<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-12688
STEWART INFORMATION SERVICES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677330
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1980 Post Oak Blvd., Houston, TX 77056
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(713) 625-8100
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 6,201,580
Class B Common 525,006
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C> <C>
Part I
1. Financial Statements 1
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Part II
1. Legal Proceedings 10
6. Exhibits and Reports on Form 8-K 11
Signature 15
</TABLE>
<PAGE> 3
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS AND QUARTER ENDED
JUNE 30, 1996 and 1995
<TABLE>
<CAPTION>
============================= =========================
SECOND QUARTER SIX MONTHS
----------------------------- -------------------------
1996 1995 1996 1995
----------------------------- -------------------------
($000 Omitted) ($000 Omitted)
============================= =========================
<S> <C> <C> <C> <C>
Revenues
Title premiums, fees and other revenues 85,465 63,019 160,101 118,043
Investment income 3,523 3,309 6,969 6,627
Investment gains (losses) (124) 300 250 353
Other income 855 699 403 352
----------------------------- -------------------------
89,719 67,327 167,723 125,375
Expenses
Employee costs 42,977 33,879 83,724 65,852
Other operating expenses 26,219 21,615 49,133 40,804
Title losses and related claims 8,100 6,406 16,060 13,033
Depreciation and amortization 2,714 2,416 5,179 4,679
Interest 292 263 576 415
Minority interests 507 275 743 233
----------------------------- -------------------------
80,809 64,854 155,415 125,016
Earnings before taxes 8,910 2,473 12,308 359
Income taxes 3,208 798 4,431 111
----------------------------- -------------------------
Net earnings 5,702 1,675 7,877 248
============================= =========================
Average number of shares outstanding (000) 6,693 6,228 6,680 6,223
Earnings per share 0.85 0.27 1.18 0.04
============================= =========================
</TABLE>
-1-
<PAGE> 4
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
============================
JUN 30 DEC 31
1996 1995
----------------------------
($000 Omitted)
============================
<S> <C> <C>
Assets
Cash and cash equivalents 21,266 16,698
Short-term investments 33,102 28,238
Investments - statutory reserve funds 118,408 118,040
Investments - other 65,656 67,716
Receivables 29,212 30,240
Property and equipment, net 26,824 24,271
Title plants 20,400 19,243
Goodwill 16,391 11,029
Deferred income taxes 16,331 14,108
Other 20,530 21,776
----------------------------
368,120 351,359
============================
Liabilities
Notes payable 12,419 12,589
Accounts payable and accrued liabilities 24,348 21,041
Estimated title losses 144,114 138,312
Minority interests 4,564 4,565
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 57,255 52,335
Net unrealized investment gains (losses) (262) 3,970
Retained earnings 125,682 118,547
----------------------------
Total stockholders' equity ($27.16 per share at
June 30, 1996) 182,675 174,852
----------------------------
368,120 351,359
============================
</TABLE>
-2-
<PAGE> 5
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
=============================
1996 1995
-----------------------------
($000 Omitted)
=============================
<S> <C> <C>
Cash provided (used) by operating activities (Note) 19,888 (3,343)
Cash flow from investing activities:
Purchases of property and equipment and title plants - net (6,150) (3,644)
Proceeds from investments matured and sold 47,421 36,011
Purchases of investments (56,864) (28,780)
Increases in notes receivable (386) (766)
Collections on notes receivable 1,840 759
Proceeds from issuance of stock 60 363
Cash received (paid) for the purchase of subsidiaries - net 276 (2,615)
-----------------------------
Cash (used) provided by investing activities (13,803) 1,328
Cash flow from financing activities:
Dividends paid (742) (570)
Proceeds of notes payable 1,408 3,948
Payments on notes payable (2,183) (1,690)
-----------------------------
Cash (used) provided by financing activities (1,517) 1,688
-----------------------------
Increase (decrease) in cash and cash equivalents 4,568 (327)
=============================
NOTE: Reconciliation of net income to above amounts:
Net income 7,877 248
Add (deduct):
Depreciation and amortization 5,179 4,679
Provision for title losses in excess (less than) of payments 5,802 (1,169)
Provision for uncollectible amounts 204 413
Increase in accounts receivable, net (1,142) (3,143)
Increase (decrease) in accounts payable and accrued
liabilities - net 3,210 (4,432)
Minority interest expense 743 233
Equity in net earnings of investees (392) 109
Realized investment (losses) gains - net (250) (353)
Other, net (1,343) 72
-----------------------------
Cash provided (used) by operating activities 19,888 (3,343)
=============================
</TABLE>
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<PAGE> 6
STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Note 1: Interim Financial Statements
The financial information contained in this report for the six month
periods ended June 30, 1996 and 1995, and as at June 30, 1996, is unaudited. In
the opinion of management, all adjustments necessary for a fair presentation of
this information for all unaudited periods, consisting only of normal recurring
accruals, have been made. The results of operations for the interim periods are
not necessarily indicative of results for a full year.
-4-
<PAGE> 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
A comparison of the results of operations of the Company for the first six
months of 1996 with the first six months of 1995 follows:
General
The Company's dominant segment of operations is the land title business. In
general, the principal factors which contribute to increases in title revenues
include declining mortgage interest rates (which usually increase home sales),
increases in refinancing ("refis") transactions, rising home prices, higher
premium rates, increased market share, additional revenues from new offices and
increased revenue from non-residential commercial transactions. Although
relatively few in number, large commercial transactions usually yield higher
premiums.
Revenues
The Company's revenues from title premiums and fees rose $42.1 million, or
35.6%, in the first six months of 1996 as compared to the first six months of
1995. Mortgage interest rates in early 1996 were significantly lower than a
year ago, causing higher real estate activity in the current year.
The number of closings handled by the Company were up approximately 40.6%.
Closings increased in California, Texas, Colorado and most of the Company's
other major markets. The average revenue per closing fell in 1996 because more
refinancing transactions (which are discounted) were handled. Premium revenues
from nontitle operations and new and existing agents increased in 1996 over
1995.
Investment income was up 5.2% in 1996, due to an increase in the average
balance invested.
Expenses
Employee expenses increased $17.9 million, or 27.1%, in 1996 primarily because
of an increase in the average number of employees, from 3,423 a year ago to
4,005 in 1996.
-5-
<PAGE> 8
The increase in staff in 1996 was primarily in Texas, new offices and
automation. While the Company continues to monitor overall employee expenses,
it has chosen to increase cost levels in automation and real estate information
areas. The Company believes the development and sale of new products and
services for new and existing customers is important to its future. Through
automating operating processes, the Company expects to add customer revenue and
reduce operating expenses and title losses in the future.
Other operating expenses increased by $8.3 million, or 20.4%, in 1996 primarily
because of new offices and increased volume. Other operating expenses include
business promotion, premium taxes, title plant expenses, office rent,
telephone, policy forms, delivery expenses, travel and fees paid to attorneys
for examination and closing services.
Provisions for title losses and related claims were up $3.0 million in 1996.
The Company's recent experience in claims has improved significantly. As a
percentage of title premiums, fees and related revenues, provisions decreased
to 10.0% in 1996 versus 11.0% in 1995. The ratio was 11.1% for the full year
1995.
In December 1994 the California Board of Equalization (CBOE) ruled in favor of
the Company concerning an assessment of additional premium taxes for the year
1987. However, an additional assessment for retaliatory taxes for 1987 was left
pending. In April 1996 the CBOE ruled in favor of the Company on the
retaliatory assessment.
Five other states have also assessed the Company additional premium or
retaliatory taxes. The Company cannot predict whether additional taxes of this
nature will be assessed in material amounts. State taxing authorities are under
increasing pressure to collect additional tax revenues. The Company intends to
vigorously oppose any assessments and believes its tax payments are correct.
However, there can be no assurances the Company will prevail in these
controversies.
The provision for income taxes represented a 36.0% effective tax rate in 1996
and a 30.9% effective tax rate in 1995. The effective tax rate in 1996 was
higher primarily because of the increases in state income tax provisions and in
unremitted earnings of investees.
Liquidity and capital resources
Operating earnings represent the primary source of financing, but this may be
supplemented by bank borrowings. The capital resources of the Company, and the
present debt-to-equity relationship, are considered satisfactory.
-6-
<PAGE> 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ------------------------------------------------------------------------
A comparison of the results of operations of the Company for the second of 1996
with the second quarter of 1995 follows:
General
The Company's dominant segment of operations is the land title business. In
general, the principal factors which contribute to increases in title revenues
include declining mortgage interest rates (which usually increase home sales),
increases in refinancing ("refis") transactions, rising home prices, higher
premium rates, increased market share, additional revenues from new offices and
increased revenue from non-residential commercial transactions. Although
relatively few in number, large commercial transactions usually yield higher
premiums.
Revenues
The Company's revenues from title premiums and fees rose $22.4 million, or
35.6%, in the second quarter of 1996 as compared to the second quarter of 1995.
Mortgage interest rates in early 1996 were significantly lower than a year ago,
causing higher real estate activity in the current year.
The number of closings handled by the Company were up approximately 31.2%.
Closings increased in California, Texas, Colorado and most of the Company's
other major markets. The average revenue per closing rose 1.7% in 1996. Premium
revenues from nontitle operations and new and existing agents increased in 1996
over 1995.
Investment income was up 6.5% in 1996, due to an increase in the average
balance invested.
Expenses
Employee expenses increased $9.1 million, or 26.9%, in 1996 primarily because
of an increase in the average number of employees, from 3,350 a year ago to
4,173 in 1996.
-7-
<PAGE> 10
The increase in staff in 1996 was primarily in Texas, new offices and
automation. While the Company continues to monitor overall employee expenses,
it has chosen to increase cost levels in automation and real estate information
areas. The Company believes the development and sale of new products and
services for new and existing customers is important to its future. Through
automating operating processes, the Company expects to add customer revenue and
reduce operating expenses and title losses in the future.
Other operating expenses increased by $4.6 million, or 21.3%, in 1996 primarily
because of new offices and increased volume. Other operating expenses include
business promotion, premium taxes, title plant expenses, office rent,
telephone, policy forms, delivery expenses, travel and fees paid to attorneys
for examination and closing services.
Provisions for title losses and related claims were up $1.7 million in 1996.
The Company's recent experience in claims has improved significantly. As a
percentage of title premiums, fees and related revenues, provisions decreased
to 9.5% in 1996 versus 10.2% in 1995. The ratio was 11.1% for the full year
1995.
In December 1994 the California Board of Equalization (CBOE) ruled in favor of
the Company concerning an assessment of additional premium taxes for the year
1987. However, an additional assessment for retaliatory taxes for 1987 was left
pending. In April 1996 the CBOE ruled in favor of the Company on the
retaliatory assessment.
Five other states have also assessed the Company additional premium or
retaliatory taxes. The Company cannot predict whether additional taxes of this
nature will be assessed in material amounts. State taxing authorities are under
increasing pressure to collect additional tax revenues. The Company intends to
vigorously oppose any assessments and believes its tax payments are correct.
However, there can be no assurances the Company will prevail in these
controversies.
The provision for income taxes represented a 36.0% effective tax rate in 1996
and a 32.3% effective tax rate in 1995. The effective tax rate in 1996 was
higher primarily because of the increases in state income tax provisions and in
unremitted earnings of investees.
Liquidity and capital resources
Operating earnings represent the primary source of financing, but this may be
supplemented by bank borrowings. The capital resources of the Company, and the
present debt-to-equity relationship, are considered satisfactory.
-8-
<PAGE> 11
PART II
<TABLE>
<CAPTION>
---------
Page
---------
- ---------- -----------------------------------------------------------
<S> <C> <C>
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4. - Rights of Common and Class B Common 11
Stockholders
27.0 - Financial data schedule 12
28.2 - Details of Investments as reported in the 14
Quarterly Report to Shareholders
(b) There were no reports on Form 8-K filed during the
quarter ended June 30, 1996
- ---------- ----------------------------------------------------------- ---------
</TABLE>
-9-
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
Guaranty and 18 other title insurers are defendants in a consolidated
class action proceeding originating from complaints first filed in April 1990.
The suit is currently pending in the United States District Court for the
District of Arizona. The plaintiffs allege that the defendants violated federal
antitrust law by participating in title insurance rating bureaus in Arizona and
Wisconsin in the early 1980s through which they allegedly agreed upon the
prices and other terms and conditions of sale for title search and examination
services. The plaintiffs request treble damages in an unspecified amount, costs
and attorneys' fees.
The Court has approved a settlement pursuant to which members of the
class would receive cash (not to exceed approximately $4.1 million from all
defendants) and additional coverage under, and discounts on, title insurance
policies. In addition, the Court has awarded counsel for certain plaintiffs the
negotiated sum of $1.3 million in fees and expenses. The Court has certified
the proceeding as a class action and taken under advisement the amount of fees
and expenses to be awarded to counsel for other plaintiffs.
The Registrant is a party to routine lawsuits incidental to its
business most of which involve disputed policy claims. In many of these suits,
the plaintiff seeks exemplary or treble damages in excess of policy limits
based on the alleged malfeasance of an issuing agent of the Registrant.
-10-
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stewart Information Services Corporation
----------------------------------------
(Registrant)
August 8, 1996
- --------------
Date
/s/ MAX CRISP
-------------------------------------
Max Crisp
(Vice President - Finance, Secretary-Treasurer,
Director and Principal Financial
and Accounting Officer)
-11-
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4 - Rights of Common and Class B Common Stockholders
27 - Financial data schedule
28.2 - Details of Investments as reported in the
Quarterly Report to Shareholders
<PAGE> 1
EXHIBIT 4
STEWART INFORMATION SERVICES CORPORATION
RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS
JUNE 30, 1996
================================================================================
Common and Class B Common stockholders have the same rights, except
(1) no cash dividends may be paid on Class B Common Stock and (2) the two
classes of stock are voted separately in electing directors. A provision in the
by-laws requires an affirmative vote of at least two-thirds of the directors to
approve any proposal which may come before the directors. This by-law provision
cannot be changed without majority vote of each class of stock.
Common stockholders, with cumulative voting rights, may elect five or
more of the nine directors. Class B Common stockholders may, with no cumulative
voting rights, elect four directors, if 350,000 or more shares of Class B
Common stock are outstanding; three directors, if between 200,000 and 350,000
shares of Class B Common Stock are outstanding; if less than 200,000 shares of
Class B Commons Stock are outstanding, the Common Stock and the Class B Common
Stock shall be voted as a single class upon all matters, with the right to
cumulate votes for the election of directors.
No change in the Certificate of Incorporation which would affect the
Common Stock and the Class B Common Stock unequally shall be made without the
affirmative vote of at least a majority of the outstanding shares of each
class, voting as a class.
Class B Common Stock may, at any time, be converted by its holders
into Common Stock on a share-for-share basis. Such conversion is mandatory on
any transfer to a person not a lineal descendant (or spouse, trustee, etc. of
such descendant) of William H. Stewart.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996 AND THE RELATED STATEMENT OF EARNINGS FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 184,064
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 217,166<F1>
<CASH> 21,266
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 368,120
<POLICY-LOSSES> 144,114
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 12,419
<COMMON> 6,726
0
0
<OTHER-SE> 175,949
<TOTAL-LIABILITY-AND-EQUITY> 368,120
160,101
<INVESTMENT-INCOME> 6,969
<INVESTMENT-GAINS> 250
<OTHER-INCOME> 403
<BENEFITS> 16,060
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 12,308
<INCOME-TAX> 4,431
<INCOME-CONTINUING> 7,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,877
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<RESERVE-OPEN> 138,312
<PROVISION-CURRENT> 17,405
<PROVISION-PRIOR> (1,345)
<PAYMENTS-CURRENT> 4,848
<PAYMENTS-PRIOR> 5,410
<RESERVE-CLOSE> 144,114
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term investments.
</FN>
</TABLE>
<PAGE> 1
Exhibit 28.2
STEWART INFORMATION SERVICES CORPORATION
DETAILS OF INVESTMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
=============================
JUN 30 DEC 31
1996 1995
-----------------------------
($000 Omitted)
=============================
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments $33,102 $28,238
U.S. Treasury and agency obligations 27,407 29,636
Municipal bonds 92,288 95,049
Mortgage-backed securities 31,132 27,499
Corporate bonds 33,237 33,572
-----------------------------
TOTAL INVESTMENTS $217,166 $213,994
=============================
</TABLE>
NOTE: The total appears as the sum of three amounts under short-term
investments, 'investments' - statutory reserve funds and 'investments' -
other in the balance sheet presented on page 2.
