121,093 78,683 ------------ ------------ ------------ Net premiums written.................................... 29,875,350 21,111,155 15,854,140 Investment income-interest and dividends (Note 3) ........ 1,628,188 1,352,932 1,140,636 Net realized gain on sales of investments (Note 3) ....... 269,396 178,238 45,242 Other .................................................... 617,582 348,857 325,932 ------------ ------------ ------------ Total .................................................. 32,390,516 22,991,182 17,365,950 ------------ ------------ ------------ Operating Expenses: Commissions to agents .................................... 10,065,249 5,780,048 3,669,995 Provision for claims (Note 6) ............................ 4,679,353 2,939,741 1,429,660 Salaries ................................................. 4,543,598 3,773,550 3,515,480 Employee benefits and payroll taxes (Notes 7 and 10) ..... 1,578,688 1,224,659 1,107,465 Office occupancy and operations (Note 9) ................. 2,512,370 2,159,175 1,831,074 Business development ..................................... 1,091,812 665,705 573,874 Taxes, other than payroll and income ..................... 168,607 150,617 142,811 Premium taxes ............................................ 592,660 420,963 328,791 Professional fees ........................................ 317,294 160,929 212,279 Other .................................................... 390,103 294,258 150,863 ------------ ------------ ------------ Total .................................................. 25,939,734 17,569,645 12,962,292 ------------ ------------ ------------ Income Before Income Taxes ................................. 6,450,782 5,421,537 4,403,658 Provision for Income Taxes (Note 8) ........................ 1,920,400 1,578,000 1,153,000 ------------ ------------ ------------ Net Income ................................................. $ 4,530,382 $ 3,843,537 $ 3,250,658 ============ ============ ============ Basic Earnings per Common Share ............................ $ 1.63 $ 1.39 $ 1.16 ============ ============ ============ Weighted Average Shares Outstanding-Basic .................. 2,782,449 2,772,286 2,804,632 ========= ========= ========= Diluted Earnings per Common Share .......................... $ 1.60 $ 1.37 $ 1.15 ============ ============ ============ Weighted Average Shares Outstanding-Diluted ................ 2,826,730 2,813,001 2,816,544 ========= ========= =========
See notes to consolidated financial statements. Investors Title Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the Years Ended December 31, 1997, 1996 and 1995
Net Unrealized Total Common Stock Retained Gain On Stockholders' Shares Amount Earnings Investments Equity ------------- ------------- -------------- ------------ -------------- Balance, January 1, 1995 ............................ 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) Purchases of 21,429 shares of common stock (net of distributions) ...... (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) Purchases of 22,803 shares of common stock (net of distributions) ............. (22,803) (316,093) (316,093) Net unrealized gain on investments (net of deferred taxes of $268,829)....... 522,216 522,216 ---------- ----------- Balance, December 31, 1996 .......................... 2,767,830 722,321 23,745,995 1,519,861 25,988,177 Net Income ................................. 4,530,382 4,530,382 Dividends ($.12 per share).................. (342,689) (342,689) Distributions of 32,410 shares of common stock (net of purchases) ................. 32,410 157,291 157,291 Net unrealized gain on investments (net of deferred taxes of $410,502)....... 795,747 795,747 ---------- ----------- Balance, December 31, 1997 .......................... 2,800,240 $ 879,612 $27,933,688 $2,315,608 $31,128,908 ========= ========== =========== ========== ===========
See notes to consolidated financial statements. Investors Title Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS for the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 Operating Activities: Net income ............................................................... $ 4,530,382 $ 3,843,537 $ 3,250,658 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ........................................................... 346,547 328,682 307,649 Amortization, net of accretion ......................................... 3,767 11,114 50,369 Provision for losses on premiums receivable ............................ 150,000 80,000 - (Gain) loss on disposals of property ................................... 7,326 (9,895) 11,028 Net realized gain on sales of investments .............................. (269,396) (178,238) (45,242) Provision (benefit) for deferred income taxes .......................... (445,238) (22,940) 74,654 Provision for claims .......................................... ........ 4,679,353 2,939,741 1,429,660 Payments of claims, net of recoveries .................................. (2,143,278) (1,689,741) (1,229,445) Changes in assets and liabilities: Increase in receivables ................................................ (1,635,116) (48,765) (582,264) Increase (decrease) in accounts payable and accrued liabilities ........ 71,613 (64) (2,036) Increase (decrease) in commissions and reinsurance payables ............ 35,339 22,301 (14,247) Increase in premium taxes payable ...................................... 52,091 65,926 7,074 Increase (decrease) in current income taxes payable .................... (150,062) 55,643 - ------------ ------------ ------------ Net cash provided by operating activities .............................. 5,233,328 5,397,301 3,257,858 ------------ ------------ ------------ Investing Activities: Purchases of available-for-sale securities .............................. (9,036,039) (4,370,919) (4,419,434) Purchases of held-to-maturity securities ................................ (297,951) (997,220) (415,000) Proceeds from sales of available-for-sale securities .................... 2,530,426 1,437,173 1,688,312 Proceeds from sales of held-to-maturity securities ...................... 724,123 1,118,305 1,060,200 Purchases of property ................................................... (422,111) (303,417) (315,763) Proceeds from sales of property ......................................... 32,229 23,729 34,128 ------------ ------------ ------------ Net cash used in investing activities .................................. (6,469,323) (3,092,349) (2,367,557) ------------ ------------ ------------ Financing Activities: Repayment of notes payable .............................................. - - (500,000) Distributions (repurchases) of common stock ............................. 157,291 (316,093) (224,904) Dividends paid .......................................................... (342,689) (271,297) (228,460) ------------ ------------ ------------ Net cash used in financing activities .................................. (185,398) (587,390) (953,364) ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents ..................... (1,421,393) 1,717,562 (63,063) Cash and Cash Equivalents, Beginning of Year ............................. 4,244,570 2,527,008 2,590,071 ------------ ------------ ------------ Cash and Cash Equivalents, End of Year ................................... $ 2,823,177 $ 4,244,570 $ 2,527,008 ============ ============ ============ Supplemental Disclosures: Cash Paid During the Year For: Interest ............................................................... $ 481 $ 33 $ 14,962 ============ ============ ============ Income taxes ........................................................... $ 2,516,000 $ 1,418,000 $ 897,000 ============ ============ ============
The change in unrealized gain on investments in securities (which is included in stockholders' equity, net of deferred income taxes) was $1,206,249, $791,045, and $1,299,762, in 1997, 1996 and 1995, respectively. The change in the deferred income taxes (benefit) on the net unrealized gain and loss was $410,502, $268,829, and $441,254 in 1997, 1996 and 1995, respectively. During 1996, the Company exchanged assets with a value of $60,000 for an equity investment. See notes to consolidated financial statements. 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 Florida, Georgia, 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 Michigan, 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 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 Claims The reserves for claims and the annual provision for 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 reserves for claims (see Note 6). 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. Title insurance commissions earned by the Company's agents are recognized as expense concurrently with premium recognition. Earnings Per Common Share Effective December 31, 1997, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Adoption of this standard required the Company to restate all prior period earnings per share data presented to conform with SFAS 128. This statement requires companies to compute net earnings per share under two different methods, basic and diluted, and to disclose the methodology used for the calculation. Basic earnings per common share under SFAS 128 for 1996 and 1995 is not different from net income per common share amounts as previously reported. Diluted earnings per common share had not been previously reported. The employee stock options discussed in Note 7 are considered outstanding for the diluted earnings per common share calculation. The total increase in the weighted average shares outstanding related to these equivalent shares was 44,281, 40,715 and 11,912 for 1997, 1996 and 1995, respectively. 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 tax-free exchanges, the Company 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 the Company for the purchase of exchange properties was approximately $21,015,000 and $14,016,000 as of December 31, 1997 and 1996, respectively. Effects of Inflation The effect of inflation on the Company has not been material in recent years. Accounting Changes Pending Implementation In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") and No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet. The Company will be required to adopt the new reporting guidelines for the fiscal year beginning January 1, 1998. Adoption of this statement will not have a financial impact on the Company; however, the Company anticipates additional disclosure requirements on comprehensive income upon adoption of SFAS 130. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. This statement defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company will be required to adopt the new reporting guidelines for the fiscal year beginning January 1, 1998. Adoption of this statement will not have a financial impact on the Company; however, the Company has not determined whether additional disclosures will be required on segment information upon adoption of SFAS 131. 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 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 1996 and 1995 amounts have been reclassified to conform with 1997 classifications. 2. Statutory Restrictions on Consolidated Stockholders' Equity and Investments The Company has designated approximately $13,135,000 and $10,909,000 of retained earnings as of December 31, 1997 and 1996, respectively, as appropriated to reflect the required statutory premium reserve. See Note 8 for the tax treatment of the statutory premium reserve. As of December 31, 1997 and 1996, approximately $26,810,000 and $22,550,000 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 $2,755,000 and $2,290,000 at December 31, 1997 and 1996, 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 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ ------------ ------------- December 31, 1997: Fixed maturities - Held-to-maturity, at amortized cost: Certificates of deposit .................................. $ 130,985 $ - $ - $ 130,985 Obligations of states and political subdivisions ......... 4,710,481 212,019 - 4,922,500 ----------- ---------- -------- ----------- Total ..................................................... $ 4,841,466 $ 212,019 - $ 5,053,485 =========== ========== ======== =========== Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions ......... $17,465,766 $ 786,550 $ 2,766 $18,249,550 Corporate debt securities ................................ 1,463,182 39,818 - 1,503,000 ----------- ---------- -------- ----------- Total ..................................................... $18,928,948 $ 826,368 $ 2,766 $19,752,550 =========== ========== ======== =========== Equity securities, at fair value - Common stocks and nonredeemable preferred stocks .......... $ 3,844,927 $2,862,442 $176,975 $ 6,530,394 =========== ========== ======== ===========
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ ------------ ------------- December 31, 1996: Fixed maturities - ......................................... Held-to-maturity, at amortized cost: Certificates of deposit .................................. $ 169,004 $ - $ - $ 169,004 Obligations of states and political subdivisions ......... 5,098,368 157,719 2,447 5,253,640 ----------- ---------- -------- ----------- Total ..................................................... $ 5,267,372 $ 157,719 2,447 $ 5,422,644 =========== ========== ===== =========== Fixed maturities - Available-for-sale, at fair value: Obligations of states and political subdivisions ......... $10,496,691 $ 329,912 $ 32,453 $10,794,150 Corporate debt securities ................................ 1,875,931 25,062 693 1,900,300 Debt securities issued by foreign governments ............ 145,922 2,036 9,684 138,274 ----------- ---------- -------- ----------- Total ..................................................... $12,518,544 $ 357,010 $ 42,830 $12,832,724 =========== ========== ======== =========== Equity securities, at fair value - Common stocks and nonredeemable preferred stocks .......... $ 3,484,927 $2,095,430 $106,790 $ 5,473,567 =========== ========== ======== ===========
The scheduled maturities of fixed maturities at December 31, 1997 are as follows:
Available-for-Sale Held-to-Maturity ----------------------------- ----------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------- ------------- ------------- ------------- Due in one year or less ........................ $ 401,585 $ 406,000 $ 356,094 $ 357,735 Due after one year through five years .......... 3,126,751 3,226,550 872,940 915,800 Due after five years through ten years ......... 3,505,134 3,716,500 579,832 608,250 Due after ten years ............................ 11,895,478 12,403,500 3,032,600 3,171,700 ----------- ----------- ---------- ---------- Total ......................................... $18,928,948 $19,752,550 $4,841,466 $5,053,485 =========== =========== ========== ==========
Earnings on investments and net realized gains for the three years ended December 31 are as follows:
1997 1996 1995 ------------- ------------- ------------- Fixed maturities ....................................... $1,186,248 $1,026,010 $ 853,705 Equity securities ...................................... 191,471 137,065 142,899 Invested cash and other short term investments ......... 245,907 156,885 138,768 Miscellaneous interest ................................. 4,562 32,972 5,264 Net realized gains ..................................... 269,396 178,238 45,242 ---------- ---------- ---------- Investment income ...................................... $1,897,584 $1,531,170 $1,185,878 ========== ========== ==========
Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31 are summarized as follows:
1997 1996 1995 ------------ ----------- ------------ Gross realized gains: U.S. Treasury securities and obligations of U.S. Government corporations and agencies ................................ $ - $ - $ 3,937 Redeemable preferred stocks ............................... - 11,274 - Obligations of states and political subdivisions .......... 3,641 - 727 Common stocks and nonredeemable preferred stocks .......... 369,779 233,129 67,590 ---------- --------- --------- Total .................................................... 373,420 244,403 72,254 ---------- --------- --------- Gross realized losses: Obligations of states and political subdivisions .......... (1,554) (3,838) (500) Debt securities issued by foreign governments ............. (29,278) - (800) Common stocks and nonredeemable preferred stocks .......... (73,192) (62,327) (25,712) ---------- --------- --------- Total .................................................... (104,024) (66,165) (27,012) ---------- --------- --------- Net realized gain ......................................... $ 269,396 $ 178,238 $ 45,242 ========== ========= =========
4. Property and Equipment Property and equipment at December 31 are summarized as follows:
1997 1996 --------------- --------------- Land ...................................... $ 782,582 $ 782,582 Office buildings and improvements ......... 1,317,766 1,293,726 Furniture, fixtures and equipment ......... 2,159,176 1,843,636 Automobiles ............................... 181,093 169,423 ------------ ------------ Total ................................... 4,440,617 4,089,367 Less accumulated depreciation ............. (1,640,538) (1,325,297) ------------ ------------ Property and equipment, net ............. $ 2,800,079 $ 2,764,070 ============ ============
5. Reinsurance The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Premiums assumed and ceded were approximately $58,000 and $242,000, respectively for 1997, $45,000 and $121,000, respectively for 1996, and $30,000 and $79,000, respectively for 1995. 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. 6. Reserves for Claims Changes in the reserves for claims for the years ended December 31 are summarized as follows:
1997 1996 1995 --------------- --------------- --------------- Balance, beginning of year .................... $ 5,086,065 $ 3,836,065 $ 3,635,850 Provision related to: Current year ................................. 2,394,138 1,143,070 1,050,005 Prior years .................................. 2,285,215 1,796,671 379,655 ------------ ------------ ------------ Total provision charged to operations ......... 4,679,353 2,939,741 1,429,660 ------------ ------------ ------------ Claims paid, net of recoveries, related to: Current year ................................. (333,160) (64,582) (81,148) Prior years .................................. (1,810,118) (1,625,159) (1,148,297) ------------ ------------ ------------ Total claims paid, net of recoveries .......... (2,143,278) (1,689,741) (1,229,445) ------------ ------------ ------------ Balance, end of year .......................... $ 7,622,140 $ 5,086,065 $ 3,836,065 ============ ============ ============
In management's opinion, the reserves are adequate to cover claim losses which might result from pending and possible claims. 7. 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 443,300 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 10 to 20% per year beginning on the date of grant or one year from the date of grant and generally expire in five to ten 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:
1997 1996 1995 --------------- --------------- --------------- Net income: As reported .............. $ 4,530,382 $ 3,843,537 $ 3,250,658 Pro forma ................ 4,427,593 3,767,770 3,217,552 Basic earnings per share: As reported .............. $ 1.63 $ 1.39 $ 1.16 Pro forma ................ 1.59 1.36 1.15 Diluted earnings per share: As reported .............. 1.60 1.37 1.15 Pro forma ................ 1.57 1.34 1.14
The estimated weighted average grant-date fair values of options granted in 1997, 1996 and 1995 were $7.09, $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 1997, 1996 and 1995, respectively: dividend yield of .7%, .7% and .8%; expected volatility of 22%, 22% and 21%; risk-free interest rates of 6%, 6% and 5%; and expected lives of 5 to 10 years. A summary of the status of the Company's plans as of December 31 and changes during the years ended on those dates is presented below:
1997 1996 1995 -------------------------- ------------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ ----------- ----------- ----------- ---------- ---------- Outstanding at beginning of year ................................ 114,010 $ 8.84 107,860 $ 7.79 99,400 $ 7.76 Granted ................................. 14,500 17.80 17,400 14.60 14,500 8.30 Exercised ............................... (42,091) 7.18 (8,150) 7.41 (40) 8.50 Terminated .............................. (6,100) 9.30 (3,100) 8.50 (6,000) 8.47 ------- ------- ------- ------ ------ ------- Outstanding at end of year .............. 80,319 $ 11.29 114,010 $ 8.84 107,860 $ 7.79 ====== ======= ======= ====== ======= ======= Options exercisable at year end ......... 40,896 $ 9.62 37,830 $ 7.48 25,640 $ 7.04 ====== ======= ====== ====== ====== =======
The following table summarizes information about fixed stock options outstanding at December 1997:
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 - -------------------------- ------------- ------------------ ----------- ------------- ---------- $ 6.75-$ 9.75.......... 49,719 1 $ 8.27 32,859 $ 8.19 10.00- 15.50 ......... 20,700 5 13.93 6,940 14.81 17.50- 22.25 ......... 9,900 9 19.45 1,097 19.58 ------ ------ $ 6.75-$22.25.......... 80,319 3 $ 11.29 40,896 $ 9.62 ====== = ======= ====== ======
8. Income Taxes At December 31 the approximate effect on each component of deferred income taxes and liabilities is summarized as follows:
1997 1996 ------------- ------------- Deferred income tax assets: Accrued vacation ....................................................... $ 70,828 $ 82,426 Reinsurance payable .................................................... 13,142 14,875 Bad debt reserve ....................................................... 119,000 68,000 Net state operating loss carryforward .................................. - 310,857 Other .................................................................. 62,625 - ---------- ---------- Total ................................................................. 265,595 476,158 Less valuation allowance ............................................... - 310,857 ---------- ---------- Total ................................................................. 265,595 165,301 ---------- ---------- Deferred income tax liabilities: Statutory premium reserves net of recorded reserves for claims ......... 130,577 486,521 Net unrealized gain on investments ..................................... 1,193,461 782,959 Excess of tax over book depreciation ................................... 106,034 109,314 Discount accretion on tax-exempt obligations ........................... 25,696 19,223 Other .................................................................. 7,235 - ---------- ---------- Total ................................................................. 1,463,003 1,398,017 ---------- ---------- Net deferred income tax liabilities ..................................... $1,197,408 $1,232,716 ========== ==========
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 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:
1997 1996 1995 ------------- ------------- ------------- Anticipated income tax expense ..................................... $2,193,266 $1,843,323 $1,497,244 Increase (reduction) related to: State income taxes, net of the federal income tax benefit ......... 11,626 9,240 10,560 Tax exempt interest income (net of amortization) .................. (352,477) (276,678) (227,206) Refund of taxes paid in prior years ............................... - - (119,994) Other, net ........................................................ 67,985 2,115 (7,604) ---------- ---------- ---------- Provision for income taxes ......................................... $1,920,400 $1,578,000 $1,153,000 ========== ========== ==========
The components of income tax expense for the years ended December 31 are summarized as follows:
1997 1996 1995 ------------- ------------- ------------- Current: Federal ........................... $2,329,333 $1,586,940 $1,062,346 State ............................. 36,305 14,000 16,000 ---------- ---------- ---------- Total ............................ 2,365,638 1,600,940 1,078,346 Deferred expense (benefit) ......... (445,238) (22,940) 74,654 ---------- ---------- ---------- Total ............................ $1,920,400 $1,578,000 $1,153,000 ========== ========== ==========
For state income tax purposes, ITIC and NE-ITIC must pay only a gross premium tax. At December 31, 1996 and 1995, the Company had available state net operating loss carryforwards of approximately $3,900,000 and $4,100,000, respectively, that originated in 1992 and expired in 1997. 9. Leases Rent expense totaled approximately $409,000, $400,000, and $373,000 in 1997, 1996 and 1995, 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, 1997 are summarized as follows: Year End: 1998 $178,156 1999 150,086 2000 82,604 2001 30,299 2002 18,771 -------- Total $459,916 ========
10. 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 $24,000 per employee. All contributions are deposited in Individual Retirement Accounts for participants. Contributions under the plan were approximately $259,000, $216,000, and $193,000 for 1997, 1996 and 1995, respectively. 11. 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. 12. 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 $23,900,461 and $18,985,205 as of December 31, 1997 and 1996, respectively. Net income on a statutory basis was $4,564,782, $3,322,356 and $3,377,015 for the twelve months ended December 31, 1997, 1996 and 1995, respectively. REPORT OF INDEPENDENT ACCOUNTANTS Investors Title Company and Subsidiaries: We have audited the accompanying consolidated balance sheets of Investors Title Company and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 Investors Title Company and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Raleigh, North Carolina January 30, 1998 EX-27 5 EXHIBIT 27.1
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 5,473,639 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 1.00 1.37 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
EX-27 6 EXHIBIT 27.2
7 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 13,276,954 14,567,157 17,523,066 4,832,752 4,687,316 4,644,864 0 0 0 4,579,347 5,137,853 6,255,731 0 0 0 0 0 0 22,838,058 24,511,331 28,534,646 5,100,623 5,626,284 4,309,264 0 0 0 0 0 0 33,842,040 36,259,517 39,422,126 5,436,065 6,078,330 7,171,295 0 0 0 89,154 67,744 47,188 0 0 0 0 0 0 0 0 0 0 0 0 705,966 805,069 818,235 25,660,262 27,149,211 28,829,318 33,842,040 36,259,517 39,422,126 5,418,788 13,080,477 21,186,637 398,113 783,719 1,196,461 107,081 107,049 233,387 121,529 266,065 403,166 814,821 1,817,988 3,100,832 0 0 0 4,049,766 9,640,133 15,258,218 1,180,924 2,779,189 4,660,601 319,870 772,661 1,325,501 861,054 2,006,528 3,335,100 0 0 0 0 0 0 0 0 0 861,054 2,006,528 3,335,100 .31 .72 1.20 .30 .71 1.18 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.
EX-27.3 7 FDS EXHIBIT 27.3
7 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 19,752,550 4,730,481 4,942,500 6,530,394 0 0 31,124,410 2,823,177 0 0 41,293,007 7,622,140 0 96,241 0 0 0 0 879,612 30,249,296 41,293,007 29,875,350 1,628,188 269,396 617,582 4,679,353 0 21,260,381 6,450,782 1,920,400 4,530,382 0 0 0 4,530,382 1.63 1.60 0 0 0 0 0 0 0
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