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, 2000
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 74-1677330
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(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)
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common 13,997,677
Class B Common 1,050,012
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2000
TABLE OF CONTENTS
Item No. Page
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Part I
1. Financial Statements 1
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
3. Quantitative and Qualitative Disclosures About
Market Risk 8
Part II
1. Legal Proceedings 10
5. Other Information 10
6. Exhibits and Reports on Form 8-K 9
Signature 11
<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 and 1999
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
--------------------- --------------------
2000 1999 2000 1999
---------- --------- -------- --------
<S> <C> <C> <C> <C>
($000 Omitted) ($000 Omitted)
Revenues
Title premiums, fees and other revenues 219,459 246,460 616,905 749,293
Real estate information services 14,019 14,507 39,246 45,823
Investment income 5,519 5,394 16,006 15,186
Investment gains (losses) - net 7 20 (280) 50
--------- -------- -------- ------
239,004 266,381 671,877 810,352
Expenses
Amounts retained by agents 100,514 124,186 280,771 378,582
Employee costs 75,398 72,030 217,208 215,493
Other operating expenses 43,465 43,321 125,013 122,898
Title losses and related claims 9,340 9,937 27,447 31,123
Depreciation and amortization 5,575 4,968 15,801 13,161
Interest 497 314 1,364 910
Minority interests 1,341 1,377 3,786 3,803
--------- -------- -------- -------
236,130 256,133 671,390 765,970
--------- -------- -------- -------
Earnings before taxes 2,874 10,248 487 44,382
Income taxes 1,116 4,150 209 16,958
--------- -------- -------- -------
Net earnings 1,758 6,098 278 27,424
========= ======== ======== =======
Average number of shares outstanding -
assuming dilution (000) 15,018 14,762 14,913 14,562
Earnings per share - basic 0.12 0.42 0.02 1.90
Earnings per share - diluted 0.12 0.41 0.02 1.88
========= ========= ======== =======
Comprehensive earnings:
Net earnings 1,758 6,098 278 27,424
Changes in unrealized investment gains (losses),
net of taxes of $916, $(700), $1,129
and $(3,950), respectively 1,701 (1,300) 2,097 (7,335)
--------- -------- -------- -------
Comprehensive earnings 3,459 4,798 2,375 20,089
========= ========= ======== =======
</TABLE>
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<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEP 30 DEC 31
2000 1999
---------- ----------
<S> <C> <C>
($000 Omitted)
Assets
Cash and cash equivalents 34,359 36,803
Short-term investments 64,221 65,583
Investments - statutory reserve funds 194,955 186,917
Investments - other 51,484 57,711
Receivables 46,295 48,580
Property and equipment 47,487 45,900
Title plants 27,809 26,258
Goodwill 37,515 31,641
Deferred income taxes 12,535 12,378
Other 29,177 23,970
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545,837 535,741
========== ==========
Liabilities
Notes payable 28,954 19,054
Accounts payable and accrued liabilities 34,056 41,303
Estimated title losses 184,951 183,787
Minority interests 6,625 6,673
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 84,590 79,126
Retained earnings 209,732 209,454
Accumulated other comprehensive deficit (1,559) (3,656)
Treasury stock - 116,900 shares (1,512) -
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Total stockholders' equity ($19.36 per share at
September 30, 2000) 291,251 284,924
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545,837 535,741
========== ===========
</TABLE>
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<PAGE>
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
($000 Omitted)
Cash provided by operating activities (Note) 17,272 42,114
Investing activities:
Purchases of property and equipment and title plants - net (16,446) (19,794)
Proceeds from investments matured and sold 51,360 32,839
Purchases of investments (48,863) (57,269)
Increases in notes receivable (2,795) (5,838)
Collections on notes receivable 860 5,315
Proceeds from sale of equity investment - 5,840
Cash paid for the acquisition of subsidiaries - net (8,537) (5,166)
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Cash used by investing activities (24,421) (44,073)
Financing activities:
Dividends paid - (1,612)
Repurchases of common stock (1,512) -
Distribution to minority interests (3,568) (2,871)
Proceeds from issuance of stock - 39
Proceeds of notes payable 13,842 8,470
Payments on notes payable (4,057) (5,745)
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Cash provided (used) by financing activities 4,705 (1,719)
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Decrease in cash and cash equivalents (2,444) (3,678)
========== ==========
</TABLE>
NOTE: Reconciliation of net earnings to the above amounts -
<TABLE>
<S> <C> <C>
Net earnings 278 27,424
Add (deduct):
Depreciation and amortization 15,801 13,161
Provision for title losses in excess of payments 1,164 7,206
Provision for uncollectible amounts - net 38 (465)
Decrease in accounts receivable - net 4,218 5,477
Decrease in accounts payable and accrued liabilities - net (7,450) (12,918)
Minority interest expense 3,786 3,803
Equity in net earnings of investees (166) (750)
Realized investment losses (gains) - net 280 (50)
Gain on sale of equity investment - (1,145)
Stock bonuses 541 598
Increase in other assets (2,228) (846)
Other - net 1,010 619
---------- ---------
Cash provided by operating activities 17,272 42,114
========== =========
</TABLE>
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<PAGE>
STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Note 1: Interim Financial Statements
The financial information contained in this report for the three and nine month
periods ended September 30, 2000 and 1999, and as of September 30, 2000, 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 1999 condensed consolidated financial statements have
been reclassified for comparative purposes. Net earnings, as previously
reported, were not affected.
Note 2: Segment Information
The Company's two reportable segments are title and real estate information.
Selected financial information related to these segments follows:
<TABLE>
<CAPTION>
Real Estate
Title Information Total
----- ----------- -----
($000 Omitted)
<S> <C> <C> <C>
Revenues:
---------
Three months ended
9/30/00 224,985 14,019 239,004
9/30/99 251,874 14,507 266,381
Nine months ended
9/30/00 632,631 39,246 671,877
9/30/99 764,529 45,823 810,352
Pretax Earnings (Losses):
-------------------------
Three months ended
9/30/00 3,945 (1,071) 2,874
9/30/99 9,675 573 10,248
Nine months ended
9/30/00 4,392 (3,905) 487
9/30/99 41,551 2,831 44,382
Identifiable Assets:
--------------------
9/30/00 505,717 40,120 545,837
12/31/99 496,191 39,550 535,741
</TABLE>
Note 3: Earnings Per Share
The Company's basic earnings per share figures were calculated by dividing net
earnings by the weighted average number of shares of Common Stock and Class B
Common Stock outstanding during the reporting period. The only potentially
dilutive effect on earnings per share for the Company related to its stock
option plans.
In calculating the effect of the options and determining a figure for diluted
earnings per share, the average number of shares used in calculating basic
earnings per share was increased by 97,000 and 138,000 for the three month
periods ending September 30, 2000 and 1999, respectively and 98,000 and 138,000
for the nine month periods ending September 30, 2000 and 1999, respectively.
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<PAGE>
Note 4: Contingent Liabilities and Commitments
The Company is presently named in a private class action brought under
California's Unfair Business Practices Act: Soriano v. Stewart Title. In a
related matter, The Company is an unnamed and unserved defendant in a large
class action filed by the California Attorney General against a class of all
title companies in the State of California. The lawsuit seeks restitution and
injunctive relief against an unidentified defendant class of all title companies
in the state, based on alleged title company practices concerning escheatment,
fees and banking services credits. The Company is in settlement discussion with
the California Attorney General. Although the ultimate disposition of these
lawsuits cannot be predicted with certainty, it is the opinion of the Company's
management, based on its analysis and discussions with its outside counsel, that
the outcome of any claim, whether individually or on a combined basis, will not
have a materially adverse effect on the consolidated financial condition of the
Company.
Note 5: Changes in Accounting Principles
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
condition and to measure all derivatives at fair value. SFAS No. 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Upon implementation of SFAS
No. 133, hedging relationships may be redesignated, and securities held to
maturity may be transferred to available for sale or trading. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133", deferred the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" amended the accounting and reporting standards of SFAS No.
133 for certain derivative instruments, hedging activities, and decisions made
by the Derivatives Implementation Group. The Company does not invest in hedging
or derivative instruments nor does it intend to do so in the future.
Accordingly, SFAS 133, SFAS 137 and SFAS 138 will have no impact on the
consolidated financial statements.
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<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company's two segments of operations are title insurance ("Title") and real
estate information ("REI"). In general, the principal factors that contribute to
increases in the Company's operating revenues for both segments include
declining mortgage interest rates (which usually increase home sales and
refinancing transactions), rising home prices, higher premium rates, increased
market share, additional revenues from new offices and increased revenues from
commercial transactions. Although relatively few in number, large commercial
transactions typically yield higher premiums.
Mortgage interest rates, which averaged 7.0% in the first quarter of 1999, rose
over the rest of the year to about 7.9% at the end of the year. Rates in 2000
increased again to an average of 8.3% during the first six months, but dropped
to about 7.9% in September.
According to the most recent industry sources available, existing home sales
declined about 4.4% in the first nine months of 2000 compared with the first
nine months of 1999. Refinancing transactions decreased significantly beginning
in the second half of 1999 and continued at much lower levels in 2000. Refinance
activity dropped from representing 34.4 percent of total applications in the
first nine months of 1999 to 16.6 percent in the same period in 2000.
A comparison of the results of operations of the Company for the first nine
months of 2000 with the first nine months of 1999 follows.
REVENUES
For the first nine months of 2000, revenues from title premiums and fees
decreased $132.4 million, or 17.7%, from a year ago. Mortgage interest rates
were significantly higher in 2000 than in the same period a year ago, which
reduced real estate sales and refinancing transactions.
The number of direct closings handled by the Company decreased 12.3%. Closings
decreased in California, Texas, Arizona, Colorado and most other states. The
average revenue per closing increased in 2000 due to higher home prices and a
smaller number of refinancings, which generate lower premiums. Increases in
revenues from commercial transactions also contributed to higher revenues per
closing in 2000.
Premiums from agents were $347.9 million in 2000 and $467.2 million in 1999.
While nearly all states declined, the largest decreases were in California and
Florida. The decrease in premiums from agents was primarily attributable to the
reduced number of refinancing and other transactions resulting from a higher
interest rate environment.
Other revenues in the first nine months of 1999 included a $1.1 million pretax
gain resulting from a settlement of a lawsuit and a related sale of an equity
ownership in a title agency.
Real estate information revenues were $39.2 million in 2000 and $45.8 million in
1999. The 14.4% decrease was primarily due to the decline in real estate
activity. REI profits were reduced in the first nine months of 1999 by a $1.3
million pretax charge resulting from the settlement of a lawsuit.
Investment income increased 5.4% in 2000 over 1999 primarily due to an increase
in the average balances invested.
EXPENSES
The amounts retained by agents, as a percentage of premiums, were 80.7% and
81.0% in 2000 and 1999, respectively. Amounts retained by agents are based on
contracts between agents and the title underwriters of the Company. The
percentage that amounts retained by agents bears to agent revenues may vary from
year to year because of the geographical mix of agent operations and the volume
of title revenues.
Employee expenses for the combined business segments increased $1.7 million, or
0.8%, in 2000. Employee costs for both the title and REI segments increased. The
number of employees in existing title offices at the end of the first nine
months of 2000 was reduced approximately 10.7% from a year ago. The reduction in
the number of employees was offset, however, by significant increases in newly
acquired and startup offices, expansion of national marketing operations to gain
market share and continued expansion in technology.
-6-
<PAGE>
Other operating expenses increased by $2.1 million, or 1.7%, in 2000. Increased
expenses include expenses of new offices, rent and search fees. Other components
of other operating expenses are title plant expenses, supplies, computer costs,
business promotion, telephone, travel, premium taxes, policy forms, delivery
costs and cost of resale products purchased.
Provisions for title losses and related claims were down $3.7 million, or 11.8%,
in 2000. As a percentage of title premiums, fees and related revenues, the
provision in 2000 was 4.4% versus 4.2% in 1999.
The provision for income taxes represented effective tax rates of 42.9% and
38.2% in 2000 and 1999, respectively.
A comparison of the results of operations of the Company for the third quarter
of 2000 with the third quarter of 1999 follows.
REVENUES
For the third quarter of 2000, revenues from title premiums and fees decreased
$27.0 million, or 11.0%, from a year ago. Mortgage interest rates were
significantly higher in the third quarter of 2000 than in the same period a year
ago, which reduced real estate sales and refinancing transactions.
The number of direct closings handled by the Company increased slightly.
Closings in new offices offset the decreases in Arizona, Texas, California and
many other states. The average revenue per closing increased in 2000 due to
higher home prices and a smaller number of refinancings, which generate lower
premiums. Increases in revenues from commercial transactions also contributed to
higher average revenues per closing in 2000.
Premiums from agents decreased $28.7 million from $153.3 million in the third
quarter of 1999 to $124.6 million in the third quarter of 2000. While nearly all
states declined, the largest decreases were in California and Florida. The
decrease in premiums from agents was primarily attributable to the reduced
number of refinancing and other transactions resulting from a higher interest
rate environment.
Real estate information revenues were $14.0 million in 2000 and $14.5 million
in 1999. The decrease wasprimarily due to the decline in real estate activity.
Investment income increased 2.3% in 2000 over 1999 primarily due to an increase
in the average yield.
EXPENSES
The amounts retained by agents, as a percentage of premiums, were 80.7% and
81.0% in 2000 and 1999, respectively. Amounts retained by agents are based on
contracts between agents and the title underwriters of the Company. The
percentage that amounts retained by agents bears to agent revenues may vary from
year to year because of the geographical mix of agent operations and the volume
of title revenues.
Employee expenses for the combined business segments increased $3.4 million, or
4.7%, in 2000. Employee costs for both the title and REI segments increased. The
number of employees in existing title offices at the end of the third quarter of
2000 was reduced approximately 10.7% from a year ago. The reduction in the
number of employees was offset, however, by significant increases in newly
acquired and startup offices, expansion of national marketing operations to gain
market share and continued expansion in technology.
Other operating expenses increased by $0.1 million, or 0.3%, in 2000. Increased
expenses include expenses of new offices and search fees. Other components of
other operating expenses are rent, title plant expenses, supplies, computer
costs, business promotion, telephone, travel, premium taxes, policy forms,
delivery costs and cost of resale products purchased.
Provisions for title losses and related claims were down $0.6 million, or 6.0%
in 2000. As a percentage of title premiums, fees and related revenues, the
provision in the third quarter of 2000 increased to 4.3% versus 4.0% in 1999.
The provision for income taxes represented effective tax rates of 38.8% and
40.5% in 2000 and 1999, respectively.
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<PAGE>
YEAR 2000 ISSUE
Information technology is a crucial part of the Company's business. Accordingly,
the Company completed a comprehensive Year 2000 ("Y2K") readiness program that
addressed challenges associated with the Y2K issue. As a result of this program,
the Company encountered no major automation or business disruption due to Y2K
issues. The Company continues to operate normally across all business units and
geographies and will continue to monitor operations through 2000. The total
costs incurred for the Y2K readiness program were $3.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations represents 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.
During the first nine months of 2000, the Company financed a portion of various
acquisitions through the issuance of Common Stock totaling $4.9 million.
Acquisitions during the first nine months of 2000 have resulted in an increase
in goodwill of $7.3 million.
FORWARD LOOKING STATEMENTS
All statements included in this report, other than statements of historical
facts, 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's investment strategies,
types of financial instruments held or the risks associated with such
instruments which would materially alter the market risk disclosures made in the
Company's Annual Statement on Form 10-K for the year ended December 31, 1999.
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<PAGE>
PART II
Page
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Item 1. Legal Proceedings 10
Item 5. Other Information 10
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, 2000.
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<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.
ITEM 5. OTHER INFORMATION
The Board of Directors has approved a plan to repurchase up to 5
percent (680,000 shares) of the Company's currently issued and outstanding
Common Stock. The Board also determined that the Company's regular quarterly
dividend should be discontinued in favor of returning those and additional funds
to stockholders through the stock purchase plan. As of September 30, 2000, the
Company had repurchased a total of 116,900 shares under this plan.
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<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
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(Registrant)
November 9, 2000
----------------
Date
/S/ MAX CRISP
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Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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4. - Rights of Common and Class B Common Stockholders
27.0 - Financial data schedule
