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 March 31, 2002 Commission File No. 1-13990
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LANDAMERICA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1589611
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Gateway Centre Parkway
Richmond, Virginia 23235-5153
(Address of principal executive offices) (Zip Code)
(804) 267-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, No Par Value 18,563,385 May 7, 2002
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1
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets...........................3
Consolidated Statements of Operations ................5
Consolidated Statements of
Cash Flows.........................................6
Consolidated Statements of Changes in
Shareholders' Equity...............................7
Notes to Consolidated
Financial Statements...............................8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations.........................11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.................................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................15
Signatures...........................................16
2
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
------ ---- ----
INVESTMENTS:
Fixed maturities available-for-sale - at fair value
(amortized cost: 2002 - $916,743; 2001 - $865,354) $ 918,580 $ 874,270
Mortgage loans (less allowance for doubtful accounts:
200 and 2001 - $176) 1,142 1,536
Invested cash 85,692 133,185
-------------- --------------
Total Investments 1,005,414 1,008,991
CASH 25,054 35,585
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts: 2002 -
$5,279; 2001 - $5,278) 9,122 8,773
Accounts receivable (less allowance for doubtful
accounts: 2002 - $8,153; 2001 - $8,058) 48,950 58,564
-------------- --------------
Total Notes and Accounts Receivable 58,072 67,337
PROPERTY AND EQUIPMENT - at cost (less
accumulated depreciation and amortization: 2002 -
$130,969; 2001 - $123,301) 62,510 62,015
TITLE PLANTS 96,632 96,580
GOODWILL (less accumulated amortization: 2001 -
$37,588) 190,728 190,702
DEFERRED INCOME TAXES 142,470 142,543
OTHER ASSETS 99,113 103,728
-------------- --------------
Total Assets $ 1,679,993 $ 1,707,481
============== ==============
See accompanying notes.
3
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
March 31, December 31,
LIABILITIES 2002 2001
----------- ---- ----
POLICY AND CONTRACT CLAIMS $ 564,016 $ 561,438
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 156,886 187,308
FEDERAL INCOME TAXES 9,605 3,653
NOTES PAYABLE 187,311 208,595
OTHER 23,691 18,994
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Total Liabilities 941,509 979,988
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COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY
Common stock, no par value, 45,000,000 shares authorized,
shares issued and outstanding: 2002 - 18,552,849; 2001
- 18,583,937 520,922 521,795
Accumulated other comprehensive loss (8,248) (3,647)
Retained earnings 225,810 209,345
-------------- --------------
Total Shareholders' Equity 738,484 727,493
-------------- --------------
Total Liabilities and Shareholders' Equity $ 1,679,993 $ 1,707,481
============== ==============
See accompanying notes.
4
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(In thousands of dollars except per share amounts)
(Unaudited)
2002 2001
---- ----
REVENUES
Title and other operating revenues:
Direct operations $ 239,420 $ 203,787
Agency operations 311,838 222,309
---------- ----------
551,258 426,096
Investment income 12,829 12,918
Gain (loss) on sales of investments 170 (409)
---------- ----------
564,257 438,605
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EXPENSES
Salaries and employee benefits 164,741 140,877
Agents' commissions 247,275 174,618
Provision for policy and contract claims 22,093 16,706
Interest expense 3,217 3,667
General, administrative and other 100,173 92,361
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537,499 428,229
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INCOME BEFORE INCOME TAXES 26,758 10,376
INCOME TAX EXPENSE
Current 6,815 187
Deferred 2,550 3,548
---------- ----------
9,365 3,735
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NET INCOME 17,393 6,641
DIVIDENDS - PREFERRED STOCK - (145)
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 17,393 $ 6,496
========== ==========
NET INCOME PER COMMON SHARE $0.94 $0.43
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 18,529 15,148
NET INCOME PER COMMON SHARE ASSUMING DILUTION $0.93 $0.36
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ASSUMING DILUTION 18,657 18,608
See accompanying notes.
5
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(In thousands of dollars)
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 17,393 $ 6,641
Depreciation and amortization 5,135 8,573
Amortization of bond premium 2,006 1,143
Realized investment (gains) losses (170) 409
Deferred income tax 2,550 187
Change in assets and liabilities, net of businesses acquired:
Notes receivable (349) (839)
Premiums receivable 9,614 (3,654)
Income taxes receivable/payable 5,952 4,934
Policy and contract claims 2,578 (101)
Accounts payable and accrued expenses (30,422) (26,193)
Other 9,046 (2,156)
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Net cash provided by (used in) operating activities 23,333 (11,056)
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Cash flows from investing activities:
Purchase of property and equipment, net (5,682) (3,357)
Purchase of business, net of cash acquired - (433)
Cost of investments acquired:
Fixed maturities - available-for-sale (155,919) (110,018)
Equity securities - (8)
Mortgage loans - (6,245)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 102,710 101,531
Mortgage loans 394 -
---------- ----------
Net cash used in investing activities (58,497) (18,530)
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Cash flows from financing activities:
Proceeds from sale of common shares 464 611
Cost of common shares repurchased (1,337) -
Repayment of cash surrender value loan 225 (322)
Dividends paid (928) (1,005)
Proceeds from issuance of notes payable - 10,000
Payments on notes payable (21,284) (3,010)
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Net cash (used in) provided by financing activities (22,860) 6,274
---------- ----------
Net decrease in cash and invested cash (58,024) (23,312)
Cash and invested cash at beginning of period 168,770 123,351
---------- ----------
Cash and invested cash at end of period $ 110,746 $ 100,039
========== ==========
See accompanying notes.
6
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(In thousands of dollars except per share amounts)
(Unaudited)
Accumulated
Other Total
Preferred Stock Common Stock Comprehensive Retained Shareholders'
Shares Amounts Shares Amounts Income (Loss) Earnings Equity
------ ------- ------ ------- ------------- -------- ------
Balance - December 31, 2000 2,200,000 $175,700 13,518,319 $340,269 $ (4,712) $152,843 $ 664,100
Comprehensive income:
Net income - - - - - 6,641 6,641
Other comprehensive income, net of tax of
$2,714
Net unrealized gain on securities - - - 9,751 - 9,751
---------
16,392
Stock option and incentive plans - - 18,573 611 - - 611
Preferred stock conversion (2,034,017) (162,444) 4,460,561 162,444 - - -
Preferred dividends (7%) - - - - - (145) (145)
Common dividends ($0.05/share) - - - - - (860) (860)
-------- ------- --------- -------- -------- -------- ---------
Balance - March 31, 2001 165,983 $13,256 17,997,453 $503,324 $ 5,039 $158,479 $ 680,098
======== ======= ========== ======== ======== ======== =========
BALANCE - December 31, 2001 - - 18,583,937 $521,795 $ (3,647) $209,345 $ 727,493
Comprehensive income:
Net income - - - - - 17,393 17,393
Other comprehensive income, net of tax of
$(2,477)
Net unrealized gains on securities - - - - (4,601) - (4,601)
---------
12,792
Common stock retired - - (48,800) (1,337) - - (1,337)
Stock option and incentive plans - - 17,712 464 - - 464
Common dividends ($0.05/share) - - - - - (928) (928)
-------- ------- --------- -------- -------- -------- ---------
BALANCE - March 31, 2002 - - 18,552,849 $520,922 $ (8,248) $225,810 $ 738,484
======== ======= ========== ======== ======== ======== =========
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 Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 with the exception of a change in the
method of accounting for goodwill described in Note 4. 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.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
2002 2001
---- ----
Numerator:
Net income - numerator for diluted earnings
per share $ 17,393 $ 6,641
Less preferred dividends - (145)
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Numerator for basic earnings per share $ 17,393 $ 6,496
========== =========
Denominator:
Weighted average shares - denominator for
basic earnings per share 18,529 15,148
Effect of dilutive securities:
Assumed weighted average conversion of
preferred stock - 3,176
Employee stock options 128 284
---------- ---------
Denominator for diluted earnings per share 18,657 18,608
========== =========
Basic earnings per common share $ 0.94 $ 0.43
========== =========
Diluted earnings per common share $ 0.93 $ 0.36
========== ==========
8
3. Commitments and Contingencies
For additional information, see Pending Legal Proceedings on pages F-29
and F-30 and Legal Proceedings on pages 12 and 13 of the Form 10-K for
the year ended December 31, 2001.
4. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 and
included guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. Under SFAS No. 142, goodwill and other
intangible assets with indefinite lives will no longer be amortized but
will be subject to annual impairment tests. Intangible assets with
indefinite lives consist of Title Plants.
On January 1, 2002, the Company adopted SFAS No. 142 which resulted in
a $1.9 million increase in the Company's first quarter net of tax
earnings and is expected to increase annual net earnings by $6.9
million. The Company will test goodwill for impairment using the
two-step process prescribed in SFAS No. 142. The first step is a screen
for potential impairment, while the second step measures the amount of
impairment, if any. The Company expects to perform the first of the
required impairment tests of goodwill as of January 1, 2002 in the
first sixth months of 2002. Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of
2002. The Company does not expect application of the impairment
provisions of SFAS No. 142 to have an impact on the financial
statements upon adoption.
The following table provides comparative earnings and earnings per
share had the non-amortization provisions of SFAS No. 142 been adopted
for the periods presented:
9
Three Months Ended March 31,
2002 2001
---- ----
Reported net income $ 17,393 $ 6,641
Goodwill amortization, net of tax - 1,858
---------- ----------
Adjusted net income $ 17,393 $ 8,499
========== ==========
Basic earnings per share:
Reported net income $ 0.94 $ 0.43
Goodwill amortization - 0.12
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Adjusted net income $ 0.94 $ 0.55
========== ==========
Diluted earnings per share:
Reported net income $ 0.93 $ 0.36
Goodwill amortization - 0.10
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Adjusted net income $ 0.93 $ 0.46
========== ==========
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The adoption of the Statement did not have a
material impact on the Company's financial position and results of
operations.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Operating Revenues
In the first quarter of 2002 the Company reported operating revenues of $551.3
million which was a 29.4% increase from the $426.1 million reported in the first
quarter of 2001. The improvement in 2002 compared to 2001 resulted from
continued strength in residential refinancings and a resilient housing market.
Direct revenues increased 17.5% and agency revenues increased 40.3% in the first
quarter of 2002 compared to the first quarter of 2001. Agency revenue reported
reflected in part the typical industry time lag in reporting such revenues.
Investment Income
Investment income reported was $12.9 million in the first quarter of both 2002
and 2001. The amount reported in 2002 was earned on a higher level of invested
assets which was offset by lower yields and a shift to tax exempt investments.
Expenses
Operating expenses for the first quarter of 2002 were $537.5 million compared to
$428.2 in the first quarter of 2001. Overall expenses increased at a slightly
lesser rate than revenues did in the first quarter of 2002 compared to the same
period of 2001.
Commissions increased $72.7 million or 41.6% resulting from the increase in
agency revenue levels and a slight increase in effective commission rates.
Salary and related expenses increased 16.9% from $140.9 million in the first
quarter of 2001 to $164.7 in the first quarter of 2002. The largest contributor
to this increase was increased levels of incentive compensation related to the
production of the increased revenue in the first quarter of 2002 compared to the
same period of 2001. Salary also increased due to an increase in the average
staffing levels required to handle the increased revenue volumes. However, by
the end of March 2002, actual staffing levels had been reduced approximately 6%
from those at December 2001.
Other operating expenses increased from $92.4 million in the first quarter of
2001 to $100.2 in the 2002 comparable period. Increases in these expenses
included revenue volume related items and a $3.2 million pretax charge related
primarily to office closings and restructuring in the Company's OneStop
operation. These increases were offset by a $2.6 million decrease in goodwill
amortization related to the adoption of SFAS No 142.
11
The provision for policy and contract claims increased from $16.7 million in the
first quarter of 2001 to $22.1 million in the first quarter of 2002 in
proportion to the increase in revenues.
Net Income
The Company reported a net income of $17.4 million, or $0.93 per diluted share
for the first quarter of 2002 compared to $6.6 million or $0.36 per diluted
share for the comparable quarter of 2001.
In the first quarter of 2002 the Company adopted SFAS No. 142 which eliminated
the requirement to amortize goodwill. As a result, net income was $1.9 million
greater than it would have been without adoption. The effect of adoption is
expected to be a $6.9 million increase in net income for the calendar year.
Finally, the first quarter of 2002 included after tax charges of $2.1 million or
$0.11 per diluted share related primarily to office closures and restructuring
of its OneStop operations.
Liquidity and Capital Resources
Cash provided by operations for the three months ended March 31, 2001 was $23.3
million. As of March 31, 2002, the Company held cash and invested cash of $110.7
million and fixed maturity securities of $918.6 million.
In December 2001 the board of directors approved a program allocating $25.0
million to repurchase up to 1.25 million shares or 7% of the Company's
outstanding stock over the following twelve months. Through March 31, 2002,
48,800 shares at a cost of $1.4 million had been repurchased.
In view of the historical ability of the Company to generate strong, positive
cash flows, and the strong cash position and relatively conservative
capitalization structure of the Company, management believes that the Company
will have sufficient liquidity and adequate capital resources to meet both its
short- and long-term capital needs. In addition, the Company has $114.5 million
available under a credit facility which was unused at March 31, 2002.
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.
12
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
2007 and
2002 2003 2004 2005 2006 after Total Fair Value
---- ---- ---- ---- ---- ----- ----- ----------
Assets:
Taxable available-for-sale
securities:
Book value $22,756 $36,180 $25,451 $48,871 $43,638 $337,862 $514,758 $516,185
Average yield 6.1% 5.8% 7.0% 6.8% 6.1% 6.4%
Non-taxable available-for-
sale securities:
Book value 5,363 16,795 18,350 34,469 28,532 244,919 348,428 352,516
Average yield 4.3% 5.0% 4.7% 4.3% 4.5% 4.9%
Preferred stock:
Book value - - - - - 53,557 53,557 49,879
Average yield - - - - - 7.8%
The Company also has long-term debt of $187.3 million bearing weighted-average
interest at 6.4% at March 31, 2002. A 0.25% change in the interest rate would
affect income before income taxes by approximately $0.5 million annually.
Forward-Looking and Cautionary Statements
Certain information contained in this Quarterly Report on Form 10-Q includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other
things, these statements relate to the financial condition, results of operation
and business of the Company. In addition, the Company and its representatives
may from time to time make written or oral forward-looking statements, including
statements contained in other filings with the Securities and Exchange
Commission and in its reports to shareholders. These forward-looking statements
are generally identified by phrases such as "the Company expects," "the Company
believes" or words of similar import. These forward-looking statements involve
certain risks and uncertainties and other factors that may cause the actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Further, any such statement is specifically
qualified in its entirety by the cautionary statements set forth in the
following paragraph.
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
13
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.
14
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
--------------------
None.
15
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: May 13, 2002 /s/ Charles Henry Foster, Jr.
-------------------- -------------------------------------
Charles Henry Foster, Jr.
Chairman and Chief Executive Officer
Date: May 13, 2002 /s/ G. William Evans
-------------------- -------------------------------------
G. William Evans
Executive Vice President and Chief
Financial Officer
16
EXHIBIT INDEX
No. Description
--- -----------
11 Statement Re: Computation of Earnings Per Share