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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 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, including 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 6,295,539
Class B Common 525,006
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1997
TABLE OF CONTENTS
Item No. Page
- -------- ----
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 8
6. Exhibits and Reports on Form 8-K 7
Signature 9
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 and 1996
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
--------------------- --------------------
1997 1996 1997 1996
---------- --------- -------- --------
($000 Omitted) ($000 Omitted)
<S> <C> <C> <C> <C>
Revenues
Title premiums, fees and other revenues 93,134 84,133 253,936 244,234
Investment income 3,962 3,710 11,550 10,679
Investment gains - net 124 (149) 305 101
Other income - net 902 352 1,128 755
-------- -------- -------- -------
98,122 88,046 266,919 255,769
Expenses
Employee costs 48,236 43,590 135,749 127,314
Other operating expenses 29,580 25,693 80,936 74,826
Title losses and related claims 8,035 8,484 22,138 24,544
Depreciation and amortization 3,110 2,724 8,729 7,903
Interest 400 277 966 853
Minority interests 561 314 1,471 1,057
-------- -------- -------- -------
89,922 81,082 249,989 236,497
-------- -------- -------- -------
Earnings before taxes 8,200 6,964 16,930 19,272
Income taxes 2,713 2,507 5,851 6,938
-------- -------- -------- -------
Net earnings 5,487 4,457 11,079 12,334
======== ======== ======== =======
Average number of shares outstanding (000) 6,821 6,727 6,805 6,696
Earnings per share 0.80 0.66 1.63 1.84
======== ========= ======== =======
</TABLE>
-1-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPT 30 DEC 31
1997 1996
---------- ----------
($000 Omitted)
<S> <C> <C>
Assets
Cash and cash equivalents 22,092 18,484
Short-term investments 33,850 31,946
Investments - statutory reserve funds 135,150 127,057
Investments - other 69,277 73,456
Receivables 33,547 31,616
Property and equipment 30,215 28,185
Title plants 22,142 21,096
Goodwill 18,189 16,535
Deferred income taxes 17,275 14,615
Other 21,346 20,382
---------- ----------
403,083 383,372
========== ==========
Liabilities
Notes payable 17,763 12,324
Accounts payable and accrued liabilities 22,660 25,452
Estimated title losses 155,381 150,331
Minority interests 3,987 4,275
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 58,705 57,574
Net unrealized investment gains 3,208 1,920
Retained earnings 141,379 131,496
---------- ----------
Total stockholders' equity ($29.81 per share at
September 30, 1997) 203,292 190,990
---------- ----------
403,083 383,372
========== ===========
</TABLE>
-2-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
($000 Omitted)
<S> <C> <C>
Cash provided by operating activities (Note) 15,533 27,692
Investing activities:
Purchases of property and equipment and title plants - net (9,612) (8,272)
Proceeds from investments matured and sold 33,020 62,426
Purchases of investments (36,552) (77,592)
Increases in notes receivable (1,756) (886)
Collections on notes receivable 594 2,472
Proceeds from issuance of stock 96 71
Cash (paid) received for the acquisition of subsidiaries - net (2,608) 276
---------- ---------
Cash used by investing activities (16,818) (21,505)
Financing activities:
Dividends paid (1,196) (1,115)
Proceeds of notes payable 8,803 3,054
Payments on notes payable (2,714) (3,988)
---------- ---------
Cash provided (used) by financing activities 4,893 (2,049)
---------- ---------
Increase in cash and cash equivalents 3,608 4,138
========== ==========
</TABLE>
NOTE: Reconciliation of net earnings to the above amounts -
<TABLE>
<S> <C> <C>
Net earnings 11,079 12,334
Add (deduct):
Depreciation and amortization 8,729 7,903
Provision for title losses in excess of payments 5,050 8,385
Provision for uncollectible amounts - net 403 18
Increase in accounts receivable - net (4,477) (1,448)
(Decrease) increase in accounts payable and
accrued liabilities - net (2,715) 3,711
Minority interest expense 1,471 1,057
Equity in net earnings of investees (922) (733)
Realized investment gains - net (305) (101)
Other - net (2,780) (3,434)
---------- ---------
Cash provided by operating activities 15,533 27,692
========== =========
</TABLE>
-3-
<PAGE>
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, 1997 and 1996, and as at September 30, 1997, 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>
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 1997 with the first nine months of 1996 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 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
Revenues from title premiums and fees increased $9.7 million, or 4.0%, from a
year ago. Mortgage interest rates were higher in the early part of 1997 than in
the same period a year ago but then rates began to decline in the second
quarter, causing increased real estate activity. Refinancing transactions, which
had been at lower, more normal levels since mid 1996, also increased.
The number of closings handled by the Company decreased 5.0%. Closings decreased
in California, Florida, and Texas. The average revenue per closing increased in
the first nine months of 1997 over the first nine months of 1996. Industry
sources report an increase of 4-5% in home prices, which has the effect of
raising title premiums and fees. Increases in commercial transactions and
revenues from agents also contributed to higher revenues in 1997.
Investment income increased 8.2% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $8.4 million, or 6.6%, in 1997 primarily because of
a higher average number of employees during the first three quarters of 1997
compared to a year ago and increased average rates of compensation.
The Company continued to maintain higher staff levels in comparison with a year
ago. Increases were in areas of automating services rendered to customers and
improving its own processes, real estate information services that are being
developed and sold to customers and the expansion of its national marketing
efforts.
The Company believes the development and sale of new products and services is
important to its future. Through automated operating processes, the Company
expects to add customer revenues and reduce operating expenses and title losses
in the future.
Other operating expenses increased by $6.1 million, or 8.2%, primarily because
of increased rent, premium taxes, travel, business promotion and fees paid to
attorneys for examination and closing services. Other operating expenses also
include supplies, policy forms, delivery costs, title plant expenses and
telephone.
Provisions for title losses and related claims were down $2.4 million, or 9.8%
in 1997. The Company's experience in claims continues to improve significantly.
As a percentage of title premiums, fees and related revenues, the provisions for
the first nine months of 1997 decreased to 8.7% versus 10.0% for the first nine
months of 1996.
The provision for income taxes represented a 34.6% effective tax rate in 1997
and 36.0% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Operating margins represent the primary source of financing for the Company, but
this may be supplemented by bank borrowings. The capital resources of the
Company, and the present debt-to-equity relationship, are considered
satisfactory.
-5-
<PAGE>
A comparison of the results of operations of the Company for the third
quarter of 1997 with the third quarter of 1996 follows:
REVENUES
Revenues from title premiums and fees increased $9.0 million, or 10.7%, from a
year ago. Mortgage interest rates were higher in the early part of the second
quarter of 1997 than the same time in 1996 but then rates began to decline.
Mortgage interest rates are now lower than one year ago. Because of lower rates,
real estate activity increased. Refinancing transactions, which had been at
lower, more normal levels since mid 1996, also began to increase.
The number of closings handled by the Company increased 10.3%. Closings
increased in California, Arizona, Texas and most other states. The average
revenue per closing increased slightly in 1997 from 1996. Industry sources
report an increase of 4-5% in home prices, which has the effect of raising title
premiums and fees. Increases in commercial transactions and revenues from agents
also contributed to higher revenues in 1997.
Investment income increased 6.8% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $4.6 million, or 10.7%, in 1997 primarily because of
increased average rates of compensation. The average number of employees was
approximately 3% higher in 1997.
In comparison with a year ago, the Company continued to maintain higher staff
levels in areas of automating services rendered to customers and improving its
own processes, real estate information services that are being developed and
sold to customers and the expansion of its national marketing efforts. The
number of employees in title operations was lower in California and Florida in
the third quarter of 1997 compared to the third quarter of 1996.
The Company believes the development and sale of new products and services is
important to its future. Through automated operating processes, the Company
expects to add customer revenues and reduce operating expenses and title losses
in the future.
Other operating expenses increased by $3.9 million, or 15.1%, primarily because
of increased rent, business promotion and premium taxes. Other operating
expenses also include travel, supplies, title plant expenses, telephone,
delivery costs and insurance.
Provisions for title losses and related claims were down $0.4 million, or 5.3%
in 1997. The Company's experience in claims continues to improve significantly.
As a percentage of title premiums, fees and related revenues, the provision in
the third quarter of 1997 decreased to 8.6% versus 10.1% in the third quarter of
1996.
The provision for income taxes represented a 33.1% effective tax rate in 1997
and 36.0% in 1996. The effective tax rate for the quarter ended September 30,
1997 is lower than the same quarter of last year because of refunds received in
the current quarter for a federal net operating loss carryforward and a change
in the filing method for a certain state.
-6-
<PAGE>
PART II
Page
----------
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K
(a) Index to exhibits
(b) There were no reports on Form 8-K filed during the
quarter ended September 30, 1997.
-7-
<PAGE>
ITEM 1. 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 was consolidated 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 plaintiffs the negotiated sum of $1.9 million in fees and
expenses. The settlement has become final.
James C. O'Brien and Ingrid K. O'Brien vs. Stewart Title Guaranty
Company, filed September 25, 1996, in the United States District Court, Southern
District of Florida. This purported class action was one of eight similar suits
filed against various underwriters in Florida, including Guaranty. On April 14,
1997, the United States District Court, Southern District of Florida, entered
its Omnibus Order dismissing the plaintiffs' complaints against the
underwriters, including the O'Briens' claims against Guaranty. Subsequent to the
entry of the Omnibus Order, Guaranty and the other underwriters entered into a
final resolution of all claims between the underwriters and the purported
plaintiffs' class representatives. Dismissal of the claims against Guaranty are
final and there are no pending claims against Guaranty relating to this suit.
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.
-8-
<PAGE>
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)
September 11, 1997
- ----------------
Date
/S/ MAX CRISP
-----------------------------------------------
Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
-9-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4. - Rights of Common and Class B Common Stockholders
27.0 - Financial data schedule
28.2 - Details of investments as reported in the
Quarterly Report to Shareholders
EXHIBIT 4
STEWART INFORMATION SERVICES CORPORATION
RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS
September 30, 1997
Common and Class B Common stockholders have the same rights, except (1)
no cash dividend 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
Common 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.
Exhibit 28.2
STEWART INFORMATION SERVICES CORPORATION
DETAILS OF INVESTMENTS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPT 30 DEC 31
1997 1996
--------- --------
($000 Omitted)
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments 33,850 31,946
U. S. Treasury and agency obligations 26,162 27,958
Municipal bonds 109,454 106,934
Mortgage-backed securities 28,156 30,595
Corporate bonds 40,655 35,026
--------- --------
TOTAL INVESTMENTS 238,277 232,459
========= ========
</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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
STEWART INFORMATION SERVICES CORPORATION
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE RELATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 204,427
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 238,277 <F1>
<CASH> 22,092
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 403,083
<POLICY-LOSSES> 155,381
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 17,763
0
0
<COMMON> 6,821
<OTHER-SE> 196,471
<TOTAL-LIABILITY-AND-EQUITY> 403,083
253,936
<INVESTMENT-INCOME> 11,550
<INVESTMENT-GAINS> 305
<OTHER-INCOME> 1,128
<BENEFITS> 22,138
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 16,930
<INCOME-TAX> 5,851
<INCOME-CONTINUING> 11,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,079
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
<RESERVE-OPEN> 150,331
<PROVISION-CURRENT> 21,986
<PROVISION-PRIOR> 152
<PAYMENTS-CURRENT> (3,489)
<PAYMENTS-PRIOR> (13,599)
<RESERVE-CLOSE> 155,381
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes short-term investments.
</FN>
</TABLE>