<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, 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> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1997
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 8
6. Exhibits and Reports on Form 8-K 7
Signature 9
</TABLE>
<PAGE> 3
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 1997 and 1996
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
($000 Omitted) ($000 Omitted)
<S> <C> <C> <C> <C>
Revenues
Title premiums, fees and other revenues 87,561 85,465 160,802 160,101
Investment income 3,861 3,523 7,588 6,969
Investment gains - net 25 (124) 181 250
Other income - net 596 855 226 403
-------- -------- -------- --------
92,043 89,719 168,797 167,723
Expenses
Employee costs 44,219 42,977 87,513 83,724
Other operating expenses 27,849 26,219 51,356 49,133
Title losses and related claims 7,544 8,100 14,103 16,060
Depreciation and amortization 2,843 2,714 5,619 5,179
Interest 313 292 566 576
Minority interests 643 507 910 743
-------- -------- -------- --------
83,411 80,809 160,067 155,415
-------- -------- -------- --------
Earnings before taxes 8,632 8,910 8,730 12,308
Income taxes 3,104 3,208 3,138 4,431
-------- -------- -------- --------
Net earnings 5,528 5,702 5,592 7,877
======== ======== ======== ========
Average number of shares outstanding (000) 6,805 6,693 6,796 6,680
Earnings per share 0.81 0.85 0.82 1.18
======== ======== ======== ========
</TABLE>
-1-
<PAGE> 4
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1997 1996
------- -------
($000 Omitted)
<S> <C> <C>
Assets
Cash and cash equivalents 25,520 18,484
Short-term investments 27,000 31,946
Investments - statutory reserve funds 130,014 127,057
Investments - other 69,039 73,456
Receivables 33,904 31,616
Property and equipment 29,389 28,185
Title plants 21,719 21,096
Goodwill 16,759 16,535
Deferred income taxes 16,744 14,615
Other 21,225 20,382
------- -------
391,313 383,372
======= =======
Liabilities
Notes payable 14,990 12,324
Accounts payable and accrued liabilities 23,562 25,452
Estimated title losses 152,492 150,331
Minority interests 4,056 4,275
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 58,704 57,574
Net unrealized investment gains 1,176 1,920
Retained earnings 136,333 131,496
------- -------
Total stockholders' equity ($28.77 per share at
June 30, 1997) 196,213 190,990
------- -------
391,313 383,372
======= =======
</TABLE>
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<PAGE> 5
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------- -------
($000 Omitted)
<S> <C> <C>
Cash provided by operating activities (Note) 7,711 19,888
Investing activities:
Purchases of property and equipment and title plants - net (5,988) (6,150)
Proceeds from investments matured and sold 24,390 47,421
Purchases of investments (18,949) (56,864)
Increases in notes receivable (1,743) (386)
Collections on notes receivable 435 1,840
Proceeds from issuance of stock 96 60
Cash (paid) received for the acquisition of subsidiaries - net (942) 276
------- -------
Cash used by investing activities (2,701) (13,803)
Financing activities:
Dividends paid (755) (742)
Proceeds of notes payable 4,868 1,408
Payments on notes payable (2,087) (2,183)
------- -------
Cash provided (used) by financing activities 2,026 (1,517)
------- -------
Increase in cash and cash equivalents 7,036 4,568
======= =======
NOTE: Reconciliation of net earnings to the above amounts -
Net earnings 5,592 7,877
Add (deduct):
Depreciation and amortization 5,619 5,179
Provision for title losses in excess of payments 2,161 5,802
Provision for uncollectible amounts - net 199 204
Increase in accounts receivable - net (3,261) (1,142)
(Decrease) increase in accounts payable and
accrued liabilities - net (1,804) 3,210
Minority interest expense 910 743
Equity in net earnings of investees (334) (392)
Realized investment gains - net (181) (250)
Other - net (1,190) (1,343)
------- -------
Cash provided by operating activities 7,711 19,888
======= =======
</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, 1997 and 1996, and as at June 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> 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 1997 with the first six 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 $0.7 million, or 0.4%, 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. Because of lower rates real estate activity increased. Refinancing
transactions, which had been at lower, more normal levels since mid 1996, also
increased.
The number of closings handled by the Company decreased 12.1%. Closings
decreased in California, Florida, Texas and most other states. The average
revenue per closing increased in the first six months of 1997 over the first
six months of 1996. Fewer refinancings, with their lower premiums, resulted in
higher revenues per closing in 1997. 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 8.9% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $3.8 million, or 4.5%, in 1997 primarily because of
a higher average number of employees during the first two 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, 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 $2.2 million, or 4.5%, primarily because
of increased rent, travel, fees paid to attorneys for examination and closing
services, bad debt provisions and premium taxes. Other operating expenses also
include business promotion, supplies, policy forms, delivery costs, title plant
expenses and telephone.
Provisions for title losses and related claims were down $2.0 million, or
12.2% 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 six months of 1997 decreased to 8.8% versus 10.0%
for the first six months of 1996. The provision for the year 1996 was 10.3
percent.
The provision for income taxes represented a 36.0% effective tax rate in both
1997 and 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> 8
A comparison of the results of operations of the Company for the second quarter
of 1997 with the second quarter 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 $2.1 million, or 2.5%, 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 decreased 9.0%. Closings
decreased in California, Florida, Texas and most other states. The average
revenue per closing increased 10.4% in 1997 over 1996. Fewer refinancings,
with their lower premiums, resulted in higher revenues per closing in 1997.
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 9.6% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $1.2 million, or 2.9%, in 1997 primarily because of
increased average rates of compensation. The average number of employees was
approximately the same in 1997 and 1996.
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, Florida and
Texas in the second quarter of 1997 compared to the second 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 $1.6 million, or 6.2%, primarily because
of increased travel, fees paid to attorneys for examination and closing
services and rent. Other operating expenses also include business promotion,
delivery costs, insurance and telephone.
Provisions for title losses and related claims were down $0.6 million, or 6.9%
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 second quarter of 1997 decreased to 8.6% versus 9.5% in
the second quarter of 1996. The provision for the year 1996 was 10.3 percent.
The provision for income taxes represented a 36.0% effective tax rate in both
1997 and 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.
-6-
<PAGE> 9
PART II
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 June 30, 1997.
</TABLE>
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<PAGE> 10
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 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 totaling $0.5 million. The Court has under advisement the
motions of such plaintiff's counsel to amend and to reconsider that award.
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 is one of eight
similar suits filed against various underwriters in Florida, including
Guaranty. The alleged class would include all purchasers of title insurance of
evidence of title in Florida since 1990. Plaintiffs allege that Guaranty's
premium and cost sharing agreements with its Florida agents, which are governed
by and set in accordance with rates promulgated by the Florida Department of
Insurance, constitute violations of the Real Estate Settlement Procedures Act
and Florida law, including fraudulent and negligent misrepresentation.
Plaintiffs seek injunctive relief and treble damages of at least $60 million
based upon the title insurance premiums paid by the purported class. Guaranty
has filed a motion to dismiss the complaint on various grounds, including the
filed rate doctrine. The Court has deferred any action on the plaintiff's
motion to certify the proceedings as a class action pending disposition of
Guaranty's motion to dismiss. Guaranty believes that the plaintiff's
allegations are without merit and intends to vigorously defend 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> 11
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 12, 1997
- ----------------
Date
/S/ MAX CRISP
-----------------------------------------------
Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
-9-
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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
</TABLE>
<PAGE> 1
EXHIBIT 4
STEWART INFORMATION SERVICES CORPORATION
RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS
June 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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1997 AND THE RELATED STATEMENT OF EARNINGS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 199,053
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 226,053<F1>
<CASH> 25,520
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 391,313
<POLICY-LOSSES> 152,492
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 14,990
0
0
<COMMON> 6,821
<OTHER-SE> 189,392
<TOTAL-LIABILITY-AND-EQUITY> 391,313
160,802
<INVESTMENT-INCOME> 7,588
<INVESTMENT-GAINS> 181
<OTHER-INCOME> 226
<BENEFITS> 14,103
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 8,730
<INCOME-TAX> 3,138
<INCOME-CONTINUING> 5,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,592
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
<RESERVE-OPEN> 150,331
<PROVISION-CURRENT> 13,718
<PROVISION-PRIOR> 385
<PAYMENTS-CURRENT> (2,163)
<PAYMENTS-PRIOR> (9,779)
<RESERVE-CLOSE> 152,492
<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, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1997 1996
------- -------
($000 Omitted)
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments 27,000 31,946
U. S. Treasury and agency obligations 28,004 27,958
Municipal bonds 107,007 106,934
Mortgage-backed securities 28,690 30,595
Corporate bonds 35,352 35,026
------- -------
TOTAL INVESTMENTS 226,053 232,459
------- -------
</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.
