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 March 31, 1998
[ ] 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
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(Address of principal executive offices, including zip code)
(713) 625-8100
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(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 6,424,126
Class B Common 525,006
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1998
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 THREE MONTHS ENDED
MARCH 31, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MAR 31 MAR 31
1998 1997
-------- --------
($000 Omitted)
<S> <C> <C>
Revenues
Title premiums, fees and other revenues 180,984 135,190
Real estate information services 11,716 6,893
Investment income 4,274 3,727
Investment gains - net 68 156
-------- -------
197,042 145,966
Expenses
Amounts retained by agents 85,910 69,212
Employee costs 55,074 43,294
Other operating expenses 29,812 23,507
Title losses and related claims 8,215 6,559
Depreciation and amortization 3,270 2,776
Interest 387 253
Minority interests 902 267
-------- -------
183,570 145,868
-------- -------
Earnings before taxes 13,472 98
Income taxes 4,847 34
-------- -------
Net earnings 8,625 64
======== =======
Average number of shares outstanding (000) 7,015 6,837
Earnings per share - diluted 1.23 0.01
======== =======
Comprehensive earnings:
Net earnings 8,625 64
Changes in unrealized investment gains, net of tax (628) 2,616
-------- -------
Comprehensive earnings 7,997 2,680
======== =======
</TABLE>
-1-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MAR 31 DEC 31
1998 1997
---------- ----------
($000 Omitted)
<S> <C> <C>
Assets
Cash and cash equivalents 27,427 30,391
Short-term investments 36,409 35,761
Investments - statutory reserve funds 140,346 138,462
Investments - other 78,927 71,044
Receivables 36,393 31,868
Property and equipment 31,134 30,415
Title plants 22,573 21,778
Goodwill 19,335 18,427
Deferred income taxes 15,116 15,632
Other 24,366 23,913
---------- ----------
432,026 417,691
========== ==========
Liabilities
Notes payable 21,462 19,087
Accounts payable and accrued liabilities 26,441 27,917
Estimated title losses 162,176 156,791
Minority interests 4,762 4,392
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 59,961 59,828
Retained earnings 153,316 145,140
Other comprehensive earnings 3,908 4,536
---------- -----------
Total stockholders' equity ($31.31 per share at
March 31, 1998) 217,185 209,504
---------- -----------
432,026 417,691
========== ===========
</TABLE>
-2-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MAR 31 MAR 31
1998 1997
-------- --------
($000 Omitted)
<S> <C> <C>
Cash provided (used) by operating activities (Note) 11,495 (1,998)
Investing activities:
Purchases of property and equipment and title plants - net (4,126) (2,189)
Proceeds from investments matured and sold 16,900 22,887
Purchases of investments (28,214) (18,368)
Increases in notes receivable (1,100) (506)
Collections on notes receivable 517 174
Proceeds from issuance of stock 354 36
Cash (paid)received for the acquisition of subsidiaries - net (743) 26
---------- ---------
Cash (used) provided by investing activities (16,412) 2,060
Financing activities:
Dividends paid (449) (377)
Proceeds of notes payable 3,498 1,849
Payments on notes payable (1,096) (1,322)
---------- ---------
Cash provided by financing activities 1,953 150
---------- ---------
(Decrease) increase in cash and cash equivalents (2,964) 212
========== ==========
</TABLE>
NOTE: Reconciliation of net earnings to the above amounts -
<TABLE>
<S> <C> <C>
Net earnings 8,625 64
Add (deduct):
Depreciation and amortization 3,270 2,796
Provision for title losses in excess of (less than) payments 4,265 (521)
Provision for uncollectible amounts - net (508) 176
(Increase)decrease in accounts receivable - net (2,889) 969
Decrease in accounts payable and accrued liabilities - net (637) (5,005)
Minority interest expense 902 267
Equity in net earnings of investees (320) 11
Realized investment gains - net (68) (156)
Other, net (1,145) (599)
---------- ---------
Cash provided (used) by operating activities 11,495 (1,998)
========== =========
</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 three month periods
ended March 31, 1998 and 1997, and as at March 31, 1998, 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.
Certain amounts in the 1997 consolidated financial statements have been
reclassified for comparative purposes. Net earnings, as previously reported,
were not affected.
-4-
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
FIRST QUARTER COMPARISON
A comparison of the results of operations of the Company for the first three
months of 1998 with the first three months of 1997 follows.
REVENUES
Revenues from title premiums and fees increased $45.8 million, or 33.9%, from a
year ago. Mortgage interest rates were lower in the early part of 1998 than in
the same period a year ago, increasing real estate transactions. Refinancing
transactions, in particular, were higher in 1998.
The number of closings handled by the Company increased 49.9%. Closings
increased in California, Texas, Colorado and most other states. The average
revenue per closing decreased slightly in 1998 due, in part, to a larger number
of refinancings with their lower premiums. Increases in commercial transactions
and revenues from agents contributed to higher revenues in 1998.
Real estate information revenues were $11.7 million in 1998 and $6.9 million in
1997. The increase was primarily due to a significant number of new businesses
started in 1997.
Investment income increased 14.7% in 1998 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Amounts retained by agents increased $16.7 million, or 24.1%, over the
comparable period in 1997. The percentage of retention by agents to the amounts
of revenues from agents was 80.0% and 80.4% for the three months ended March 31,
1998 and March 31, 1997, respectively.
Employee expenses increased $11.8 million, or 27.2%, in 1998 primarily because
of a higher average number of employees during the first quarter of 1998
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 $6.3 million, or 26.8%, primarily because
of the increase in transaction volume. Expenses that increased include appraisal
fees, business promotion, expenses of new offices, rent and travel. Other
operating expenses also include premium taxes, supplies, search fees, policy
forms, delivery costs, title plant expenses and telephone. Most of these
expenses follow, to varying degrees, the changes in transaction volume and
revenues.
Provisions for title losses and related claims were up $1.7 million, or 25.2% in
1998. As a percentage of title premiums, fees and related revenues, the
provision in the first quarter of 1998 decreased to 4.5% versus 4.9% in the
first quarter of 1997. The provision for the year 1997 was 4.5 percent.
The provision for income taxes represented effective tax rates of 36% and 35% in
1998 and 1997, respectively.
-5-
<PAGE>
YEAR 2000 ISSUE
Currently, significant attention is being given by companies to the problem of
how their computer operations may be adversely affected by the rollover of the
calendar to the year 2000. The Company has taken steps to make software programs
substantially compliant with the upcoming demands of the change. The Company is
testing and reviewing the electronic data transfers conducted with business
partners. The Company expects to substantially complete its work in this area in
1998. The related costs are being expensed as incurred and additional costs are
expected to be insignificant.
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>
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 March 31, 1998.
-7-
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
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. The Registrant
does not expect that any of these proceedings will have a material adverse
effect on its financial condition.
-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)
April 30, 1998
- ----------------
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
March 31, 1998
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
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MAR 31 DEC 31
1998 1997
--------- --------
($000 Omitted)
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments 36,409 35,761
U. S. Treasury and agency obligations 25,745 24,867
Municipal bonds 117,463 110,627
Mortgage-backed securities 25,864 27,085
Corporate bonds 45,220 42,718
Equity securities 4,981 4,209
--------- --------
TOTAL INVESTMENTS 255,682 245,267
========= ========
</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 MARCH 31, 1998 AND THE RELATED STATEMENT OF EARNINGS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 219,273
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 255,682 <F1>
<CASH> 27,427
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 432,026
<POLICY-LOSSES> 162,176
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 21,462
<COMMON> 6,937
0
0
<OTHER-SE> 210,248
<TOTAL-LIABILITY-AND-EQUITY> 432,026
180,984
<INVESTMENT-INCOME> 4,274
<INVESTMENT-GAINS> 68
<OTHER-INCOME> 11,716
<BENEFITS> 8,215
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 13,472
<INCOME-TAX> 4,847
<INCOME-CONTINUING> 8,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,625
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.23
<RESERVE-OPEN> 156,791
<PROVISION-CURRENT> 7,070
<PROVISION-PRIOR> 1,145
<PAYMENTS-CURRENT> (346) <F2>
<PAYMENTS-PRIOR> 3,176
<RESERVE-CLOSE> 162,176
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes short-term investments.
<F2> Includes reserve balance increase of $1,116 from the acquisition of an
existing underwriter.
</FN>
</TABLE>
