SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001 Commission File No. 1-13990
---------------------- ---------
LANDAMERICA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1589611
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Gateway Centre Parkway
Richmond, Virginia 23235-5153
(Address of principal executive offices) (Zip Code)
(804) 267-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, No Par Value 18,581,112 November 8, 2001
---------------- ---------------------
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets....................................3
Consolidated Statements of Operations .........................5
Consolidated Statements of Cash Flows..........................6
Consolidated Statements of Changes in
Shareholders' Equity........................................7
Notes to Consolidated Financial Statements.....................8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations..................................10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..........................................13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................14
Signatures....................................................15
2
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
September 30, December 31,
ASSETS 2001 2000
------ ---- ----
INVESTMENTS:
Fixed maturities available-for-sale - at fair value
(amortized cost: 2001 - $840,224; 2000 - $800,504) $ 861,220 $ 796,842
Equity securities - at fair value (cost: 2001 - $4,219;
2000 - $4,285) 2,372 3,235
Mortgage loans (less allowance for doubtful accounts:
2001 - $196; 2000 - $139) 14,344 9,652
Invested cash 58,744 80,976
------------- -------------
Total Investments 936,680 890,705
CASH 24,075 42,375
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts: 2001 -
$4,779; 2000 - $2,230) 11,073 11,011
Premiums (less allowance for doubtful accounts: 2001 -
$7,022; 2000 - $9,945) 52,002 36,857
Income tax recoverable - 4,479
------------- -------------
Total Notes and Accounts Receivable 63,075 52,347
PROPERTY AND EQUIPMENT - at cost (less accumulated
depreciation and amortization: 2001 - $113,751; 2000 -
$92,715) 68,633 61,599
TITLE PLANTS 92,704 91,609
GOODWILL (less accumulated amortization: 2001 -
$38,671; 2000 - $32,072) (Note 4) 232,409 217,425
DEFERRED INCOME TAXES 125,537 139,006
OTHER ASSETS 128,639 123,891
------------- -------------
Total Assets $ 1,671,752 $ 1,618,957
============= =============
See accompanying notes.
3
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
September 30, December 31,
LIABILITIES 2001 2000
----------- ---- ----
POLICY AND CONTRACT CLAIMS $ 557,765 $ 556,798
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 136,853 178,681
FEDERAL Income taxES 10,921 -
NOTES PAYABLE 208,478 202,379
OTHER 19,806 16,999
------------- -------------
Total Liabilities 933,823 954,857
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COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, no par value, authorized 5,000,000 shares,
no shares of Series A Junior Participating Preferred
Stock issued or outstanding; shares of 7% Series B
Cumulative Convertible Preferred Stock issued and
outstanding: 2001 - 0; 2000 - 2,200,000 - 175,700
Common stock, no par value, 45,000,000 shares
authorized, shares issued and outstanding: 2001 -
18,579,363; 2000 - 13,518,319 521,567 340,269
Accumulated other comprehensive gain (loss) 12,448 (4,712)
Retained earnings 203,914 152,843
------------- -------------
Total Shareholders' Equity 737,929 664,100
------------- -------------
Total Liabilities and Shareholders' Equity $ 1,671,752 $ 1,618,957
============= =============
See accompanying notes.
4
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Title and other operating revenues:
Direct operations $ 250,665 $ 195,353 $ 724,271 $ 563,145
Agency operations 277,367 244,280 770,983 724,472
------------ ------------ ------------ ------------
528,032 439,633 1,495,254 1,287,617
Investment income 12,507 12,724 38,289 38,144
Gain (loss) on sales of investments 542 39 (235) (144)
------------ ------------ ------------ ------------
541,081 452,396 1,533,308 1,325,617
------------ ------------ ------------ ------------
EXPENSES
Salaries and employee benefits 164,148 129,931 470,733 379,314
Agents' commissions 219,426 191,509 607,976 566,286
Provision for policy and contract claims 20,789 19,340 58,805 56,727
Interest expense 2,943 3,412 9,925 10,153
Amortization of intangibles 2,475 2,821 7,328 8,343
Exit and termination costs - 2,179 - 2,179
General, administrative and other 102,005 91,337 294,315 266,981
------------ ------------ ------------ ------------
511,786 440,529 1,449,082 1,289,983
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 29,295 11,867 84,226 35,634
INCOME TAX EXPENSE (BENEFIT)
Current 5,332 6,018 23,869 13,005
Deferred 5,213 (1,983) 6,451 (889)
------------ ------------ ------------ ------------
10,545 4,035 30,320 12,116
------------ ------------ ------------ ------------
NET INCOME 18,750 7,832 53,906 23,518
DIVIDENDS - PREFERRED STOCK - (1,925) (145) (5,775)
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 18,750 $ 5,907 $ 53,761 $ 17,743
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ 1.02 $ 0.44 $ 3.12 $ 1.32
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 18,418 13,431 17,240 13,408
NET INCOME PER COMMON SHARE ASSUMING
DILUTION $ 1.01 $ 0.43 $ 2.91 $ 1.28
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ASSUMING DILUTION 18,567 18,403 18,525 18,314
See accompanying notes.
5
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands of dollars)
(Unaudited)
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 53,906 $ 23,518
Depreciation and amortization 26,276 27,127
Amortization of bond premium 2,134 1,017
Realized investment losses 235 144
Deferred income tax 6,451 (889)
Change in assets and liabilities, net of businesses acquired:
Notes receivable (62) 1,024
Premiums receivable (15,145) 152
Income taxes receivable/payable 15,400 10,371
Policy and contract claims 967 4,843
Accounts payable and accrued expenses (41,828) (8,264)
Other (7,329) (7,312)
------------ ------------
Net cash provided by operating activities 41,005 51,731
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net (25,982) (15,438)
Purchase of business, net of cash acquired (16,227) (12,507)
Change in cash surrender value (1,476) (1,637)
Cost of investments acquired:
Fixed maturities - available-for-sale (286,172) (180,073)
Equity securities (8) -
Mortgage loans (42,016) (9,471)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 244,158 151,823
Mortgage loans 37,324 6,374
------------ ------------
Net cash used in investing activities (90,399) (60,929)
------------ ------------
Cash flows from financing activities:
Proceeds from the sale of common shares 5,598 2,572
Cost of common shares repurchased - (4,906)
Dividends paid (2,835) (7,790)
Proceeds from issuance of notes payable 160,000 3,900
Payments on notes payable (153,901) (31,053)
------------ ------------
Net cash provided by (used in) financing activities 8,862 (37,277)
------------ ------------
Net decrease in cash and invested cash (40,532) (46,475)
Cash and invested cash at beginning of period 123,351 163,984
------------ ------------
Cash and invested cash at end of period $ 82,819 $ 117,509
============ ============
See accompanying notes.
6
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands of dollars except per share amounts)
(Unaudited)
Accumulated
Preferred Stock Common Stock Other Total
--------------- ------------ Comprehensive Retained Shareholders'
Shares Amounts Shares Amounts Income (Loss) Earnings Equity
------ ------- ------ ------- ------------- -------- ------
Balance - December 31, 1999 2,200,000 $ 175,700 13,680,421 $ 342,138 $ (31,135) $ 244,000 $ 730,703
Net income - - - - - 23,518 23,518
Unrealized gain on securities - - - - 7,804 - 7,804
---------
Comprehensive income - - - - - - 31,322
---------
Common stock issued - - 111,198 2,572 - - 2,572
Common stock retired - - (287,300) (4,906) - - (4,906)
Preferred dividends (7%) - - - - - (5,775) (5,775)
Common dividends ($0.15/share) - - - - - (2,015) (2,015)
--------- --------- ---------- --------- ----------- --------- ---------
Balance - September 30, 2000 2,200,000 $ 175,700 13,504,319 $ 339,804 $ (23,331) $ 259,728 $ 751,901
========= ========= ========== ========= =========== ========= =========
Balance - December 31, 2000 2,200,000 $ 175,700 13,518,319 $ 340,269 $ (4,712) $ 152,843 $ 664,100
Net income - - - - - 53,906 53,906
Unrealized gain on securities - - - - 17,160 - 17,160
---------
Comprehensive income - - - - - - 71,066
---------
Common stock issued - - 236,485 5,598 - - 5,598
Preferred stock conversion (2,200,000) (175,700) 4,824,559 175,700 - - -
Preferred dividends (7%) - - - - - (145) (145)
Common dividends ($0.15/share) - - - - - (2,690) (2,690)
--------- --------- ---------- --------- ----------- --------- ---------
Balance - September 30, 2001 - $ - 18,579,363 $ 521,567 $ 12,448 $ 203,914 $ 737,929
========= ========= ========== ========= =========== ========= =========
See accompanying notes.
7
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except per share amounts)
1. Interim Financial Information
The unaudited consolidated financial information included in this report
has been prepared in conformity with the accounting principles and
practices reflected in the consolidated financial statements included in
the Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934. This report should be read in conjunction with the aforementioned
Form 10-K. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of this
information have been made. The results of operations for the interim
periods are not necessarily indicative of results for a full year.
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net income - numerator for diluted
earnings per share $ 18,750 $ 7,832 $ 53,906 $ 23,518
Less preferred dividends - 1,925 145 5,775
-------- -------- -------- --------
Numerator for basic earnings per share $ 18,750 $ 5,907 $ 53,761 $ 17,743
======== ======== ======== ========
Denominator:
Weighted average shares -
denominator for basic earnings per
share 18,418 13,431 17,240 13,408
Effect of dilutive securities:
Assumed weighted average
conversion of preferred stock - 4,824 1,125 4,824
Employee stock options 149 148 160 82
-------- -------- -------- --------
Denominator for diluted earnings per
share 18,567 18,403 18,525 18,314
======== ======== ======== ========
Basic earnings per common share $1.02 $0.44 $3.12 $1.32
===== ===== ===== =====
Diluted earnings per common share $1.01 $0.43 $2.91 $1.28
===== ===== ===== =====
8
3. Commitments and Contingencies
For additional information, see Pending Legal Proceedings on pages F-29,
F-30 and F-31 and Legal Proceedings on pages 13, 14 and 15 of the Form 10-K
for the fiscal year ended December 31, 2000, Legal Proceedings on page 13
of the Form 10-Q for the quarter ended March 31, 2001, and Legal
Proceedings on page 14 of the Form 10-Q for the period ended June 30, 2001.
4. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that
all business combinations be accounted for under the purchase method. The
statement applies to all business combinations initiated after June 30,
2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement
also provides that goodwill should not be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying
amount. Existing goodwill will continue to be amortized through the
remainder of 2001 at which time amortization will cease and the Company
will perform a transitional goodwill impairment test. SFAS No. 142 is
effective for the fiscal periods beginning after December 15, 2001. The
Company is currently evaluating the impact of the new accounting standards
on existing goodwill and other intangible assets. The ultimate impact of
the new accounting standards has yet to be determined.
5. Subsequent Event
The Company recently determined that it would no longer pursue the
development of TitleQuest, its back office title production software. On
November 5, 2001, approximately forty employees of Elliptus Technologies,
Inc., the Company's technology subsidiary, were terminated in connection
with the decision. The Company expects to record a non-cash, after-tax
charge of approximately $7.2 million in the fourth quarter 2001 relating to
the TitleQuest project. The decision is not expected to have a material
effect on the Company's operations.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Operating Revenues
Operating revenues for the third quarter and first nine months of 2001 exceeded
the levels experienced in the comparable periods of 2000 as lower mortgage rates
sparked heightened levels of refinancing activity. Revenues for the third
quarter were $528.0 million or 20% over the $439.6 million reported for the
prior year's third quarter. In the first nine months of 2001 revenues were $1.50
billion compared to $1.29 billion reported in the same period of 2000.
In both the three and nine month periods of 2001, the revenue increases compared
to the same periods of 2000 were stronger in the direct operations than agency
operations. Agency revenues are recognized as they are reported, and the lag
compared to the direct revenue increase is expected.
Open order counts were 250,000 in the third quarter of 2001 compared to 172,100
in the third quarter of 2000.
Investment Income
Investment income in the first nine months of 2001 was $38.3 million compared to
$38.1 million in the first nine months of 2000.
Expenses
Operating expenses for the third quarter of 2001 were $511.8 million compared to
$440.5 million for the third quarter of 2000 and were $1.45 billion in the first
nine months of 2001 compared to $1.29 billion in the first nine months of 2000.
Salaries and employee benefits increased in the 2001 periods over the prior year
periods principally as a result of increased staffing levels required by higher
business volumes and higher levels of variable pay associated with the increased
revenue and improved profitability. Commissions retained by agents increased in
direct proportion to the volume of agency revenue reported. General
administrative and other expenses increased primarily as a result of higher
business volumes.
The provision for policy and contract claims was $20.8 million in the third
quarter of 2001 compared to $19.3 million in the third quarter of 2000. In the
nine months ended September 30, 2001 this provision was $58.8 million compared
to $56.7 million in the comparable period of 2000. These increases are the
result of a higher level of business written offset by improved experience
particularly related to the refinance book of business.
10
Net Income
LandAmerica reported net income of $18.8 million, or $1.01 per share on a
diluted basis, for the third quarter of 2001, compared to net income of $7.8
million, or $0.43 per share on a diluted basis, for the third quarter of 2000.
The results for the third quarter of 2000 were impacted by a one time after-tax
charge of $1.4 million, or $0.08 per diluted share, for personnel and
termination costs related to the Data Trace joint venture entered into during
that period.
For the nine months ended September 30, 2001, net income was $53.9 million, or
$2.91 per share on a diluted basis, compared to $23.5 million, or $1.28 per
share on a diluted basis, for the first nine months of 2000. The first nine
months of 2001 included an after-tax loss on sales of investments of $0.2
million compared to an after-tax loss on sales of investments of $0.1 million
for the first nine months of 2000, both less than $0.01 per diluted share. The
2000 nine month period was also impacted by the one time after-tax charges of
$1.4 million, or $0.08 per diluted share, related to the joint venture noted
above.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30,
2001 was $41.0 million. As of September 30, 2001, the Company held cash and
invested cash of $82.8 million and fixed maturity securities of $861.2 million.
In addition, the Company has $94.5 million of unused availability under a credit
facility at September 30, 2001.
During February, March and June 2001, 2.2 million shares of the Company's
preferred stock were converted to common stock. This conversion decreases the
amount of preferred dividends paid by $7.7 million on an annual basis. The new
common shares will require dividends at the same rate paid on all other
outstanding common shares.
The Company believes that it will have sufficient liquidity and capital
resources to meet both its short and long term capital needs.
Interest Rate Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted
interest rates by expected maturity dates. Actual cash flows could differ from
the expected amounts.
11
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
---------------------
(dollars in thousands)
2006 and Fair
2001 2002 2003 2004 2005 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Assets:
Taxable
available-for-sale
securities:
Book value $3,717 $25,277 $40,976 $27,471 $51,481 $343,822 $492,744 $506,423
Average yield 6.8% 6.1% 5.8% 6.8% 6.8% 6.8%
Non-taxable
available-for-sale
securities:
Book value 25 8,094 16,237 18,039 33,876 221,494 297,765 309,488
Average yield 5.3% 4.4% 5.0% 4.7% 4.4% 4.9%
Preferred stock:
Book value - - - - - 49,715 49,715 45,309
Average yield - - - - - 7.7%
The Company also has variable rate long-term debt of $55.5 million bearing
interest at 4.03% at September 30, 2001. A .25% change in the interest rate
would affect income before income taxes by approximately $0.1 million annually.
Change in Accounting for Goodwill
In the fourth quarter of 2000 the Company elected to change its accounting
policy for assessing the recoverability of goodwill from one based on
undiscounted cash flows to one based on discounted cash flows. The Company
believes that using the discounted cash flow approach to assess recoverability
is a preferable policy as it is consistent with the methodology used by the
Company to evaluate investment and acquisition decisions. In connection with
this change, the Company incurred a non-cash pre-tax charge of $172.5 million
related to the goodwill acquired through the 1998 acquisition of Commonwealth
and Transnation. The discount rate used in determining discounted cash flows was
13.5% representing the Company's cost of capital. In originally evaluating this
acquisition, the Company used discount rates ranging from 12% to 16% for
discounting anticipated future cash flows. After recording this charge the
remaining goodwill related to the Commonwealth and Transnation acquisition was
$95.4 million.
Forward-Looking and Cautionary Statements
Certain information contained in this Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the
12
Securities Exchange Act of 1934, as amended. Among other things, these
statements relate to the financial condition, results of operation and business
of the Company. In addition, the Company and its representatives may from time
to time make written or oral forward-looking statements, including statements
contained in other filings with the Securities and Exchange Commission and in
its reports to shareholders. These forward-looking statements are generally
identified by phrases such as "the Company expects," "the Company believes" or
words of similar import. These forward-looking statements involve certain risks
and uncertainties and other factors that may cause the actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Further, any such statement is specifically qualified in its
entirety by the following cautionary statements.
In connection with the title insurance industry in general, factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include the following: (i) the costs of producing
title evidence are relatively high, whereas premium revenues are subject to
regulatory and competitive restraints; (ii) real estate activity levels have
historically been cyclical and are influenced by such factors as interest rates
and the condition of the overall economy; (iii) the value of the Company's
investment portfolio is subject to fluctuation based on similar factors; (iv)
the title insurance industry may be exposed to substantial claims by large
classes of claimants and (v) the industry is regulated by state laws that
require the maintenance of minimum levels of capital and surplus and that
restrict the amount of dividends that may be paid by the Company's insurance
subsidiaries without prior regulatory approval.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
The information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk" in Item 2 of this report.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
--------
Exhibit No. Document
----------- --------
11 Statement re: Computation of Earnings Per Share.
b) Reports on Form 8-K
-------------------
Form 8-K, filed September 6, 2001, reporting under Item 5 that the Company
issued a press release on September 4, 2001 relating to the Company's
issuance of $150 million of senior notes through a private placement
managed by First Union Securities, Inc. and SunTrust Equitable Securities.
14
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANDAMERICA FINANCIAL GROUP, INC.
------------------------------------
(Registrant)
Date: November 12, 2001 /s/ Charles Henry Foster, Jr.
------------------------- ------------------------------------
Charles Henry Foster, Jr.
Chairman and Chief Executive Officer
Date: November 12, 2001 /s/ G. William Evans
-------------------------- ------------------------------------
G. William Evans
Executive Vice President and Chief
Financial Officer
15
EXHIBIT INDEX
Exhibit
No. Document
--- --------
11 Statement Re: Computation of Earnings Per Share.