-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SrBDAtuwaOfvh7TlnTH9B185JWQND3n2V45ApOkoiU3TZbHEXQx+UQi7sEgUHWHZ OOWaABkdOPDqbf9E6fdckw== 0000094344-99-000003.txt : 19990513 0000094344-99-000003.hdr.sgml : 19990513 ACCESSION NUMBER: 0000094344-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART INFORMATION SERVICES CORP CENTRAL INDEX KEY: 0000094344 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 741677330 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02658 FILM NUMBER: 99617820 BUSINESS ADDRESS: STREET 1: 1980 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136258100 MAIL ADDRESS: STREET 1: 1980 POST OAK BLVD STREET 2: STE 830 CITY: HOUSTON STATE: TX ZIP: 77056 10-Q 1 10-Q FOR 3/31/99 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, 1999 [ ] 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 6,648,217 Class B Common 525,006 FORM 10-Q QUARTERLY REPORT Quarter Ended March 31, 1999 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 3. Quantitative and Qualitative Disclosures About Market Risk 7 Part II 1. Legal Proceedings 9 5. Other Information 9 6. Exhibits and Reports on Form 8-K 8 Signature 10 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 and 1998
THREE MONTHS ENDED ------------------ MAR 31 MAR 31 1999 1998 ------- ------- ($000 Omitted) Revenues Title premiums, fees and other revenues 227,716 180,984 Real estate information services 15,091 11,716 Investment income 4,907 4,274 Investment gains - net 164 68 ------- ------- 247,878 197,042 Expenses Amounts retained by agents 112,134 85,910 Employee costs 69,499 55,074 Other operating expenses 36,461 29,812 Title losses and related claims 9,266 8,215 Depreciation and amortization 3,875 3,270 Interest 286 387 Minority interests 990 902 ------- ------- 232,511 183,570 ------- ------- Earnings before taxes 15,367 13,472 Income taxes 5,767 4,847 ------- ------- Net earnings 9,600 8,625 ======= ======= Average number of shares outstanding - assuming dilution (000) 7,168 7,015 Earnings per share - basic 1.35 1.25 Earnings per share - diluted 1.34 1.23 ======= ======= Comprehensive earnings: Net earnings 9,600 8,625 Changes in unrealized investment gains, net of taxes of $(1,190) and $(339) (2,210) (628) ------- ------- Comprehensive earnings 7,390 7,997 ======= =======
-1- STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND DECEMBER 31, 1998
MAR 31 DEC 31 1999 1998 ---------- ---------- ($000 Omitted) Assets Cash and cash equivalents 47,200 44,883 Short-term investments 60,497 59,446 Investments - statutory reserve funds 167,774 164,554 Investments - other 56,848 62,758 Receivables 43,310 46,732 Property and equipment 37,266 36,392 Title plants 24,111 23,608 Goodwill 25,808 23,615 Deferred income taxes 11,915 10,633 Other 22,643 25,860 ---------- ---------- 497,372 498,481 ========== ========== Liabilities Notes payable 15,547 16,194 Accounts payable and accrued liabilities 33,692 44,578 Estimated title losses 172,137 171,763 Minority interests 6,468 5,503 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 66,174 63,951 Retained earnings 199,435 190,363 Accumulated other comprehensive earnings 3,919 6,129 ---------- ----------- Total stockholders' equity ($37.88 per share at March 31, 1999) 269,528 260,443 ---------- ----------- 497,372 498,481 ========== ===========
-2- STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
THREE MONTHS ENDED --------------------- MAR 31 MAR 31 1999 1998 -------- -------- ($000 Omitted) Cash provided by operating activities (Note) 9,858 12,030 Investing activities: Purchases of property and equipment and title plants - net (4,874) (4,126) Proceeds from investments matured and sold 8,034 16,900 Purchases of investments (9,469) (28,214) Increases in notes receivable (1,617) (1,100) Collections on notes receivable 350 517 Cash received (paid)for the sale or purchase of subsidiaries - net 1,817 (743) -------- -------- Cash used by investing activities (5,759) (16,766) Financing activities: Dividends paid (527) (449) Distribution to minority interests (530) (535) Proceeds from issuance of stock 104 354 Proceeds of notes payable 2,346 3,498 Payments on notes payable (3,175) (1,096) -------- -------- Cash (used) provided by financing activities (1,782) 1,772 -------- -------- Increase (decrease) in cash and cash equivalents 2,317 (2,964) ========= =========
NOTE: Reconciliation of net earnings to the above amounts - Net earnings 9,600 8,625 Add (deduct): Depreciation and amortization 3,875 3,270 Provision for title losses in excess of payments 374 4,265 Provision for uncollectible amounts - net (160) (508) Decrease (increase) in accounts receivable - net 9,070 (2,889) Decrease in accounts payable and accrued liabilities - net (12,802) (637) Minority interest expense 990 902 Equity in net earnings of investees (274) (320) Realized investment gains - net (164) (68) Stock bonuses 527 342 Increase in other assets (1,224) (91) Other, net 46 (861) -------- -------- Cash provided by operating activities 9,858 12,030 ======== ========
-3- 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, 1999 and 1998, and as at March 31, 1999, 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 1998 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:
Real Estate Title information Total ----- ----------- ----- (000's omitted) Revenues: - --------- Three months ended 3/31/99 232,787 15,091 247,878 3/31/98 185,326 11,716 197,042 Pretax Earnings: - ---------------- Three months ended 3/31/99 13,805 1,562 15,367 3/31/98 12,835 637 13,472 Identifiable Assets: - -------------------- 3/31/99 454,344 43,028 497,372 12/31/98 463,030 35,451 498,481
-4- Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The Company's two segments of operations are land titles and real estate information. In general, the principal factors that contribute to increases in the Company's operating revenues 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, on the average, fell from 7.6% in 1997 to 6.94% in 1998 and hovered around 7% in the first quarter of 1999. In the first half of 1998 rates rose slightly above 7% and stayed just below 7% for the rest of the year and into the first three months of 1999. Operating in these mortgage interest rate environments and a strong general economy, real estate activity began to increase in late 1997. Strong activity in home sales continued through 1998. Refinancing transactions rose in the last month of 1997 and in the first quarter of 1998 to record levels, decreased in the second and third quarters and then increased dramatically to still another record level in the fourth quarter of 1998. A good housing market continued into 1999. According to published data, sales of existing and new homes, along with housing starts, were up in the first two months of 1999 when compared to the same period last year. Refinance activity dropped from representing 54 percent of total applications in the first three months of 1998 to 50 percent in the same period of 1999, as reported by the National Mortgage Banker's Association. Refinance activity represented approximately 40 percent of application volume in the first two weeks of April 1999. A comparison of the results of operations of the Company for the first three months of 1999 with the first three months of 1998 follows. REVENUES Revenues from title premiums and fees increased $46.7 million, or 25.8%, from a year ago. Mortgage interest rates, on average, were slightly lower in the early part of 1999 than in the same period a year ago, increasing real estate transactions. Strong order counts in the last few months of 1998 and a healthy real estate market in the first quarter of 1999 generated additional first quarter revenues. The number of closings handled by the Company increased 15.7%. Closings increased in California, Texas, Arizona and most other states. The average revenue per closing increased slightly in 1999 due, in part, to a fewer number of refinancings with their lower premiums. Increases in revenues from agents and commercial transactions contributed to higher revenues in 1999. Other revenues in the first quarter 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 $15.1 million in 1999 and $11.7 million in 1998. The increase was primarily due to a healthy real estate environment and new businesses started or acquired in 1998. Investment income increased 14.8% in 1999 due to an increase in the average balances invested. EXPENSES Amounts retained by agents increased $26.2 million, or 30.5%, over the comparable period in 1998. The percentage of retention by agents to the amounts of revenues from agents was 80.9% and 80.0% for the three months ended March 31, 1999 and March 31, 1998, respectively. Employee expenses increased $14.4 million, or 26.2%, in 1999 primarily because of a higher average number of employees during the first quarter of 1999 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. -5- 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 services and revenues while reducing operating expenses and title losses in the future. Other operating expenses increased by $6.6 million, or 22.3%, primarily because of the increase in transaction volume. Expenses that increased include REI expenses, rent, computer costs and business promotion. Other operating expenses also include title plant expenses, supplies, telephone, travel, premium taxes, policy forms, search fees and delivery costs. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Provisions for title losses and related claims were up $1.1 million, or 12.8% in 1999. As a percentage of title premiums, fees and related revenues, the provision in the first quarter of 1999 decreased to 4.1% versus 4.5% in 1998. The continued improvement in industry trends in claims and the Company's improved experience in claims have led to lower loss ratios. An overall increase in refinancing transactions in recent years, which results in lower loss exposure, also reduced loss ratios. The provision for income taxes represented effective tax rates of 37.5% and 36.0% in 1999 and 1998, respectively. YEAR 2000 ISSUE Information technology is a crucial part of the Company's business. The Company recognizes the technological challenges associated with the Year 2000 Issue ("Y2K"). It has established a formal compliance plan to address these challenges and a Y2K Team to carry out this plan. The plan includes several distinct phases: (1) assessment, (2) remediation, (3) testing and (4) implementation. The progress of the work of the Y2K Team is monitored by the Company's senior management and the audit committee of the Company's board of directors. Computer software is used in the title and real estate information segments of the Company's business. The uses of software in the title segment include searching and examining titles, closing transactions, accounting for agent policies and claims. In the real estate information segment, software is used in providing mortgage services, such as flood determinations, appraisals and assignments. Most of this software was developed by the Company in recent years with Y2K issues in mind. The Company has substantially completed its assessment and remediation of this software. All remaining remediation and testing is scheduled to be completed during the second and third quarters of 1999. Implementation is being carried out as remediation is completed, with all implementation expected to be completed in the third quarter of 1999. In addition to its work on internally-developed computer software, the Company has conducted an inventory of its systems worldwide. This inventory includes software and hardware acquired from third parties for use by the Company. The inventory also includes critical non-information technology systems which may house non-compliant, imbedded technology, such as fax machines, photocopiers, telephone facilities and other common devices. Assessment of these systems is on-going, and any necessary remediation is scheduled for completion by the end of the second quarter of 1999. Mission-critical systems have been given high priority. Certain subsidiaries that have been acquired by the Company and still operate with different systems from the Company's have been given high priority under the Company's Y2K plan. The Company expects to complete all phases of Y2K compliance for these subsidiaries during the second quarter of 1999. In addition to addressing the Company's own systems, as described above, the Y2K Team must assess the state of readiness of the systems of other entities with which it does business. These include independent title insurance agents and other business partners, such as county courthouses and lenders, whose condition or operational capability is important to the Company. Failure by these third parties to resolve adequately their Y2K problems could have a material adverse effect on the Company's operations. The Company believes its success in being Y2K compliant will not be conclusively known until the year 2000 is actually reached. Failure by one or more of the Company's own systems could result in lost revenues and additional expenses required to carry out manual processing of transactions. The magnitude of the failure of external forces on the business of the Company cannot be predicted. Failures by the telecommunications industry, banking institutions and others could have far-reaching, materially adverse effects on the Company, the title insurance industry and the entire economy. The Company expects to complete its Y2K program in a timely manner. However, the Company believes that it is not possible to determine with certainty that all Y2K issues have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, the Company cannot accurately predict how many failures related to the -6- Y2K problem will occur or the severity, duration or financial consequences of such failures. The Company has hired an outside Y2K consultant to assist the Company in meeting its goals and in developing contingency plans to define and address the worst-case scenario likely to be faced. The plan is expected to be in place by the end of the second quarter of 1999. The Company has spent approximately $1.3 million from 1997 through the first quarter of 1999 directly related to assessing, remediating and testing its information technology systems. These amounts have been funded from operations. The Company currently estimates that the total cost of its Y2K compliance program will not exceed $3.5 million. A significant portion of the remaining costs are expected to be incurred during the second and third quarters of 1999. This entire section ("Year 2000 Issue") is hereby designated a "Year 2000 Readiness Disclosure", as defined in the Year 2000 Information and Readiness Disclosure Act. 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 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, 1998. -7- PART II Page ---------- Item 1. Legal Proceedings 9 Item 5. Other Information 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 March 31, 1999. -8- 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 On March 15, the Registrant's Board of Directors approved a two-for-one split of the Registrant's Common Stock, $1.00 par value ("Common Stock"), and Class B Common Stock, $1.00 par value, to be effected in the form of a stock dividend. The stock split was contingent on approval of an amendment to the Certificate of Incorporation of the Registrant by its stockholders, increasing the number of authorized shares of Common Stock from 15 million to 30 million. Such amendment was approved by the Registrant's stockholders on April 30, 1999. Accordingly, each stockholder of record of the Registrant at the close of business on May 7, 1999 will receive one additional share for each share owned on that date. The stock dividend will be paid on May 21, 1999. -9- 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) May 12, 1999 - ------------ Date /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -10- 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 EX-4 2 10-Q FOR 3/31/99 EXHIBIT 4 STEWART INFORMATION SERVICES CORPORATION RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS March 31, 1999 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 ashare-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. EX-28.2 3 10-Q FOR 3/31/99 Exhibit 28.2 STEWART INFORMATION SERVICES CORPORATION DETAILS OF INVESTMENTS MARCH 31, 1999 AND DECEMBER 31, 1998
MAR 31 DEC 31 1999 1998 -------- -------- ($000 Omitted) Investments, at market, partially restricted: Short-term investments 60,497 59,446 U. S. Treasury and agency obligations 20,365 24,086 Municipal bonds 133,778 133,533 Mortgage-backed securities 4,145 4,233 Corporate bonds 60,907 59,796 Equity securities 5,427 5,664 -------- -------- TOTAL INVESTMENTS 285,119 286,758 ======== ========
NOTE: The total appears as the sum of three amounts on the balance sheet presented on page 2: (1) short-term investments, (2)`investments - statutory reserve funds' and (3)`investments - other'. EX-27 4 FDS 3/31/99
7 STEWART INFORMATION SERVICES CORPORATION THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 Year DEC-31-1999 MAR-31-1999 224,622 0 0 0 0 0 285,119 47,200 0 0 497,372 172,137 0 0 0 15,547 7,116 0 0 262,412 497,372 227,716 4,907 164 15,091 9,266 0 0 15,367 5,767 9,600 0 0 0 9,600 1.35 1.34 171,763 7,995 1,271 (1,599) (7,293) 172,137 0 Includes short-term investments.
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