<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 September 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 6,202,779
Class B Common 525,006
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 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 NINE MONTHS AND QUARTER ENDED
SEPTEMBER 30, 1996 and 1995
<TABLE>
<CAPTION>
============================= =========================
THIRD QUARTER NINE MONTHS
----------------------------- -------------------------
1996 1995 1996 1995
----------------------------- -------------------------
($000 Omitted) ($000 Omitted)
============================= =========================
<S> <C> <C> <C> <C>
Revenues
Title premiums, fees and other revenues 84,133 73,158 244,234 191,201
Investment income 3,710 3,384 10,679 10,011
Investment gains (losses) (149) 247 101 600
Other income 352 376 755 728
----------------------------- -------------------------
88,046 77,165 255,769 202,540
Expenses
Employee costs 43,590 36,872 127,314 102,724
Other operating expenses 25,693 22,446 74,826 63,250
Title losses and related claims 8,484 9,201 24,544 22,234
Depreciation and amortization 2,724 2,640 7,903 7,319
Interest 277 416 853 831
Minority interests 314 403 1,057 636
----------------------------- -------------------------
81,082 71,978 236,497 196,994
Earnings before taxes 6,964 5,187 19,272 5,546
Income taxes 2,507 1,686 6,938 1,797
----------------------------- -------------------------
Net earnings 4,457 3,501 12,334 3,749
============================= =========================
Average number of shares outstanding (000) 6,727 6,344 6,696 6,264
Earnings per share 0.66 0.55 1.84 0.60
============================= =========================
</TABLE>
-1-
<PAGE> 4
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
============================
SEPT 30 DEC 31
1996 1995
----------------------------
($000 Omitted)
============================
<S> <C> <C>
Assets
Cash and cash equivalents 20,836 16,698
Short-term investments 34,772 28,238
Investments - statutory reserve funds 121,344 118,040
Investments - other 67,845 67,716
Receivables 29,572 30,240
Property and equipment, net 27,620 24,271
Title plants 20,887 19,243
Goodwill 16,251 11,029
Deferred income taxes 15,168 14,108
Other 20,824 21,776
----------------------------
375,119 351,359
============================
Liabilities
Notes payable 12,243 12,589
Accounts payable and accrued liabilities 24,115 21,041
Estimated title losses 146,697 138,312
Minority interests 4,495 4,565
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 57,266 52,335
Net unrealized investment gains 537 3,970
Retained earnings 129,766 118,547
----------------------------
Total stockholders' equity ($27.88 per share at
September 30, 1996) 187,569 174,852
----------------------------
375,119 351,359
============================
</TABLE>
-2-
<PAGE> 5
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
=============================
1996 1995
-----------------------------
($000 Omitted)
=============================
<S> <C> <C>
Cash provided by operating activities (Note) 27,692 13,052
Cash flow from investing activities:
Purchases of property and equipment and title plants - net (8,272) (5,781)
Proceeds from investments matured and sold 62,426 52,583
Purchases of investments (77,592) (54,594)
Increases in notes receivable (886) (1,014)
Collections on notes receivable 2,472 923
Proceeds from issuance of stock 71 253
Cash received (paid) for the purchase of subsidiaries - net 276 (5,278)
-----------------------------
Cash used by investing activities (21,505) (12,908)
Cash flow from financing activities:
Dividends paid (1,115) (863)
Proceeds of notes payable 3,054 6,488
Payments on notes payable (3,988) (2,677)
-----------------------------
Cash (used) provided by financing activities (2,049) 2,948
-----------------------------
Increase in cash and cash equivalents 4,138 3,092
=============================
NOTE: Reconciliation of net income to above amounts:
Net income 12,334 3,749
Add (deduct):
Depreciation and amortization 7,903 7,319
Provision for title losses in excess of payments 8,385 3,086
Provision for uncollectible amounts 18 0
(Increase) decrease in accounts receivable, net (1,448) 552
Increase (decrease) in accounts payable and accrued
liabilities - net 3,711 (1,420)
Minority interest expense 1,057 635
Equity in net earnings of investees (733) (310)
Realized investment (losses) gains - net (101) 600
Other, net (3,434) (1,159)
-----------------------------
Cash provided by operating activities 27,692 13,052
=============================
</TABLE>
-3-
<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 nine month
periods ended September 30, 1996 and 1995, and as at September 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
nine months of 1996 with the first nine 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
$53.0 million, or 27.7%, in the first nine months of 1996
as compared to the first nine 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
27.6%. Closings increased in California, Texas, Colorado and most
of the Company's other major markets. The average revenue per
closing increased slightly in 1996. Premium revenues from nontitle
operations and new and existing agents increased in 1996 over 1995.
Investment income was up 6.7% in 1996 due to an increase in the average
balance invested.
Expenses
Employee expenses increased $24.6 million, or 23.9%, in 1996 primarily because
of an increase in the average number of employees, from 3,559 a year ago to
3,961 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 $11.6 million, or 18.3%, 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 $2.3 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 11.6% 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 32.4% 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 third quarter
of 1996 with the third 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 $11.0 million, or
15.0%, in the third quarter of 1996 as compared to the third 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 5.1%.
Closings increased in Texas, Colorado, Arizona and most of the Company's
other major markets. The average revenue per closing rose 7.9% in 1996. Premium
revenues from nontitle operations and new and existing agents increased in 1996
over 1995.
Investment income was up 9.6% in 1996, due to an increase in the average
balance invested.
Expenses
Employee expenses increased $6.7 million, or 18.2%, in 1996 primarily because
of an increase in the average number of employees, from 3,511 a year ago to
4,208 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 $3.2 million, or 14.5%, 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 down $0.7 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 10.1% in 1996 versus 12.6% 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 32.5% 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 September 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 certified the proceeding as a class action and 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 awarded counsel for the remaining
plaintiffs fees and expenses totalling $0.5 million. The Court has under
advisement the motions of such plaintiff's counsel to amend and to reconsider
that award.
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)
November 13, 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
September 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 SEPTEMBER 30, 1996 AND THE RELATED STATEMENT OF EARNINGS FOR THE NINE
MONTHS ENDED SEPTEMBER 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> SEP-30-1996
<DEBT-HELD-FOR-SALE> 189,189
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 223,961<F1>
<CASH> 20,836
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 375,119
<POLICY-LOSSES> 146,697
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 12,243
<COMMON> 6,728
0
0
<OTHER-SE> 180,841
<TOTAL-LIABILITY-AND-EQUITY> 375,119
244,234
<INVESTMENT-INCOME> 10,679
<INVESTMENT-GAINS> 101
<OTHER-INCOME> 755
<BENEFITS> 24,544
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 19,272
<INCOME-TAX> 6,938
<INCOME-CONTINUING> 12,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,334
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
<RESERVE-OPEN> 138,312
<PROVISION-CURRENT> 25,850
<PROVISION-PRIOR> (1,306)
<PAYMENTS-CURRENT> 4,990
<PAYMENTS-PRIOR> 11,169
<RESERVE-CLOSE> 146,697
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term investments.
</FN>
</TABLE>
<PAGE> 1
Exhibit 28.2
STEWART INFORMATION SERVICES CORPORATION
DETAILS OF INVESTMENTS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
=============================
SEP 30 DEC 31
1996 1995
-----------------------------
($000 Omitted)
=============================
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments $34,772 $28,238
U.S. Treasury and agency obligations 24,390 29,636
Municipal bonds 98,160 95,049
Mortgage-backed securities 31,109 27,499
Corporate bonds 35,530 33,572
-----------------------------
TOTAL INVESTMENTS $223,961 $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.
