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, 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
------------------------------------------------------------
(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 6,483,555
Class B Common 525,006
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 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 9
6. Exhibits and Reports on Form 8-K 8
Signature 10
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE QUARTERS AND SIX MONTHS ENDED
JUNE 30, 1998 and 1997
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------------- -------------------
1998 1997 1998 1997
--------- --------- -------- -------
($000 Omitted) ($000 Omitted)
<S> <C> <C> <C> <C>
Revenues
Title premiums, fees and other revenues 218,543 162,408 399,527 297,598
Real estate information services 12,131 7,712 23,847 14,605
Investment income 4,502 3,861 8,776 7,588
Investment gains - net 263 25 331 181
--------- -------- -------- -------
235,439 174,006 432,481 319,972
Expenses
Amounts retained by agents 103,781 81,963 189,691 151,175
Employee costs 63,172 44,219 118,245 87,513
Other operating expenses 34,669 27,849 64,482 51,356
Title losses and related claims 10,024 7,544 18,239 14,103
Depreciation and amortization 3,591 2,843 6,861 5,619
Interest 396 313 783 566
Minority interests 1,527 643 2,429 910
--------- -------- -------- -------
217,160 165,374 400,730 311,242
--------- -------- -------- -------
Earnings before taxes 18,279 8,632 31,751 8,730
Income taxes 7,021 3,104 11,868 3,138
--------- -------- -------- -------
Net earnings 11,258 5,528 19,883 5,592
========= ======== ======== =======
Average number of shares outstanding (000) 7,064 6,860 7,042 6,848
Earnings per share - diluted 1.59 0.81 2.82 0.82
========= ========= ======== =======
Comprehensive earnings:
Net earnings 11,258 5,528 19,883 5,592
Changes in unrealized investment gains,
net of tax 17 1,853 (611) (744)
--------- -------- -------- -------
Comprehensive earnings 11,275 7,381 19,272 4,848
========= ========= ======== =======
</TABLE>
-1-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1998 1997
---------- ----------
($000 Omitted)
<S> <C> <C>
Assets
Cash and cash equivalents 35,764 30,391
Short-term investments 48,525 35,761
Investments - statutory reserve funds 141,621 138,462
Investments - other 75,585 71,044
Receivables 36,533 31,868
Property and equipment 31,843 30,415
Title plants 23,215 21,778
Goodwill 18,637 18,427
Deferred income taxes 15,818 15,632
Other 23,309 23,913
---------- ----------
450,850 417,691
========== ==========
Liabilities
Notes payable 19,576 19,087
Accounts payable and accrued liabilities 31,942 27,917
Estimated title losses 164,747 156,791
Minority interests 4,968 4,392
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 61,572 59,828
Retained earnings 164,120 145,140
Other comprehensive earnings 3,925 4,536
---------- -----------
Total stockholders' equity ($32.76 per share at
June 30, 1998) 229,617 209,504
---------- -----------
450,850 417,691
========== ===========
</TABLE>
-2-
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
($000 Omitted)
<S> <C> <C>
Cash provided by operating activities (Note) 35,205 7,711
Investing activities:
Purchases of property and equipment and title plants - net (8,533) (5,988)
Proceeds from investments matured and sold 24,365 24,390
Purchases of investments (45,438) (18,949)
Increases in notes receivable (1,541) (1,743)
Collections on notes receivable 1,029 435
Proceeds from issuance of stock 1,893 96
Cash paid for the acquisition of subsidiaries - net (823) (942)
---------- ---------
Cash used by investing activities (29,048) (2,701)
Financing activities:
Dividends paid (903) (755)
Proceeds of notes payable 3,134 4,868
Payments on notes payable (3,015) (2,087)
---------- ---------
Cash (used) provided by financing activities (784) 2,026
---------- ---------
Increase in cash and cash equivalents 5,373 7,036
========== ==========
</TABLE>
NOTE: Reconciliation of net earnings to the above amounts -
<TABLE>
<S> <C> <C>
Net earnings 19,883 5,592
Add (deduct):
Depreciation and amortization 6,861 5,619
Provision for title losses in excess of payments 7,169 2,161
Provision for uncollectible amounts - net (850) 199
Increase in accounts receivable - net (2,899) (3,261)
Increase (decrease) in accounts payable and
accrued liabilities - net 4,850 (1,804)
Minority interest expense 2,429 910
Equity in net earnings of investees 15 (334)
Realized investment gains - net (331) (181)
Other - net (1,922) (1,190)
---------- ---------
Cash provided by operating activities 35,205 7,711
========== =========
</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 six month periods
ended June 30, 1998 and 1997, and as at June 30, 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 provides title insurance and related services through more than
4,000 issuing locations in the United States and several international markets.
A leading provider of real estate information technology and connectivity,
Stewart meets the needs of the real estate and mortgage industry through the
electronic delivery of services needed for settlement. These services include
title reports, flood determinations, property appraisals, document preparation,
credit reports and other real estate information. In addition, Stewart provides
expertise in tax-deferred exchanges, surveys and field services.
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.
A comparison of the results of operations of the Company for the first
six months of 1998 with the first six months of 1997 follows:
REVENUES
Revenues from title premiums and fees increased $101.9 million, or 34.3%, 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 50.6%. 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 also contributed to higher revenues in 1998.
A 3% reduction in Texas title premiums becomes effective August 1, 1998.
However, the Company is experiencing new home equity business in Texas that did
not exist before 1998.
Real estate information revenues were $23.8 million in 1998 and $14.6 million in
1997. The increase was primarily due to a significant number of new businesses
started by the Company in 1997.
Investment income increased 15.7% in 1998 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Amounts retained by agents increased $38.5 million, or 25.5%, over the
comparable period in 1997. The percentage of retention by agents to the amounts
of revenues from agents was 80.0% and 80.7% for the six months ended June 30,
1998 and June 30, 1997, respectively.
Employee expenses increased $30.7 million, or 35.1%, in 1998 primarily because
of a higher average number of employees during 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 $13.1 million, or 25.6%, primarily because
of the increase in transaction volume. Expenses that increased include appraisal
fees, premium taxes, expenses of new offices, business promotion, rent and
search fees. Other operating expenses also include supplies, travel, 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 $4.1 million, or 29.3% in
1998. As a percentage of title premiums, fees and related revenues, the
provision in 1998 decreased to 4.6% versus 4.7% in 1997.
The provision for income taxes represented effective tax rates of 37% and 36% in
1998 and 1997, respectively.
-5-
<PAGE>
A comparison of the results of operations of the Company for the second
quarter of 1998 with the second quarter of 1997 follows:
REVENUES
Revenues from title premiums and fees increased $56.1 million, or 34.6%, from a
year ago. Mortgage interest rates were lower in the early part of 1998 than 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 51.2%. 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 also contributed to higher revenues in 1998.
A 3% reduction in Texas title premiums becomes effective August 1, 1998.
However, the Company is experiencing new home equity business in Texas that did
not exist before 1998.
Real estate information revenues were $12.1 million in 1998 and $7.7 million in
1997. The increase was primarily due to a significant number of new businesses
started by the company in 1997.
Investment income increased 16.6% in 1998 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Amounts retained by agents increased $21.8 million, or 26.6%, over the
comparable period in 1997. The percentage of retention by agents to the amounts
of revenues by agents was 80.1% and 80.9% for the three months ended June 30,
1998 and June 30, 1997, respectively.
Employee expenses increased $19.0 million, or 42.9%, in 1998 primarily because
of a higher average number of employees during 1998 compared to a year ago and
increased average rates of compensation, including bonuses and profit sharing.
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 $6.8 million, or 24.5%, primarily because
of the increase in transaction volume. Expenses that increased include premium
taxes, appraisal fees, search fees, telephone and rent. Other operating expenses
also include supplies, travel, policy forms, delivery costs, title plant
expenses and business promotion. Most of these expenses follow, to varying
degrees, the changes in transaction volume and revenues.
Provisions for title losses and related claims were up $2.5 million, or 32.9% in
1998. As a percentage of title premiums, fees and related revenues, the
provision in the second quarter of 1998 decreased to 4.6% versus 4.7% in the
second quarter of 1997.
The provision for income taxes represented effective tax rates of 38% and 36% in
1998 and 1997, respectively. The 1998 effective tax rate was higher primarily
because nontaxable income from municipal bonds was significantly less in
relation to pretax profits.
-6-
<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.
FORWARD LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this
report which address activities, events or developments that the Company expects
or anticipates will or may occur in the future are forward-looking statements.
Such forward-looking statements are subject to risks and uncertainties
including, among other things, changes in mortgage interest rates, employment
levels, actions of competitors, changes in real estate markets, general economic
conditions and legislation, primarily legislation related to insurance, and
other risks and uncertainties discussed in the Company's filings with the
Securities and Exchange Commission.
-7-
<PAGE>
PART II
Page
----------
Item 1. Legal Proceedings 9
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, 1998.
-8-
<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.
-9-
<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)
August 10, 1998
- ----------------
Date
/S/ MAX CRISP
-----------------------------------------------
Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
-10-
<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
June 30, 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
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1998 1997
--------- --------
($000 Omitted)
<S> <C> <C>
Investments, at market, partially restricted:
Short-term investments 48,525 35,761
U. S. Treasury and agency obligations 23,808 24,867
Municipal bonds 117,411 110,627
Mortgage-backed securities 23,806 27,085
Corporate bonds 49,545 42,718
Equity securities 2,636 4,209
--------- --------
TOTAL INVESTMENTS 265,731 245,267
========= ========
</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 JUNE 30, 1998 AND THE RELATED STATEMENT OF EARNINGS FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 217,206
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 265,731 <F1>
<CASH> 35,764
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 450,850
<POLICY-LOSSES> 164,747
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 19,576
<COMMON> 7,009
0
0
<OTHER-SE> 222,608
<TOTAL-LIABILITY-AND-EQUITY> 450,850
399,527
<INVESTMENT-INCOME> 8,776
<INVESTMENT-GAINS> 331
<OTHER-INCOME> 23,847
<BENEFITS> 18,239
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 31,751
<INCOME-TAX> 11,868
<INCOME-CONTINUING> 19,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,883
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.82
<RESERVE-OPEN> 156,791
<PROVISION-CURRENT> 16,755 <F2>
<PROVISION-PRIOR> 2,271
<PAYMENTS-CURRENT> (2,058)
<PAYMENTS-PRIOR> (9,012)
<RESERVE-CLOSE> 164,747
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes short-term investments.
<F2> Includes reserve balance increase of $787 from the acquisition of an
existing underwriter.
</FN>
</TABLE>
