-----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, UBmbGDn45sSEieFdz65V2oItOTjUx0DNG+KMcQlAvvSaBgKTOzxyKwVjgFughj67 zTY5ygFm43QdS3UJlSUKiw== 0000950129-99-001060.txt : 19990322 0000950129-99-001060.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950129-99-001060 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 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-K405 SEC ACT: SEC FILE NUMBER: 001-02658 FILM NUMBER: 99569058 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-K405 1 STEWART INFORMATION SERVICES CORP. - 12/31/1998 1 - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 incorporation or organization) (I.R.S. Employer Identification No.) 1980 POST OAK BLVD., HOUSTON, TEXAS 77056 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 625-8100 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1 PAR VALUE 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 5, 1999, 6,589,539 shares of Common Stock, $1 par value, and 525,006 shares of Class B Common Stock, $1 par value, were outstanding. The aggregate market value as of such date of the Common Stock (based upon the closing sales price of the Common Stock as reported by the NYSE on March 5, 1999 of Stewart Information Services Corporation) held by non-affiliates of the Registrant was approximately $224,456,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement (the "Proxy Statement"), relating to the annual meeting of the Registrant's stockholders to be held April 30, 1999, are incorporated by reference in Parts III and IV of this document. - -------------------------------------------------------------------------------- 2 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
PART I ITEM NO. PAGE --- ---- 1. Business ............................................................................... 1 2. Properties ............................................................................. 4 3. Legal Proceedings ...................................................................... 5 4. Submission of Matters to a Vote of Security Holders .................................... 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 6 6. Selected Financial Data ................................................................ 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... 7 7A. Quantitative and Qualitative Disclosures About Market Risk ............................. 10 8. Financial Statements and Supplementary Data ............................................ 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................................................... 11 PART III 10. Directors and Executive Officers of the Registrant ..................................... 12 11. Executive Compensation ................................................................. 12 12. Security Ownership of Certain Beneficial Owners and Management ......................... 12 13. Certain Relationships and Related Transactions ......................................... 12 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 13 Signatures ............................................................................. 14
3 PART I ITEM 1. BUSINESS Stewart's primary business is title insurance. Stewart issues policies through more than 4,200 issuing locations on homes and other real property located in all 50 states, the District of Columbia and several foreign countries. Stewart also sells computer-related services and information, as well as mapping products and geographic information systems, to domestic and foreign governments and private entities. The Company's two segments of business are title and real estate information ("REI"). The segments significantly influence business to each other because of the nature of their operations and their common customers. The segments provide services through a network of offices, including both direct operations and agents, throughout the United States. The operations in the several international markets in which the Company does business are generally insignificant to consolidated results. The financial information related to these segments is discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference. TITLE The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property. Examination and closing. The purpose of a title examination is to ascertain the ownership of the property being transferred, what debts are owed on it and what the title policy coverage will be. This involves searching for and examining documents such as deeds, mortgages, wills, divorce decrees, court judgments, liens, paving assessments and tax records. At the closing or "settlement", the seller executes a deed to the new owner. The buyer signs new mortgage documents. Closing funds are then disbursed to the seller, the prior mortgage company, real estate brokers, the title company and others. The documents are then recorded in the public records. A title policy is generally issued to both the lender and new owner. Title policies. Lenders in the USA generally require title insurance as a condition to making a loan on real estate, including securitized lending. This is to assure lenders of the priority of their lien position. The purchasers of the property want the assurance given in their policy against claims that may arise against their ownership. The face amount of the policy is normally the purchase price or the amount of the related loan. Title insurance is substantially different from other types of insurance. Fire, auto, health and life insurance protect against losses and events in the future. In contrast, title insurance seeks to eliminate most risks through the examination and settlement process. Investments. The Company has established policies and procedures to manage its exposure to changes in the fair value of its investments. These policies include an emphasis on credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending on market conditions. The Company has classified all of its investments as available-for-sale. Losses. Losses on policies occur because of a title defect not discovered during the examination and settlement process. Other reasons for losses include forgeries, misrepresentations, unrecorded construction liens, the failure to pay off existing liens, mishandling of settlement funds, issuance by agents of unauthorized coverages and other legal issues. Some claimants seek damages in excess of policy limits. Such claims are based on various legal theories usually alleging misrepresentation by an issuing office. Although the Company vigorously defends against spurious claims, it has from time to time incurred a loss in excess of policy limits. Experience shows that most claims against policies and claim payments are made in the first six years after the policy has been issued, although claims may be made many years later. By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. -1- 4 Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. For losses under $750,000 each, the Company estimates the aggregate amount that will be paid in future years on title policies issued in the current year. The estimated amount is charged to earnings currently (when the related revenues are recognized). In making the estimates, the Company uses, among other things, moving average ratios of recent actual policy loss payment experience, net of recoveries, to premium revenues. Policy losses in excess of $750,000 each are individually evaluated. A reserve for incurred but not reported major losses is also maintained. Escrow and other losses incurred in office operations are accounted for separately. Amounts shown as the Company's estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. In accordance with industry practice, the amounts have not been discounted to their present values. Factors affecting revenues. Title revenues are closely related to the level of activity in the real estate market and the prices at which real estate sales are made. Real estate sales are directly affected by the availability and cost of money to finance purchases. Other factors include demand by buyers, consumer confidence and family incomes. These factors may override the seasonal nature of the title business. Generally, the third quarter is the most active in terms of real estate sales and the first quarter is the least active. Selected information for the national real estate industry follows (1998 amounts are preliminary):
------------ ------------ ------------ 1998 1997 1996 ------------ ------------ ------------ Housing starts - millions ........................... 1.62 1.48 1.47 Housing resales - millions .......................... 4.78 4.22 4.09 Housing resales - median sales price in $ thousands ......................................... 130.1 124.1 118.1
Customers. The primary sources of title business are attorneys, builders, developers, lenders and real estate brokers. No one customer was responsible for as much as ten percent of Stewart's title revenues in any of the last three years. Titles insured included residential and commercial properties, undeveloped acreage, farms and ranches. Service, location, financial strength, size and related factors affect customer acceptance. Increasing market share is accomplished primarily by providing superior service. The parties to a closing are concerned with personal schedules and the interest and other costs associated with the delays in the settlement. The rates charged to customers are regulated to varying degrees by different states. Financial strength and stability of the title underwriter is an important factor in maintaining and increasing the Company's agency network. Out of the nation's top five title insurers, Stewart earned the highest ratings awarded by the industry's leading rating companies. Stewart received an A" from Demotech, Inc., an A2 from Moodys and an A+ from Lace Financial and Duff & Phelps. Market share. Estimating a title insurer's market share is difficult. Based on unconsolidated statutory net premiums written for 1997 (1998 amounts are not available), Stewart Title Guaranty Company ("Guaranty") is one of the leading individual title insurers in America. Competitors include (names are abbreviated) Chicago Title, Fidelity, First American, Land America and Old Republic. As do most title insurers, Stewart also competes with abstractors, attorneys who issue title opinions and attorney-owned title insurance bar funds. A number of home builders, financial institutions, real estate brokers and others own or control title insurance agents, some of which issue policies underwritten by Guaranty. This "controlled" business also provides competition for Stewart's agents. Offices. The number of locations issuing Stewart policies was 4,249 at December 31, 1998, compared to 3,798 a year earlier and 3,763 two years earlier. Of these totals 3,933, 3,517 and 3,488 were independent agents at December 31, 1998, 1997, and 1996, respectively. -2- 5 Regulations. Title insurance companies are subject to extensive state regulations covering rates, agent licensing, policy forms, trade practices, reserve requirements, investments and the flow of funds between an insurer and its parent or its subsidiaries and any similar related party transaction. Kickbacks and similar practices are prohibited by certain state and federal laws. REAL ESTATE INFORMATION The real estate information segment provides services to the real estate and mortgage industries primarily 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, this segment includes services related to tax-deferred exchanges, surveys, the accounting and operating systems of title agents and government authorities and the construction of title plants. Factors affecting revenues. As in the title segment, REI revenues are also closely related to the level of activity in the real estate market. Customers. The REI segment includes both mortgage services ancillary to the settlement process as well as providing technology to facilitate the electronic preparation and delivery of all types of real estate information. The primary sources of REI business are lenders. Other customers include title offices, real estate brokers, attorneys, municipalities and courthouses. No one customer was responsible for as much as ten percent of Stewart's REI revenues in any of the last three years. The most important factor affecting customer acceptance and market share growth is superior customer service. Similar to the title operations, the real estate information being provided by the companies in this segment are a part of the closing process which is driven by personal schedules and the interest and other costs associated with the delays in the settlement. GENERAL Technology. Stewart's automation products and services are increasing productivity in the title office and speeding the real estate closing process for lenders, real estate professionals and consumers. In the past, an order typically required several individuals to search the title, retrieve and review documents and finally create the actual commitment. Today, one person can receive the order electronically and, on the same screen, view the prior file, examine the index of documents, retrieve and review electronically stored documents, prepare the commitment and deliver the product on a normal subdivision file. Trademarks. Stewart has developed numerous automation products which are crucial to both its title and REI segments. These products automate most facets of the real estate transaction. Among these trademarked products are AIM(R), LandataTitle Plant(TM), RESource(R), RealEC(TM) and Virtual Underwriter(R). Employees. Stewart and its subsidiaries employed approximately 5,638 persons at December 31, 1998. -3- 6 ITEM 2. PROPERTIES The Registrant and its wholly-owned subsidiary, Stewart Title Guaranty Company and its subsidiaries ("Guaranty"), own or lease the following properties: The following table sets forth information about the Registrant's other principal properties:
Location Type Use Size Acquired In - -------------------------- ---------------------- ------------------- --------------- ----------- Houston, Texas Leased office building Executive office of 245,427 sq. ft. (1) the Registrant and Guaranty Houston, Texas Leased office building Office of Guaranty 26,420 sq. ft. (2) Dallas, Texas Leased office building Office of Guaranty 25,117 sq. ft. (3) Los Angeles, California Leased office building Office of Guaranty 22,466 sq. ft. (1) Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (4) San Antonio, Texas Leased office building Office of Guaranty 20,864 sq. ft. (5) San Diego, California Leased office building Office of Guaranty 20,020 sq. ft. (6) Concord, California Leased office building Office of Guaranty 18,916 sq. ft. (4) Denver, Colorado Leased office building Office of Guaranty 15,935 sq. ft. (7) Austin, Texas Leased office building Office of Guaranty 14,278 sq. ft. (7) Colorado Springs, Colorado Leased office building Office of Guaranty 14,000 sq. ft. (7) Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905 San Antonio, Texas Owned office building Office of Guaranty 26,769 sq. ft. 1980 & 1982 Phoenix, Arizona Owned office building Office of Guaranty 24,459 sq. ft. 1981 Tucson, Arizona Owned office building Office of Guaranty 24,000 sq. ft. 1974 Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 1985
- --------------------------- (1) These leases terminate in 2004. (2) This lease terminates in 2002. (3) This lease terminates in 1999. (4) These leases terminate in 2003. (5) This lease terminates in 2005. (6) This lease terminates in 2000. (7) These leases terminate in 2001. The Registrant leases offices at approximately 328 locations. The average term for all such leases is approximately six years. The leases expire from 1999 to 2005. The Registrant believes it will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable property. The aggregate annual rental expense under all leases was approximately $23,131,000. All buildings and equipment owned or leased by the Registrant are considered by the Registrant to be well maintained, adequately insured and generally sufficient for the Registrant's purposes. Substantially all of the Registrant's owned real property above is subject to mortgages. -4- 7 ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -5- 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange (NYSE) under the symbol "STC". The following table sets forth the high and low sales prices of the Common Stock for each fiscal period indicated, as reported by NYSE, and the amount of cash dividends paid per share.
HIGH LOW DIVIDENDS ----- ----- --------- 1998: First quarter ........................................ 32.25 28.50 .07 Second quarter ....................................... 53.88 30.31 .07 Third quarter ........................................ 67.75 43.00 .07 Fourth quarter ....................................... 58.75 45.00 .07 1997: First quarter ........................................ 21.13 19.88 .06 Second quarter ....................................... 21.00 18.75 .06 Third quarter ........................................ 26.44 20.50 .07 Fourth quarter ....................................... 29.25 25.00 .07
The Company has paid regular quarterly cash dividends on its Common Stock since 1972. The Company's Certificate of Incorporation provides that no cash dividends may be paid on the Class B Common Stock. While it is the current intention of the Board of Directors to continue to pay quarterly cash dividends on its Common Stock, the payment of future dividends necessarily will depend on the earnings and financial needs of the Company, as well as applicable legal restrictions. The number of shareholders of record as of December 31, 1998 was 2,379. As of March 17, 1999, the price of one share of the Company's Common Stock was $33.44. -6- 9 ITEM 6. SELECTED FINANCIAL DATA (Ten year summary)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- In millions of dollars Total revenues...................... 968.8 708.9 656.0 534.6 611.1 683.6 540.7 385.5 374.0 315.5 Title segment: Operating revenues............. 899.7 657.3 609.4 496.0 599.5 672.9 530.3 372.3 363.0 303.5 Investment income.............. 18.5 15.9 14.5 13.6 12.4 10.3 10.3 11.1 11.0 10.4 Investment gains (losses)...... 0.2 0.4 0.1 1.0 (0.8) 0.4 0.1 2.1 -- 1.6 Total revenues................. 918.4 673.6 624.0 510.6 611.1 683.6 540.7 385.5 374.0 315.5 Pretax earnings................ 73.2 29.2 22.5 10.8 13.8 37.6 21.2 1.1 0.9 (0.4) REI segment: (1) Revenues....................... 50.4 35.3 32.0 24.0 Pretax earnings................ 3.1 (5.5) 0.4 (0.1) Title Loss provisions............... 39.2 29.8 33.8 29.6 40.2 58.6 54.1 40.7 38.2 33.0 % to title operating revenues.. 4.4 4.5 5.6 6.0 6.7 8.7 10.2 10.9 10.5 10.9 Net earnings (2).................... 47.0 15.3 14.4 7.0 9.7 23.7 14.6 1.7 0.2 0.1 Cash flow from operations........... 86.5 36.0 38.3 20.6 27.7 54.3 36.3 18.6 11.0 10.2 Total assets........................ 498.5 417.7 383.4 351.4 325.2 313.9 251.9 219.1 201.3 197.8 Long-term debt...................... 8.9 11.4 7.9 7.3 2.5 3.0 4.2 6.8 6.6 5.3 Stockholders' equity (3)............ 260.4 209.5 191.0 174.9 156.4 156.2 128.6 114.8 113.9 115.0 Per share data (4) Average shares-diluted (in thousands)................. 7,077 6,897 6,766 6,348 6,246 6,185 6,119 6,096 6,096 6,096 Net earnings-basic (2).............. 6.73 2.24 2.15 1.11 1.56 3.87 2.40 0.27 0.03 0.01 Net earnings-diluted (2)............ 6.65 2.22 2.13 1.10 1.55 3.83 2.39 0.27 0.03 0.01 Cash dividends...................... 0.28 0.26 0.24 0.21 0.20 0.17 0.15 0.13 0.23 0.33 Stockholders' equity (3)............ 36.86 30.34 28.33 27.36 25.17 25.37 21.10 18.84 18.69 18.87 Market price High........................... 67.75 29.25 22.63 22.50 21.42 20.33 14.50 9.67 12.33 14.00 Low............................ 28.50 18.75 19.63 15.13 14.38 12.50 8.67 5.17 4.50 11.17 Year end....................... 58.00 29.00 20.75 21.50 15.38 20.00 13.67 9.17 5.25 11.33
(1) Prior to 1995, segment operations for real estate information services were not reported separately from title operations and were less significant. (2) Includes the following items, after providing for income taxes: 1997 - a writeoff of goodwill of $1.2 million, or $.18 per share. 1992 - a reserve established for title losses over ten years old of $2.2 million, or $.36 per share. 1991 - a fresh start tax credit of $1.3 million, or $.21 per share. (3) Includes unrealized gains and losses upon adoption of FAS 115 in 1993. (4) Restated for one-for-two stock split in April 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A comparison of the results of operations of the Company for 1998 with 1997 and 1997 with 1996 follows. 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 7.81% in 1996 to 7.60% in 1997 and to 6.94% in 1998. In the early months of 1997, rates rose but then began a fairly steady decline in May 1997 and fell each month that followed. In 1998, rates rose slightly above 7% during the first half of the year, but stayed just below 7% for the rest of the year. -7- 10 Operating in these mortgage interest rate environments and a strong general economy, real estate activity began to increase in late 1997. Existing home sales moved to record levels in the last quarter of 1997. Strong activity in home sales continued throughout 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. TITLE REVENUES. The Company's revenues from premiums, fees and other revenues increased 36.9% in 1998 over 1997 and 7.9% in 1997 over 1996. The number of title orders opened and closed by the Company and the average revenue per order closed follow (agent operations and certain other income have been excluded).
------ ------ ------ 1998 1997 1996 ------ ------ ------ Number of orders opened (000s)....................... 510 331 319 Number of orders closed (000s)....................... 368 247 239 Average revenue per order closed..................... $ 960 $ 979 $ 938 ------ ------ ------
Total closings increased 48.9% in 1998 and 3.2% in 1997. The average revenue per closing decreased 1.9% in 1998 and increased 4.4% in 1997. The average rate was increased each year by higher home prices, offset in 1998 by a large number of refinancings with their lower premiums. A 3% reduction in Texas title premiums became effective August 1, 1998. However, the Company is experiencing new home equity business in Texas that did not exist before 1998. There were no other major revenue rate changes in 1998 and 1997. TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated title revenues for the last three years were:
------------------------------------------------------------------------- Amounts ($ millions) Percentages 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Texas................................ 162 116 111 18 18 18 California........................... 156 123 119 17 19 20 Florida.............................. 67 47 40 8 7 7 New York............................. 67 51 50 7 8 8 All Others........................... 448 320 289 50 48 47 --- --- --- --- --- --- 900 657 609 100 100 100 === === === === === ===
REI REVENUES. Real estate information revenues were $50.4 million in 1998, $35.3 million in 1997 and $32.0 million in 1996. The increases in 1998 and 1997 were primarily due to a significant number of new businesses started and additional income earned from existing operations. The Company terminated an unprofitable REI business in late 1996 which reduced the revenue increase in 1997 over 1996. INVESTMENTS. Investment income increased 16.2% in 1998 and 10.2% in 1997 primarily because of increases in average balances invested and higher market yields. Investment gains in 1998, 1997 and 1996 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. Premiums earned from agents were $545.1 million in 1998, $413.0 million in 1997 and $383.7 million in 1996. The amounts retained by agents, as a percentage of premiums, were 80.4%, 81.0% and 81.3%, in the years 1998, 1997 and 1996, respectively. Amounts retained by title 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 AND OTHER EXPENSES. Employee costs for the combined segments of businesses increased 33.2% in 1998 and 10.2% in 1997. The number of persons employed by the Company at December 31, 1998, 1997 and 1996 was 5,638, 4,569, and 4,111, respectively. The increase in staff in 1998 and 1997 was primarily the result of increased title and REI volume and the expansion of the Company's automation and national marketing operations. Through automating operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. -8- 11 Other operating expenses increased 24.8% in 1998 and 11.3% in 1997. The overall increase for each year was caused primarily by changes in transaction volume. Expenses that increased in 1998 were premium taxes, REI expenses, business promotion, rent and supplies. Expenses that increased in 1997 were rent, premium taxes, business promotion and delivery costs. Other operating expenses also include policy forms, title plant expenses, telephone and travel. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Provisions for title losses, as a percentage of title premiums, fees and other revenues, were 4.4%, 4.5% and 5.6% in 1998, 1997 and 1996, respectively. The continued improvement in industry trends in claims and the Company's improved experience in claims have led to lower loss ratios. An increase in refinancing transactions, which results in lower loss exposure, also reduced loss ratios. Such transactions were at record levels in 1998. The Company's labor and certain other operating costs are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues are also increased. Premiums are determined in part by the insured values of the transactions handled by the Company. NONRECURRING CHARGE. A subsidiary in the REI segment was sold in early 1998. A pretax writeoff of $1.9 million of goodwill in the subsidiary was recorded in the fourth quarter of 1997. The subsidiary incurred after-tax operating losses of $1.0 million in 1997. INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 38.4%, 35.4% and 36.9% in 1998, 1997 and 1996, respectively. The 1998 and 1996 effective tax rates were higher primarily because nontaxable income from municipal bonds was significantly less in relation to pretax profits. LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $86.5 million, $36.0 million and $38.3 million in 1998, 1997 and 1996, respectively. Internally generated cash flow has been the primary source of funds for additions to property and equipment, expanding operations, dividends to shareholders and other requirements. This source may be supplemented by bank borrowings. A substantial majority of consolidated cash and investments is held by Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers between Guaranty and its subsidiaries and the Company are subject to certain legal restrictions. See Notes 4 and 5 to the financial statements. The liquidity of the Company itself, excluding Guaranty and its subsidiaries, is comprised of cash and investments aggregating $11.5 million and short-term liabilities of $1.2 million at December 31, 1998. The Company knows of no commitments or uncertainties which are likely to materially affect the ability of the Company and its subsidiaries to fund cash needs. The Company's capital resources, represented primarily by long-term debt of $8.9 million and stockholders' equity of $260.4 million at December 31, 1998, are considered adequate. THE 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 ("Y2K") Issue. 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 quarter of 1999. Implementation is being carried out as remediation is completed, with the implementation expected to be completed early in the third quarter of 1999. -9- 12 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, embedded technology, such as fax machines, photocopiers, telephone facilities and other common devices. Assessment of these systems is ongoing and any necessary remediation is scheduled for completion by 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 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 second quarter of 1999. The Company has spent approximately $0.7 million during 1997 and 1998 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 $4.0 million. A significant portion of the remaining costs are expected to be incurred during the first and second 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. FORWARD LOOKING STATEMENTS. All statements 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The discussion below about the Company's risk management strategies includes forward-looking statements that are subject to risk and uncertainties. Management's projections of hypothetical net losses in fair value of the Company's market rate sensitive instruments should certain potential changes in market rates occur is presented below. While the Company believes that the potential market rate changes are reasonably possible, actual results may differ. The Company's only material market risk in investments in financial instruments is in its debt securities portfolio. The Company invests primarily in marketable municipal, US government, corporate and mortgage-backed debt securities. The Company does not invest in financial instruments of a hedging or derivative nature. -10- 13 The Company has established policies and procedures to manage its exposure to changes in the fair value of its investments. These policies include an emphasis upon credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending upon market conditions. The Company has classified all of its investments as available-for-sale. The fair value of the Company's investments in debt securities at December 31, 1998 was $221.6 million. Debt securities at December 31, 1998 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
Amortized Fair costs values ------- ------- ($000 Omitted) In one year or less....................................................... 5,215 5,266 After one year through five years......................................... 46,652 48,317 After five years through ten years........................................ 106,831 112,033 After ten years........................................................... 50,082 51,799 Mortgage-backed securities................................................ 4,131 4,233 ------- ------- 212,911 221,648 ======= =======
The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized. The mortgage-backed securities are insured by GNMA and FNMA. Based on the Company's debt securities portfolio and interest rates at December 31, 1998, a 100 basis point increase in interest rates would result in a decrease of approximately $11.5 million or 5.2% in the fair value of the portfolio. Changes in interest rates may affect the fair value of the debt securities portfolio and may result in unrealized gains or losses. Gains or losses would only be realized upon the sale of the investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required to be provided in this item is included in the Consolidated Financial Statements of the Company, including the Notes thereto, attached hereto as pages F-2 to F-16, and such information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -11- 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the directors of the Company will be included in the proxy statement for the 1999 Annual Meeting of Stockholders (the "Proxy Statement") to be filed within 120 days after December 31, 1998, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will be included in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information, if any, regarding beneficial ownership of the Common Stock will be included in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions will be included in the Proxy Statement and is incorporated herein by reference. -12- 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules The financial statements and financial statement schedules filed as part of this report are listed in the "Index to Consolidated Financial Statements" on Page F-1 hereof. All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1998. (c) Exhibits 3.1 - Certificate of Incorporation of the Registrant, as amended April 30, 1993 (incorporated by reference herein from Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 3.2 - By-Laws of the Registrant, as amended September 1, 1998 (incorporated by reference herein from Exhibit 3.2 of Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 4 - Rights of Common and Class B Common Stockholders (incorporated by reference to Exhibits 3.1 and 3.2 hereto) * 10.1 - Summary of agreements as to payment of bonuses to certain executive officers * 10.2 - Deferred Compensation Agreements dated March 10, 1986, amended July 24, 1990 and October 30, 1992, between the Registrant and certain executive officers (incorporated by reference herein from Exhibit 10.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 21. - Subsidiaries of the Registrant 23. - Consents of Independent Certified Public Accountants, including consents to incorporation by reference of their reports into previously filed Securities Act registration statements 27. - Financial Data Schedule *Indicates a management contract or compensation plan. -13- 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities 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) By: Carloss Morris ------------------------------------------- Carloss Morris, Co-Chief Executive Officer and Chairman of the Board of Directors By: Stewart Morris ------------------------------------------- Stewart Morris, Co-Chief Executive Officer, President and Director By: Max Crisp ------------------------------------------- Max Crisp, Vice President-Finance, Secretary, Treasurer, Director and Principal Financial and Accounting Officer Dated: March 17, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Max Crisp Director March 17, 1999 - ------------------------------ -------------- (Max Crisp) E. Douglas Hodo Director March 17, 1999 - ------------------------------ -------------- (E. Douglas Hodo) C. M. Hudspeth Director March 17, 1999 - ------------------------------ -------------- (C. M. Hudspeth) Carloss Morris Director March 17, 1999 - ------------------------------ -------------- (Carloss Morris) Stewart Morris Director March 17, 1999 - ------------------------------ -------------- (Stewart Morris) -14- 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Stewart Information Services Corporation and Subsidiaries Consolidated Financial Statements: Independent Auditors' Report F-2 Consolidated Statements of Earnings and Retained Earnings for the years ended December 31, 1998, 1997 and 1996 F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-5 Notes to Consolidated Financial Statements F-6 Reports of Independent Auditors F-17 Financial Statement Schedules: Schedule II - Financial Information of the Registrant (Parent Company) S-1 Schedule V - Valuation and Qualifying Accounts S-5
F-1 18 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Stewart Information Services Corporation We have audited the consolidated financial statements of Stewart Information Services Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stewart Information Services Corporation and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Houston, Texas February 10, 1999 F-2 19 CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
------- ------- ------- Years ended December 31 1998 1997 1996 ------- ------- ------- ($000 Omitted) REVENUES Title premiums, fees and other revenues........ 899,673 657,298 609,408 Real estate information services............... 50,372 35,320 32,030 Investment income.............................. 18,515 15,929 14,451 Investment gains - net ........................ 201 363 129 ------- ------- ------- 968,761 708,910 656,018 EXPENSES Amounts retained by agents..................... 438,338 334,653 311,937 Employee costs................................. 250,966 188,385 170,944 Other operating expenses....................... 142,826 114,422 102,768 Title losses and related claims................ 39,226 29,794 33,830 Depreciation and amortization.................. 14,584 12,115 11,007 Interest....................................... 1,424 1,343 1,140 Minority interests............................. 5,070 2,614 1,514 Nonrecurring charge............................ -- 1,905 -- ------- ------- ------- 892,434 685,231 633,140 Earnings before taxes............................. 76,327 23,679 22,878 Income taxes...................................... 29,289 8,391 8,441 ------- ------- ------- NET EARNINGS...................................... 47,038 15,288 14,437 Retained earnings at beginning of year............ 145,140 131,496 118,547 Cash dividends on Common Stock ($.28, $.26 and $.24 per share)............................ (1,815) (1,644) (1,488) ------- ------- ------- Retained earnings at end of year.................. 190,363 145,140 131,496 ======= ======= ======= Average number of shares outstanding - assuming dilution (000 omitted)................ 7,077 6,897 6,766 Earnings per share - basic........................ 6.73 2.24 2.15 EARNINGS PER SHARE - DILUTED...................... 6.65 2.22 2.13 ======= ======= ======= Comprehensive earnings: Net earnings...................................... 47,038 15,288 14,437 Changes in unrealized investment gains, net of taxes of $858, $1,409 and ($1,104)...... 1,593 2,616 (2,050) ------- ------- ------- Comprehensive earnings............................ 48,631 17,904 12,387 ======= ======= =======
See notes to consolidated financial statements F-3 20 CONSOLIDATED BALANCE SHEETS
------- ------- December 31 1998 1997 ------- ------- ($000 Omitted) ASSETS Cash and cash equivalents............................................ 44,883 30,391 Short-term investments............................................... 59,446 35,761 Investments in debt and equity securities, at market: Statutory reserve funds.......................................... 164,554 138,462 Other............................................................ 62,758 71,044 ------- ------- 227,312 209,506 Receivables: Notes............................................................ 8,137 7,329 Premiums from agents............................................. 16,051 10,315 Other............................................................ 27,347 19,776 Less allowance for uncollectible amounts......................... (4,803) (5,552) ------- ------- 46,732 31,868 Property and equipment, at cost: Land............................................................. 2,335 2,266 Buildings........................................................ 6,476 6,372 Furniture and equipment.......................................... 97,111 80,804 Less accumulated depreciation and amortization................... (69,530) (59,027) ------- ------- 36,392 30,415 Title plants, at cost................................................ 23,608 21,778 Real estate, at lower of cost or net realizable value................ 2,202 1,583 Investments in investees, on an equity basis......................... 7,368 7,231 Goodwill, less accumulated amortization of $6,995 and $5,840............................................................ 23,615 18,427 Deferred income taxes................................................ 10,633 15,632 Other assets......................................................... 16,290 15,099 ------- ------- 498,481 417,691 LIABILITIES Notes payable, including $8,894 and $11,442 long-term portion........................................................... 16,194 19,087 Accounts payable and accrued liabilities............................. 42,615 26,553 Estimated title losses............................................... 171,763 156,791 Income taxes......................................................... 1,963 1,364 Minority interests................................................... 5,503 4,392 Contingent liabilities and commitments Stockholders' equity Common - $1 par, authorized 15,000,000, issued and outstanding 6,539,965 and 6,381,046.............................. 6,540 6,381 Class B Common - $1 par, authorized 1,500,000, issued and outstanding 525,006.............................................. 525 525 Additional paid-in capital........................................... 56,886 52,922 Retained earnings.................................................... 190,363 145,140 Accumulated other comprehensive earnings ............................ 6,129 4,536 ------- ------- Total stockholders' equity ($36.86 and $30.34 per share)......... 260,443 209,504 ------- ------- 498,481 417,691 ======= =======
See notes to consolidated financial statements. F-4 21 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1998 1997 1996 -------- ------- ------- ($000 Omitted) Cash provided by operating activities (Note)..................... 86,467 35,959 38,349 Investing activities: Purchases of property and equipment and title plants-net................................................. (20,473) (13,209) (12,670) Proceeds from investments matured and sold ................... 65,770 40,133 47,724 Purchases of investments ..................................... (104,017) (48,554) (69,213) Increases in notes receivable................................. (2,316) (2,644) (1,340) Collections on notes receivable............................... 2,141 1,006 2,833 Cash paid for the acquisition of subsidiaries-net............. (5,886) (3,592) (493) -------- ------- ------- Cash used by investing activities................................ (64,781) (26,860) (33,159) Financing activities: Dividends paid................................................ (1,815) (1,644) (1,488) Distribution to minority interests............................ (4,031) (2,131) (1,599) Proceeds from issuance of stock............................... 1,543 135 11 Proceeds of notes payable..................................... 9,150 10,688 4,366 Payments on notes payable..................................... (12,041) (4,240) (4,694) -------- ------- ------- Cash (used) provided by financing activities..................... (7,194) 2,808 (3,404) -------- ------- ------- Increase in cash and cash equivalents............................ 14,492 11,907 1,786 ======== ======= ======= Note: Reconciliation of net earnings to the above amounts Net earnings.................................................. 47,038 15,288 14,437 Add (deduct): Depreciation and amortization................................. 14,584 12,115 11,007 Provisions for title losses in excess of payments............. 14,185 6,460 12,019 Provision for uncollectible amounts-net....................... (749) (1,118) 171 (Increase) decrease in accounts receivable-net................ (12,473) 2,660 (2,419) Increase in accounts payable and accrued liabilities-net............................................ 16,577 1,419 4,195 Provision (benefit) for deferred income taxes................. 4,142 (1,886) 596 Increase (decrease) in income taxes payable................... 599 945 (1,184) Minority interest expense..................................... 5,070 2,614 1,514 Equity in net earnings of investees........................... (1,477) (1,964) (980) Realized investment gains-net................................. (201) (363) (129) Stock bonuses................................................. 577 409 328 Increase in other assets...................................... (1,952) (2,963) (1,151) Nonrecurring charge........................................... -- 1,905 -- Other-net..................................................... 547 438 (55) -------- ------- ------- Cash provided by operating activities 86,467 35,959 38,349 ======== ======= ======= Supplemental information: Income taxes paid......................................... 26,511 7,636 9,004 Interest paid............................................. 1,478 1,222 1,092
See notes to consolidated financial statements. F-5 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Three years ended December 31, 1998) NOTE 1 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The accompanying financial statements were prepared by management which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles, including management's best judgments and estimates, with due consideration given to materiality. Actual results could differ from estimates. B. RECLASSIFICATION. Certain prior year amounts in the consolidated financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. C. CONSOLIDATION. Consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. Unconsolidated investees, owned 20% through 50%, and over which the Company exercises significant influence, are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated, and provision is made for minority interests. D. STATUTORY ACCOUNTING. The accounts of Stewart Title Guaranty Company (Guaranty) and other title insurance underwriters owned by the Company are maintained on a statutory basis, in accordance with practices required or permitted by regulatory authorities. The statutory accounts are restated in consolidation to conform to generally accepted accounting principles. In restating to generally accepted accounting principles, the amounts for statutory premium reserve and reserve for reported title losses are eliminated and, in substitution, amounts are established for estimated title losses (see below). The net effect, after providing for deferred income taxes, is included in consolidated retained earnings. In calculating the amount owed on federal income tax returns, the statutory premium reserve and reserve for reported title losses must be discounted to their present values. E. TITLE PREMIUMS AND FEES. Revenues from services rendered in closing and insuring titles are considered earned at the time of the closing of the related real estate transactions. F. TITLE LOSSES AND RELATED CLAIMS. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. For losses under $750,000 each, the Company estimates the aggregate amount that will be paid in future years on title policies issued in the current year. The estimated amount is charged to earnings currently (when the related revenues are recognized). In making the estimates, the Company uses, among other things, moving average ratios of recent actual policy loss payment experience, net of recoveries, to premium revenues. Policy losses in excess of $750,000 each are individually evaluated. A reserve for incurred but not reported major losses is also maintained. Escrow and other losses incurred in office operations are accounted for separately. Amounts shown as the Company's estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. In accordance with industry practice, the amounts have not been discounted to their present values. G. INCOME TAXES. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the tax bases and the book carrying values for certain assets and liabilities. Valuation allowances are provided as may be appropriate. Enacted tax rates are used in calculating amounts. H. CASH EQUIVALENTS. Cash equivalents are highly liquid investments that are convertible to cash or mature on a daily basis as part of the Company's management of day-to-day operating cash. I. INVESTMENTS. The Company has classified all of its investments as available-for-sale. Net unrealized gains or losses on securities, net of applicable taxes, are included in stockholders' equity. Any permanent declines in fair values of securities are charged to earnings. F-6 23 J. PROPERTY AND EQUIPMENT. Depreciation is computed principally using the straight-line method at the following rates: buildings - 30 to 40 years and furniture and equipment - 3 to 10 years. Maintenance and repairs are expensed as incurred while improvements are capitalized. Gains and losses are recognized at disposal. K. TITLE PLANTS. Title plants include compilations of a county's official land records, prior examination files, copies of prior title policies, maps and related materials which are geographically indexed to a specific property. The costs of acquiring existing title plants and creating new ones, prior to the time such plants are placed in operation, are capitalized. Such costs are not amortized because there is no indication of any loss of value. The costs of maintaining and operating title plants are expensed as incurred. Gains and losses on sales of copies of title plants or interests in title plants are recognized at the time of sale. L. GOODWILL. Goodwill is the excess of the purchase price over the fair value of net assets of subsidiaries acquired and is amortized by charges to earnings over 10 to 40 years. M. LONG-LIVED ASSETS. The Company continuously reviews the carrying value of its title plants, goodwill and other long-lived assets for possible impairment. Where appropriate, the book amounts are reduced to fair market values. N. FAIR VALUES. The fair values of financial instruments, including cash, cash equivalents, notes receivable, notes payable, accounts payable and commitments, are determined by reference to various market data and other valuation techniques, as appropriate. The fair values of these financial instruments approximate their carrying values. Investments in debt and equity securities are carried at their fair values. O. ESCROW FUNDS. Cash held in escrow for customers is excluded from the balance sheets. P. COMPREHENSIVE INCOME. As of January 1, 1998, the Company adopted FAS 130 "Reporting Comprehensive Income". The Company's comprehensive income includes net earnings and all non-owner related changes to stockholders' equity, which is primarily unrealized gains on investments. Q. DERIVATIVES AND HEDGING. The Company does not invest in hedging or derivative instruments nor does it intend to do so in the future. Accordingly, FAS 133 "Accounting for Derivative Instruments and Hedging Activities", which becomes effective January 1, 1999, will have no impact on the consolidated financial statements. NOTE 2 NONRECURRING CHARGE. During the fourth quarter of 1997, the Company recorded a pretax charge of $1,905,000 representing the writeoff of goodwill in a subsidiary located in England that was sold in early 1998. This subsidiary was included in the REI segment of the Company's operations until its sale. NOTE 3 INCOME TAXES. The following reconciles federal income taxes computed at the statutory rate with income taxes as reported.
1998 1997 1996 ------ ----- ----- ($000 Omitted) Expected income taxes at 35%..................... 26,714 8,288 8,007 State income taxes............................... 2,932 537 908 Tax effect of permanent differences: Tax-exempt interest.......................... (1,779) (1,640) (1,407) Nondeductible items.......................... 661 558 465 Equity income................................ (517) (687) (343) Minority interests........................... 1,775 915 530 Other - net.................................. (497) 420 281 ------ ----- ----- Income taxes.................................... 29,289 8,391 8,441 ====== ===== ===== Effective income tax rate (%).................... 38.4 35.4 36.9 ====== ===== =====
F-7 24 Deferred tax assets and liabilities at December 31, 1998 and 1997 were as follows:
1998 1997 ------ ------ ($000 Omitted) Deferred tax assets: Book over tax title loss provisions....................... 10,389 15,830 Accruals not currently deductible......................... 1,035 302 Net operating losses...................................... 972 810 Allowance for bad debts................................... 777 1,269 Book over tax depreciation................................ 898 359 Writeoff of goodwill...................................... -- 667 Other..................................................... 2,103 1,023 ------ ------ 16,174 20,260 Less valuation allowance.................................. (1,008) (805) ------ ------ 15,166 19,455 Deferred tax liabilities: Unrealized gains on investments........................... (3,301) (2,443) Investments in partnerships............................... (835) (985) Other..................................................... (397) (395) ------ ------ (4,533) (3,823) ------ ------ Net deferred tax assets...................................... 10,633 15,632 ====== ======
The Company's valuation allowance relates to portions of certain subsidiary operating loss carryforwards and other deferred tax assets. Management believes future earnings will be sufficient to permit the Company to realize net deferred tax assets. There was a deferred tax expense of $4,142,000 in 1998, a deferred tax benefit of $1,886,000 in 1997 and a deferred tax expense of $596,000 in 1996. NOTE 4 RESTRICTIONS ON CASH AND INVESTMENTS. The statutory reserve funds included in the accompanying financial statements are maintained to comply with legal requirements for statutory premium reserves and state deposits. These funds are not available for any other purpose. A substantial majority of investments and cash at each year end was held by the Company's title insurer subsidiaries. Generally, the types of investments a title insurer can make are subject to legal restrictions. Furthermore, the transfer of funds by a title insurer to its parent or subsidiary operations, as well `as other related party transactions, are restricted by law and generally require the approval of state insurance authorities. NOTE 5 DIVIDEND RESTRICTIONS. Substantially all of the consolidated retained earnings at each year end was represented by the retained earnings of Guaranty, which owns directly or indirectly substantially all of the subsidiaries included in the consolidation. Guaranty cannot pay a dividend in excess of certain limits without the approval of the Texas Insurance Commissioner. The maximum dividend which could have been paid without such approval in 1998 was $29,036,000. Guaranty paid dividends significantly less than maximum legal limits in 1998, 1997 and 1996. Dividends from Guaranty were also voluntarily restricted primarily to maintain statutory surplus and liquidity at competitive levels. The ability of a title insurer to pay claims can significantly affect the decision of lenders and other customers when buying a policy from a particular insurer. F-8 25 NOTE 6 INVESTMENTS. The amortized costs and market values of investments in debt and equity securities at December 31 follow:
1998 1997 -------------------------- -------------------------- Amortized Market Amortized Market costs values costs values --------- ------ --------- ------ ($000 Omitted) Debt securities: Municipal......................... 128,745 133,533 106,645 110,627 Mortgage-backed................... 4,131 4,233 26,466 27,085 US Government..................... 23,325 24,086 24,344 24,867 Corporate and utilities........... 56,710 59,796 41,028 42,718 Equity securities................. 4,971 5,664 4,044 4,209 ------- ------- ------- ------- 217,882 227,312 202,527 209,506 ======= ======= ======= =======
Gross unrealized gains and losses at December 31 were:
1998 1997 ------------------------- ------------------------- Gains Losses Gains Losses ----- ------ ----- ------ ($000 Omitted) Debt securities: Municipal........................ 5,006 218 4,013 31 Mortgage-backed.................. 103 1 1,433 814 US Government.................... 789 28 636 113 Corporate and utilities.......... 3,182 96 1,709 19 Equity securities................ 749 56 165 -- ----- --- ----- --- 9,829 399 7,956 977 ===== === ===== ===
Debt securities at December 31, 1998 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
Amortized Market costs values --------- ------- ($000 Omitted) In one year or less.............................................. 5,215 5,266 After one year through five years................................ 46,652 48,317 After five years through ten years............................... 106,831 112,033 After ten years.................................................. 50,082 51,799 Mortgage-backed securities....................................... 4,131 4,233 ------- ------- 212,911 221,648 ======= =======
The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized. The mortgage-backed securities are insured by GNMA and FNMA. F-9 26 NOTE 7 INVESTMENT INCOME. Income from investments and net realized gains and losses from sales of investments for the three years follow:
1998 1997 1996 ------ ------ ------ ($000 Omitted) Income: Debt securities........................................... 12,143 11,938 11,376 Short-term investments, cash equivalents and other............................................... 6,372 3,991 3,075 ------ ------ ------ 18,515 15,929 14,451 ====== ====== ====== Realized gains and losses: Gains...................................................... 1,923 571 632 Losses..................................................... (1,722) (208) (503) ------ ------ ------ 201 363 129 ====== ====== ======
The sales of securities resulted in proceeds of $54,368,000 in 1998, $30,870,000 in 1997 and $33,191,000 in 1996. Expenses assignable to investment income were insignificant. There were no significant investments at December 31, 1998 that did not produce income during the year. NOTE 8 NOTES PAYABLE.
1998 1997 ------ ------ ($000 Omitted) Banks Primarily unsecured, 5.2% to 8.5%, varying payments............. 13,174 17,384 Other than banks................................................... 3,020 1,703 ------ ------ 16,194 19,087 ====== ======
The above notes are due $7,300,000 in 1999, $3,114,000 in 2000, $3,781,000 in 2001, $520,000 in 2002, $129,000 in 2003 and $1,350,000 subsequent to 2003. F-10 27 NOTE 9 ESTIMATED TITLE LOSSES. Provisions accrued, payments made and liability balances for the three years follow:
1998 1997 1996 ------- ------- ------- ($000 Omitted) Balances at January 1................................ 156,791 150,331 138,312 Provisions........................................ 39,226 29,794 33,830 Payments.......................................... (25,041) (23,334) (21,231) Reserve balance acquired.......................... 787 -- -- Decrease in salvage............................... -- -- (580) ------- ------- ------- Balances at December 31........................... 171,763 156,791 150,331 ======= ======= =======
Provisions include amounts related to the current year of approximately $36,327,000, $27,188,000 and $32,863,000 for 1998, 1997 and 1996, respectively. Payments related to the current year, including escrow and other loss payments, were approximately $5,977,000, $5,991,000 and $6,201,000 for 1998, 1997 and 1996, respectively. The above current year provision totals include provisions made for claims which are based on historical ratios of losses-to-premium revenues. See Note 1(F) for the principles followed in accounting for title losses and related claims. NOTE 10 COMMON STOCK AND CLASS B COMMON STOCK. Holders of Common and Class B Common Stock have the same rights, except no cash dividends may be paid on Class B Common Stock. The two classes of stock vote separately when electing directors and on any amendment to the Company's certificate of incorporation that affects the two classes unequally. A provision of the by-laws requires an affirmative vote of at least two-thirds of the directors to elect officers or to approve any proposal which may come before the directors. This provision cannot be changed without a majority vote of each class of stock. Holders of Class B Common Stock may, with no cumulative voting rights, elect four directors if 525,000 or more shares of Class B Common Stock are outstanding; three directors if between 300,000 and 525,000 shares are outstanding; and none if less than 300,000 shares of Class B Common Stock are outstanding. Holders of Common Stock, with cumulative voting rights, elect the balance of the nine directors. Class B Common Stock may, at any time, be converted by its shareholders into Common Stock on a share-for-share basis, but all of the holders of Class B Common Stock have agreed among themselves not to convert their stock prior to January 2005. 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. At December 31, 1998 and 1997, there were 72,910 shares (cost $233,000) of Common Stock held by a subsidiary of the Company. These shares are considered retired but may be issued from time to time in lieu of new shares. F-11 28 NOTE 11 CHANGES IN COMMON STOCK. Changes in stock and additional paid-in capital for the years ended December 31, 1998, 1997 and 1996 were as follows:
Class B Additional Common Common paid-in Stock Stock capital ----- ----- ------ ($000 Omitted) Balances at December 31, 1995........................ 5,865 525 45,945 Acquisitions...................................... 335 -- 4,362 Stock bonuses and other........................... 15 -- 313 Exercise of stock options......................... 1 -- 10 Foreign currency translation...................... -- -- 203 ----- --- ------ Balances at December 31, 1996........................ 6,216 525 50,833 Acquisitions...................................... 137 -- 1,634 Stock bonuses and other........................... 19 -- 390 Exercise of stock options......................... 9 -- 126 Foreign currency translation...................... -- -- (61) ----- --- ------ Balances at December 31, 1997........................ 6,381 525 52,922 Acquisitions...................................... 41 -- 1,659 Stock bonuses and other........................... 17 -- 560 Exercise of stock options......................... 101 -- 1,442 Tax benefit on stock options exercised ........... -- -- 828 Foreign currency translation...................... -- -- 51 Treasury stock.................................... -- -- (576) ----- --- ------ Balances at December 31, 1998........................ 6,540 525 56,886 ===== === ======
NOTE 12 STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years ended on those dates, follows:
Exercise Shares prices(1) ------ --------- ($) December 31, 1995............................................... 158,400 12.57 Granted...................................................... 37,900 21.09 Exercised.................................................... (1,200) 9.17 -------- ----- December 31, 1996............................................... 195,100 14.25 Granted...................................................... 38,400 19.85 Exercised.................................................... (8,500) 15.77 Forfeited.................................................... (6,900) 13.58 -------- ----- December 31, 1997............................................... 218,100 15.20 Granted...................................................... 45,300 37.67 Exercised.................................................... (101,400) 15.21 Forfeited.................................................... (5,200) 15.82 -------- ----- December 31, 1998............................................... 156,800 21.67 ======== =====
(1) Weighted average F-12 29 At December 31, 1998, 1997 and 1996 there were 140,350, 186,838 and 179,049 options, respectively, exercisable. The weighted-average fair values of options granted during the years 1998, 1997 and 1996 were $14.35, $6.79 and $6.73, respectively. The following summarizes information about fixed stock options outstanding at December 31, 1998:
-------------------------------------------------------- Range of exercise prices($) Total 9.17 to 19.50 to 37.56 to 9.17 to 15.38 21.50 37.88 37.88 ------- -------- -------- ------- Options outstanding: Shares.................................. 46,400 68,100 42,300 156,800 Remaining contractual life-years(1)..... 3.0 6.5 8.0 5.9 Exercise price(1)....................... 9.36 20.12 37.65 21.67 Options exercisable: Shares.................................. 46,400 51,650 42,300 140,350 Exercise price(1)....................... 9.36 20.32 37.65 21.92 ------ ------ ------ -------
(1) Weighted average The Company applies APB 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Under FAS 123, compensation cost is recognized for the fair value of the employees' purchase rights, which is estimated using the Black-Scholes model. The Company assumed a dividend yield of 0.7%, an expected life of five to ten years for each option, expected volatility of 22.2% and risk-free interest rates between 5.0% and 6.3% for the years 1998, 1997 and 1996. Had compensation cost for the Company's plans been determined consistent with FAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------ ------ ------ ($000 Omitted) Net earnings: As reported......................................... 47,038 15,288 14,437 Pro forma........................................... 46,615 15,119 14,271 Earnings per share: Net earnings-basic.................................. 6.73 2.24 2.15 Net earnings-assuming dilution...................... 6.65 2.22 2.13 Pro forma-assuming dilution......................... 6.59 2.19 2.11
NOTE 13 EARNINGS PER SHARE. The Company follows FAS 128 "Earnings per Share" which became effective for financial statements issued after December 15, 1997. All prior period earnings per share amounts have been restated to conform to the provisions of the Statement. 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. To calculate diluted earnings per share, the number of shares determined above was increased by assuming the issuance of all dilutive shares during the same reporting period. The treasury stock method was used in calculating the additional number of shares. The only potential 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 91,000 in 1998, 68,000 in 1997 and 59,000 in 1996. F-13 30 NOTE 14 LEASES. The Company's expense for leased office space was $23,131,000 in 1998, $20,520,000 in 1997 and $18,586,000 in 1996. These are operating, noncancelable leases expiring over the next ten years. The future minimum lease payments are as follows (stated in thousands of dollars): 1999.............................................................. 20,270 2000.............................................................. 16,911 2001.............................................................. 13,801 2002.............................................................. 10,286 2003.............................................................. 8,656 2004 and after.................................................... 4,361 ------ 74,285 ======
NOTE 15 CONTINGENT LIABILITIES AND COMMITMENTS. The Company makes separate provisions for individual title losses over $750,000 and reviews claims in excess of this amount asserted against Guaranty when evaluating the adequacy of recorded reserves. See Note 1(F). Claims have been made at December 31, 1998 against Guaranty for amounts in excess of $750,000 for which no provision was made. Management believes, with the advice of counsel, the loss on these claims (1) will be resolved for less than $750,000 each or (2) cannot be reasonably estimated. Management believes any loss on these claims which cannot be estimated at December 31, 1998 will not be material in relation to the consolidated financial condition of the Company. The Company is contingently liable for disbursements of escrow funds held by agents in certain cases where specific insured closing guarantees have been issued. Various takeout commitments approximated $3,364,000 at December 31, 1998. Management believes adequate provisions have been made for any losses resulting from these commitments. NOTE 16 REINSURANCE. As is the industry practice, the Company cedes risk to other underwriters in excess of certain underwriting limits. However, the Company remains liable if the reinsurer should fail to satisfy its obligations. The Company also assumes risk from other underwriters. A payment on an assumed risk or a recovery on a ceded risk is rare in the experience of the Company and the industry. The Company has not paid or recovered any reinsured losses during the three years ended December 31, 1998. The total amount of premiums for assumed and ceded risks was less than one percent of title premiums, fees and other revenues in each of the last three years. NOTE 17 EQUITY IN INVESTEES. Certain summarized aggregate financial information for investees follows:
1998 1997 1996 ------ ------ ------ ($000 Omitted) For the year: Revenues............................................. 85,706 66,760 59,368 Net earnings......................................... 5,360 4,808 3,120 As of December 31: Total assets........................................ 47,331 30,508 Stockholders' equity................................ 19,760 17,389
F-14 31 NOTE 18 SEGMENT INFORMATION. The Company's two reportable segments are title and real estate information. The segments significantly influence business to each other because of the nature of their operations and their common customers. The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property. The real estate information segment provides services to the real estate and mortgage industries primarily 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, this segment includes services related to tax-deferred exchanges, surveys, the accounting and operating systems of title agents and government authorities and the construction of title plants. The segments provide services through a network of offices, including both direct operations and agents, throughout the United States. The operations in the several international markets in which the Company does business are generally insignificant to consolidated results. Under the Company's internal reporting and accountability systems, most general corporate expenses are incurred by and charged to the title segment. Technology operating costs are also charged to the title segment, except for direct expenditures relating to the real estate information segment. These expenditures are charged to that segment. All investment income is included in the title segment as it is generated primarily from the investments of the title underwriting operations.
Real estate Title information Total ----- ----------- ----- ($000 omitted) Revenues: 1998 918,389 50,372 968,761 1997 673,590 35,320 708,910 1996 623,988 32,030 656,018 Pretax earnings (losses): 1998 73,198 3,129 76,327 1997 29,145 (5,466)(1) 23,679 1996 22,462 416 22,878 Identifiable assets: 1998 463,030 35,451 498,481 1997 392,963 24,728 417,691
(1) Includes a nonrecurring pretax charge of $1,905,000 for a writeoff of goodwill in a subsidiary that was sold in 1998. NOTE 19 QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
Mar 31 June 30 Sept 30 Dec 31 ($000 Omitted, except per share) Revenues: 1998........................................ 197,042 235,439 250,425 285,855 1997........................................ 145,966 174,006 182,626 206,312 Net earnings: 1998........................................ 8,625 11,258 14,048 13,107 1997........................................ 64 5,528 5,487 4,209 Earnings per share-diluted: 1998........................................ 1.23 1.59 1.98 1.84 1997........................................ .01 .81 .80 .61
F-15 32 STEWART TITLE GUARANTY COMPANY STEWART TITLE INSURANCE COMPANY Principal Underwriters of Stewart Information Services Corporation UNCONSOLIDATED STATUTORY BALANCE SHEETS From statutory Annual Statements as filed (unaudited)
Stewart Title Stewart Title December 31, 1998 Guaranty Company Insurance Company ---------------- ----------------- ($000 Omitted) Admitted assets Bonds.................................................................... 190,411 21,553 Stocks - investments in affiliates....................................... 115,071 1,088 Stocks - other........................................................... 6,507 -- Cash and bank deposits................................................... 28,630 1,990 Short-term investments................................................... 8,731 -- Title plants............................................................. 4,797 229 Title insurance premiums, fees and other receivables .................... 13,590 849 Other.................................................................... 9,049 776 ------- ------ 376,786 26,485 ======= ====== Liabilities, surplus and other funds Reserve for title losses................................................. 31,856 3,541 Statutory premium reserve................................................ 146,440 6,807 Other.................................................................... 14,524 1,200 ------- ------ 192,820 11,548 Surplus as regards policyholders (Note) 183,966 14,937 ------- ------ 376,786 26,485 ======= ======
- ------------------------------------------------------------------------------------------------------------------- Consolidated stockholder's equity (unaudited), based on generally accepted accounting principles (GAAP), for Stewart Title Guaranty Company at December 31, 1998 was ($000 omitted)........................................................... $228,950 ========
Note: The amount shown above for stockholder's equity exceeds policyholder surplus primarily because under GAAP the statutory premium reserve and reserve for reported title losses are eliminated and estimated title loss reserves are substituted, net of applicable income taxes. F-16 33 To the Board of Directors Stewart Title of Fresno County Fresno, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheets of Stewart Title of Fresno County at December 31, 1996 and 1995 and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Fresno County as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 8, 1997 F-17 34 To the Board of Directors Stewart Title of Monterey County Monterey, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Stewart Title of Monterey County at December 31, 1996 and 1995 and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Monterey County as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles, /s/ GRANT BENNETT ACCOUNTANTS GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 7, 1997 F-18 35 To the Board of Directors Stewart Title of California San Jose, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Stewart Title of California at December 31, 1996 and 1995 and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of California as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 16, 1997 F-19 36 To the Board of Directors Stewart Title of Modesto Modesto, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheets of Stewart Title of Modesto at December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Modesto as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 7, 1997 F-20 37 INDEPENDENT AUDITORS' REPORT The Board of Directors Stewart Title Dallas, Inc. dba: Stewart Title North Texas, Inc, We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998, prepared from the accounts maintained at your office at 5728 LBJ Freeway, Dallas, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Dallas, Inc. dba: Stewart Title North Texas, Inc. as of December 31, 1998 in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and are not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ WILKERSON & ARTHUR Wilkerson & Arthur, P.C. January 29, 1999 F-21 38 INDEPENDENT AUDITORS' REPORT The Board of Directors Priority Title Company of Dallas, L.L.C. We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998, prepared from the accounts maintained at your office at 5728 LBJ Freeway, Dallas, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Priority Title Company of Dallas, L.L.C. as of December 31, 1998 in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and are not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ WILKERSON & ARTHUR Wilkerson & Arthur, P.C. January 29, 1998 F-22 39 REPORT OF INDEPENDENT ACCOUNTANT Stewart Title Company El Paso, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at 500 N. Mesa, Suite 300, El Paso, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company, El Paso, Texas, as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ M. TIMOTHY O'ROARK, C.P.A. M. TIMOTHY O'ROARK, C.P.A. January 20, 1999 F-23 40 REPORT OF INDEPENDENT ACCOUNTANT To: Stewart Title Company - Galveston Galveston, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Company - Galveston as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at Galveston, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Galveston, as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 13, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-24 41 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title of Montgomery County, Inc. The Woodlands, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title of Montgomery County, Inc. as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at The Woodlands, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Montgomery County, Inc., as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 20, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-25 42 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title Company - Fort Bend Sugar Land, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Company - Fort Bend as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at Sugar Land, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Fort Bend, as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 20, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-26 43 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title Austin, Inc. Austin, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Austin, Inc. as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at Austin, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Austin, Inc., as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental Information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 8, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-27 44 REPORT OF INDEPENDENT ACCOUNTANTS To: Pacific Title, L.C. Sugar Land, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Pacific Title, L.C. as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at Sugar Land, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Pacific Title, L.C., as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 20, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-28 45 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title of Eagle Pass, Inc. d/b/a Title Guaranty Eagle Pass, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title of Eagle Pass, Inc. d/b/a Title Guaranty as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at Eagle Pass, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Eagle Pass, Inc. d/b/a Title Guaranty, as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 11, 1999 /s/ AARONSON, WHITE & COMPANY Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 F-29 46 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title of Houston We have audited the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Houston as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the Statements of Assets and Liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 20, 1999 F-30 47 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title Guaranty Company We have audited the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Suite 650, Houston, Texas. The financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Guaranty Company's National Title Services Division as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the Statements of Assets and Liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 20, 1999 F-31 48 INDEPENDENT AUDITORS' REPORT Managers Priority Title Company of Houston, L.L.C. We have audited the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Suite 1750, Houston, Texas. The financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Priority Title Company of Houston, L.L.C. as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the Statements of Assets and Liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 13, 1999 F-32 49 INDEPENDENT AUDITORS' REPORT Managers Premier Title Company of Houston, L.L.C. We have audited the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Premier Title Company of Houston, L.L.C. as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the Statements of Assets and Liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 13, 1999 F-33 50 INDEPENDENT AUDITORS' REPORT Managers MHI Title Company of Houston, L.L.C. We have audited the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by MHI Title Company of Houston, L.L.C. as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the Statements of Assets and Liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 13, 1999 F-34 51 INDEPENDENT AUDITORS' REPORT Managers Allecon Title Agency, L.L.C. We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Suite 1785, Houston, Texas. The financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Allecon Title Agency, L.L.C. as of December 31, 1998, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ GRATZER, CLEM & COMPANY, P.C. Gratzer, Clem & Company, P.C. January 13, 1999 F-35 52 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title Company - Beaumont Division Beaumont, Texas 77706 We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998, prepared from the accounts maintained at your office at 2390 N. Dowlen Road, Beaumont, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Beaumont Division, as of December 31, 1998, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. Very truly yours, /s/ EDGAR, KIKER & CROSS EDGAR, KIKER & CROSS, LLP Certified Public Accountants and Consultants January 19, 1999 RTE/ms F-36 53 INDEPENDENT AUDITOR'S REPORT Board of Directors Stewart Title Company Houston, Texas I have examined the statements of assets and liabilities of trust (escrow) fund accounts as of December 31, 1998 and 1997, prepared from the accounts maintained at your office in San Antonio, Texas. My examination, which was limited to such accounts, was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as I considered necessary in the circumstances. In my opinion, the aforementioned statements of assets and liabilities of trust (escrow) fund accounts (not separately presented herein) present fairly the assets and liabilities of such accounts handled by the San Antonio Division of Stewart Title Company, as of December 31, 1998 and 1997, in accordance with generally accepted accounting principles, applied on a consistent basis. /s/ JIM S. WALKER Jim S. Walker Certified Public Accountant Beaumont, Texas January 20, 1999 F-37 54 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title Company Amarillo, Texas District Office We have audited the accompanying Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998, prepared from the accounts maintained at your office at Amarillo, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts provides a reasonable basis for our opinion. In our opinion, the accompanying Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company, for the year then ended in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the audit of the basic Statement of Assets and Liabilities, and is fairly stated in all material respects in relation to the basic Statement of Assets and Liabilities, taken as a whole. /s/ DOSHIER, PICKENS & FRANCIS, P.C. DOSHIER, PICKENS & FRANCIS, P.C. January 15, 1999 F-38 55 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title of Corpus Christi, Inc. Corpus Christi, Texas We have audited the Statement of Assets and Liabilities of Trust [Escrow] Fund Accounts as of December 31, 1998, prepared from the accounts maintained at your office at Corpus Christi, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the financial statement provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust [Escrow] Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Corpus Christi, Inc., as of December 31, 1998, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ FANCHER AND COMPANY FANCHER AND COMPANY February 4,1999 F-39 56 REPORT OF INDEPENDENT ACCOUNTANT Board of Directors Stewart Title of Lubbock, Inc. 7802 Indiana Avenue Lubbock, Texas 79423 I have audited the accompanying Statement of Assets and Liabilities of Trust (Escrow) Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at 7802 Indiana Avenue, Lubbock, Texas 79423. These financial statements are the responsibility of the company's management. My responsibility is to express an opinion of these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable base for my opinions. In my opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such escrow accounts handled by Stewart Title of Lubbock, Inc., as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. My audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information contained in Exhibit C through F, inclusive, and Exhibit H of these reports, is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the basic Statement of Assets and Liabilities, and is fairly stated in all material respects in relation to the basic statements of assets and liabilities taken as a whole. /s/ JESUS YEPEZ CPA Jesus Yepez Certified Public Accountant Lubbock, Texas January 21, 1999 F-40 57 REPORT OF INDEPENDENT ACCOUNTANT Board of Directors Stewart Title Guaranty Company Houston, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 and 1997, prepared from the accounts maintained at your office at 2401 Moores Lane, Texarkana, Texas. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Texarkana as of December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports are presented as additional information and are not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examinations of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ WILLIAMS & PEARCY Williams & Pearcy, P.C. February 3, 1999 F-41 58 Independent Auditor's Report Stewart Title Company of Rockport, Inc. Rockport, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 prepared from the accounts maintained at your office at Rockport, Texas. The financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company of Rockport, Inc. as of December 31, 1998, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through H, inclusive and Form T-19, of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ FLUSCHE, VAN BEVEREN, KILGORE, P.C. FLUSCHE, VAN BEVEREN, KILGORE, P.C. Corpus Christi, Texas January 19, 1999 F-42 59 Independent Auditors' Report Stewart Title of San Patricio County, Inc. Portland, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1998 prepared from the accounts maintained at your office at Portland, Texas. The financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of San Patricio County, Inc. as of December 31, 1998, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ JENNINGS, HAWLEY & CO. P.C. Corpus Christi, Texas January 18, 1999 F-43 60 SCHEDULE II STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) INCOME AND RETAINED EARNINGS INFORMATION
=================================================================================================================== Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------- --------- --------- (In thousands) =================================================================================================================== Revenues Investment income .................................................. $ 583 $ 701 $ 439 Other income ....................................................... -- 3 -- ------- --------- --------- 583 704 439 Expenses Employee costs ..................................................... 229 201 163 Other operating expenses ........................................... 3,006 2,098 1,515 Depreciation and amortization ...................................... 92 90 100 ------- --------- --------- 3,327 2,389 1,778 Loss before taxes and equity in earnings of investees ................. (2,744) (1,685) (1,339) Income taxes (benefit) ................................................ (566) (502) (458) Equity in earnings of investees ....................................... 49,216 16,471 15,318 ------- --------- --------- Net income ............................................................ 47,038 15,288 14,437 Retained earnings at beginning of year ................................ 145,140 131,496 118,547 Cash dividends on Common Stock ($.28, $.26 and $.24 per share) ............................................................ (1,815) (1,644) (1,488) ------- --------- --------- Retained earnings at end of year ...................................... 190,363 $ 145,140 $ 131,496 ======= ========= =========
See accompanying note to financial statements. (Schedule continued on following page.) S-1 61 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) BALANCE SHEET INFORMATION
====================================================================================================================== December 31, ------------------------ 1998 1997 --------- --------- (In thousands) ====================================================================================================================== Assets Cash and cash equivalents............................................................. $ 13 $ 13 --------- --------- Short-term investments................................................................ 11,439 9,001 --------- --------- Receivables: Notes, including $6,918 and $7,324 from affiliates.................................. 7,471 7,435 Other, including $3,275 and $9,521 from affiliates.................................. 4,038 10,522 Less allowance for uncollectible amounts............................................ (20) (20) --------- --------- 11,489 17,937 Furniture and equipment at cost....................................................... 202 183 Less accumulated depreciation......................................................... (104) (95) --------- --------- 98 88 Title plants, at cost................................................................. 48 48 Investments in investees.............................................................. 238,095 182,754 Other assets.......................................................................... 4,313 3,482 --------- --------- $ 265,495 $ 213,323 ========= ========= Liabilities Notes payable, including $ - and $ - from affiliates................................ $ 1,097 685 Accounts payable and accrued liabilities............................................ 3,955 3,134 Contingent liabilities and commitments Stockholders' equity Common - $1 par, authorized 15,000,000 issued and outstanding 6,539,965 and 6,381,046.......................................................................... 6,540 6,381 Class B Common - $1 par, authorized 1,500,000 and outstanding 525,006................. 525 525 Additional paid-in-capital............................................................ 56,886 52,922 Retained earnings (1)................................................................. 190,363 145,140 Accumulated other comprehensive earnings.............................................. 6,129 4,536 --------- --------- Total stockholders' equity ($36.86 and $30.34 per share)....................... 260,443 209,504 --------- --------- $ 265,495 $ 213,323 ========= =========
(1) Includes undistributed earnings of subsidiaries of $184,179 in 1998 and $142,596 in 1997. See accompanying note to financial statements. (Schedule continued on following page.) S-2 62 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) CASH FLOWS INFORMATION
=================================================================================================================== Year Ended December 31, ------------------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) =================================================================================================================== Cash flow from operating activities (Note)........................... $ (2,805) $ (3,645) $ (3,956) Cash flow from investing activities: Proceeds from investments sold.................................... -- 1,619 -- Purchases of investments, excluding mortgage loans................ (2,438) -- (6,247) Dividends received from unconsolidated subsidiaries............... 7,633 4,583 11,090 Increases in mortgages and other notes receivable................. (300) (364) (70) Collections on mortgages and other notes receivable............... 265 23 227 Cash paid for the acquisition of subsidiaries..................... (2,500) (900) (101) --------- --------- --------- Cash provided (used) by investing activities......................... 2,660 4,961 4,899 --------- --------- --------- Cash flow from financing activities: Dividends paid.................................................... (1,815) (1,644) (1,488) Proceeds of notes payable......................................... 417 106 610 Payments on notes payable......................................... -- -- (30) Proceeds from issuance of stock................................... 1,543 135 11 --------- --------- --------- Cash provided (used) by financing activities......................... 145 (1,403) (897) --------- --------- --------- (Decrease) increase in cash and cash equivalents..................... $ -- $ (87) $ 46 ========= ========= ========= Note: Reconciliation of net income to the above amounts: Net income........................................................ $ 47,038 $ 15,288 $ 14,437 Add (deduct): Depreciation and amortization.................................. 92 90 100 Provision for uncollectible amounts - net...................... -- -- 20 Increase in accounts receivable - net.......................... (1,060) (3,267) (3,207) Increase (decrease) in accounts payable and accrued liabilities - net........................................... 508 671 264 Equity in net earnings of investees............................ (49,216) (16,471) (15,318) Stock bonuses paid............................................. 577 409 328 Treasury stock acquired........................................ (576) -- -- Other - net.................................................... (152) (365) (580) --------- --------- --------- Cash used by operating activities.................................... $ (2,805) $ (3,645) $ (3,956) ========= ========= ========= Supplemental information: Income taxes paid .............................................. -- -- -- Interest paid .................................................. -- -- --
See accompanying note to financial statements. (Schedule continued on following page.) S-3 63 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) NOTE TO FINANCIAL STATEMENT INFORMATION The Registrant operates as a holding company transacting substantially all business through its subsidiaries. The consolidated financial statements for the Registrant and its subsidiaries are included in Part II, Item 8 of Form 10-K. The Parent Company financial statements should be read in conjunction with the aforementioned consolidated financial statements and notes thereto and financial statement schedules. Certain amounts in the 1997 and 1996 Parent Company financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. Total dividends received from unconsolidated subsidiaries for 1998, 1997 and 1996 were $90,000, $9,633,000, and $8,583,000, respectively. S-4 64 SCHEDULE V STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1998
========================================================================================================================= Col. A Col. B Col. C Col. D Col. E Additions ========================================================================================================================= Balance Charged Charged to at to other Balance beginning cost and accounts -Deductions- at end Description of period expenses describe described of period ========================================================================================================================= Stewart Information Services Corporation and subsidiaries: Year ended December 31, 1996: Estimated title losses.............. $138,312,534 $33,829,851 -- $21,810,822 (A) $150,331,563 Allowance for uncollectible amounts............................ 6,498,947 1,575,000 -- 1,404,356 (B) 6,669,591 Year ended December 31, 1997: Estimated title losses.............. 150,331,563 29,794,444 -- 23,334,625 (A) 156,791,382 Allowance for uncollectible amounts............................ 6,669,591 1,596,000 -- 2,713,742 (B) 5,551,849 Year ended December 31, 1998: Estimated title losses.............. 156,791,382 39,226,182 787,000 (C) 25,041,558 (A) 171,763,006 Allowance for uncollectible amounts.......................... 5,551,849 2,110,000 -- 2,859,144 (B) 4,802,705 Stewart Information Services Corporation - Parent: Year ended December 31, 1996: Allowance for uncollectible amounts.. -- $ 20,000 -- -- $ 20,000 Year ended December 31, 1997: Allowance for uncollectible amounts.. 20,000 -- -- -- 20,000 Year ended December 31, 1998: Allowance for uncollectible amounts.. 20,000 -- -- -- 20,000
(A) Represents payments of policy losses and loss adjustment expenses during the year, less salvage collections. (B) Represents uncollectible accounts written off. (C) Represents estimated title loss reserve acquired. S-5 65 INDEX TO EXHIBITS
Exhibit ------- 3.1 - Certificate of Incorporation of the Registrant, as amended April 30, 1993 (incorporated by reference herein from Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 3.2 - By-Laws of the Registrant , as amended September 1, 1998 (incorporated by reference herein from Exhibit 3.2 of Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 4 - Rights of Common and Class B Common Stockholders (incorporated by reference to Exhibits 3.1 and 3.2 hereto) 10.1 - Summary of agreements as to payment of bonuses to certain executive officers 10.2 - Deferred Compensation Agreements dated March 10, 1986, amended July 24, 1990 and October 30, 1992, between the Registrant and certain executive officers (incorporated by reference herein from Exhibit 10.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 21 - Subsidiaries of the Registrant 23 - Consents of Independent Certified Public Accountants, including consents of incorporation by reference of their reports to previously filed Securities Act registration statements 27 - Financial Data Schedule
EX-10.1 2 SUMMARY OF AGREEMENTS AS TO PAYMENT OF BONUSES 1 EXHIBIT 10.1 STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS DECEMBER 31, 1998 STEWART MORRIS, JR., as Chairman of the Board, shall receive in addition to his salary, 1% on the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits exceeding $20,000,000. For the calendar year 1998, Mr. Morris shall receive no less that $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1998, Mr. Morris received $370,000 in bonus compensation. Total compensation shall exclude payments made by the company for insurance premiums, board fees or stock options granted. MALCOLM S. MORRIS, as President and Chief Executive Officer, shall receive in addition to his salary, 1% on the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits exceeding $20,000,000. For the calendar year 1998, Mr. Morris shall receive no less that $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1998, Mr. Morris received $370,000 in bonus compensation. Total compensation shall exclude payments made by the company for insurance premiums, board fees or stock options granted. CARLOSS MORRIS, as Chairman of the Executive Committee, shall receive in addition to his salary, 1% of the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits exceeding $20,000,000. For the calendar year 1998, Mr. Morris shall receive no less than $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1998 Mr. Morris received $365,000 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. STEWART MORRIS, as Vice Chairman of the Executive Committee, shall receive in addition to his salary, 1% of the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits exceeding $20,000,000. For the calendar year 1998, Mr. Morris shall receive no less than $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1998 Mr. Morris received $365,000 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. MAX CRISP, as Vice President - Finance, shall receive in addition to his salary, .4% of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders. For the calendar year 1998, Mr. Crisp shall receive no less than $68,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $425,000. For the calendar year 1998 Mr. Crisp received $285,000 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Stewart Title of Mobile, Inc. ..................... Alabama Stewart Title of Anchorage......................... Alaska Citizens Title & Trust ............................ Arizona Stewart Title & Trust of Phoenix, Inc. ............ Arizona Stewart Title & Trust of Tucson ................... Arizona Arkansas Closing and Title Company ................ Arkansas Arkansas Title Insurance Company .................. Arkansas First Arkansas Title Company....................... Arkansas Garland County Title Company ...................... Arkansas Landata of Arkansas ............................... Arkansas McDonald Abstract Company.......................... Arkansas Stewart Title of Arkansas ......................... Arkansas Airborne Systems, Inc. ............................ California API Properties Corp. .............................. California Asset Preservation, Inc. .......................... California GPMD, Inc. ........................................ California Granite Bay Holding Corp. ......................... California Granite Properties, Inc. .......................... California Landata, Inc. of Los Angeles ...................... California Landata, Inc. of the West Coast ................... California Online Documents, Inc. ............................ California Stewart Title of California ....................... California Stewart Valuations ................................ California WTI Properties, Inc. .............................. California Landata, Inc. of the Rocky Mountains .............. Colorado Stewart Title Company of Colorado Springs ......... Colorado Stewart Title of Aspen, Inc. ...................... Colorado Stewart Title of Denver, Inc. ..................... Colorado Stewart Title of Eagle County, Inc. ............... Colorado Stewart Title of Glenwood Springs, Inc. ........... Colorado Stewart Title of Larimer County, Inc. ............. Colorado Stewart Title of Pueblo ........................... Colorado Stewart Title of Steamboat Springs ................ Colorado Advance Homestead Title, Inc. ..................... Florida Bay Title Services, Inc. .......................... Florida Landata Foresight ................................. Florida Landata, Inc. of Florida .......................... Florida New Century Title of Orlando ...................... Florida New Century Title of Sarasota ..................... Florida New Century Title of Tampa ........................ Florida Stewart Approved Title, Inc. ...................... Florida Stewart Insurance Services, Inc. .................. Florida Stewart River City Title .......................... Florida Stewart Title Company of Sarasota, Inc. ......... . Florida Stewart Title of Clearwater, Inc. ................. Florida Stewart Title of Jacksonville, Inc. ............... Florida Stewart Title of Martin County .................... Florida Stewart Title of Northwestern Florida ............. Florida Stewart Title of Orange County, Inc. .............. Florida Stewart Title of Pensacola ........................ Florida Stewart Title of Pinellas, Inc. ................... Florida Stewart Title of Polk County, Inc. ................ Florida Stewart Title of Tallahassee, Inc. ................ Florida Stewart Title of Tampa ............................ Florida (continued) 2 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Stewart Properties of Tampa ....................... Florida Blaine County Title, Inc. ......................... Idaho Stewart Title Company of Idaho, Inc. .............. Idaho Stewart Title of Canyon County .................... Idaho Stewart Title of North Idaho, Inc. ................ Idaho Stewart Title of Pocatello ........................ Idaho Information Services of Illinois .................. Illinois Landata, Inc. of Illinois ......................... Illinois Stewart Title Company of Illinois ................. Illinois Mortgage Services of Indiana ...................... Indiana Stewart Title Services of Indiana, Inc. ........... Indiana O'Rourke Title Company ............................ Kansas Stewart Title of Louisiana, Inc. .................. Louisiana Cambridge Landata, Incorporated ................... Maryland Stewart Title Company of Maryland ................. Maryland Stewart Title of Detroit, Inc. .................... Michigan Stewart Title Company of Minnesota ................ Minnesota Stewart Title of the Gulf Coast ................... Mississippi Stewart Title of Mississippi ...................... Mississippi Stewart Title, Inc. (Kansas City) ................. Missouri Stewart Title of Carson City ...................... Nevada Stewart Title of Churchill County ................. Nevada Stewart Title of Douglas County ................... Nevada Stewart Title of Nevada ........................... Nevada Stewart Title of Northeastern Nevada .............. Nevada Stewart Title of Northern Nevada .................. Nevada Northeast Land Title .............................. New Hampshire Stewart Title of Bergen County .................... New Jersey Stewart Title of Central Jersey, Inc. ............. New Jersey Stewart Title Services of North Jersey, L.L.C...... New Jersey Stewart-Princeton Abstract ........................ New Jersey Santa Fe Abstract Limited ......................... New Mexico Stewart Title Limited ............................. New Mexico River City Abstract, L.L.C. ....................... New York Stewart Title Insurance Company ................... New York Stewart Title of North Carolina, Inc. ............. North Carolina Stewart Title of the Piedmont ..................... North Carolina Stewart Title Agency of Columbus, Ltd. L.L.C.. .... Ohio Stewart Title Agency of Ohio, Inc. ................ Ohio Landata Research .................................. Oklahoma Stewart Abstract & Title Co. of Oklahoma .......... Oklahoma Stewart Escrow & Title Services of Lawton ......... Oklahoma Stewart Title Insurance Company of Oregon ......... Oregon Stewart Title of Oregon ........................... Oregon Stewart Title - Newport, LLC ...................... Rhode Island Stewart Title of Rhode Island, Inc. ............... Rhode Island Allecon Title, LLC ................................ Texas Baca-Landata, Inc. ................................ Texas Brazoria County Abstract .......................... Texas (continued) 3 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- East-West, Inc. .................................. Texas Electronic Closing Services, Inc. ................ Texas Fulghum, Inc. .................................... Texas GC Acquisition, Inc. ............................. Texas General American Resources ....................... Texas Gracy Title Co., L.C. ............................ Texas Landata Field Services ........................... Texas Landata Geo Services, Inc. ....................... Texas Landata Group, Inc. .............................. Texas Landata of the Midwest ........................... Texas Landata RE-Source, Inc. .......................... Texas Landata Site Services ............................ Texas Landata Systems, Inc. ............................ Texas Landata Technologies ............................. Texas MHI Title Company of Houston, L.C. ............... Texas Mortgage Outsource Services, LLC ................. Texas Nacogdoches Abstract & Title ..................... Texas Ortem Investments, Inc. .......................... Texas Pacific Title, L.C. .............................. Texas Premier Title, L.C. .............................. Texas Primero, Inc. .................................... Texas Priority Title - Dallas .......................... Texas Priority Title - Houston ......................... Texas Southland Information, Inc. ...................... Texas Stewart - U.A.M., Inc. ........................... Texas Stewart Information International, Inc. .......... Texas Stewart Investment Services Corporation .......... Texas Stewart Management Information, Inc. ............. Texas Stewart Mortgage Information Company ............. Texas Stewart Mortgage Processing ...................... Texas Stewart National Order Center .................... Texas Stewart Title Austin, Inc. ....................... Texas Stewart Title Company ............................ Texas Stewart Title Company of Rockport, Inc. .......... Texas Stewart Title Guaranty Company ................... Texas Stewart Title of Corpus Christi .................. Texas Stewart Title of Eagle Pass ...................... Texas Stewart Title of Lubbock, Inc. ................... Texas Stewart Title of Montgomery County ............... Texas Stewart Title of North Texas ..................... Texas Stewart Title of San Patricio County, Inc. ....... Texas Stewart Trust Company ............................ Texas Texarkana Title and Abstract, Inc. ............... Texas Landata Inc. of Utah ............................. Utah Cedar Run Title & Abstract ....................... Virginia Greenbrier Title, LLC ............................ Virginia Howell Title, LLC ................................ Virginia Land Title Research, Inc. ........................ Virginia Potomac Title & Escrow ........................... Virginia Resource Title, LLC .............................. Virginia (continued) 4 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Signature & Stewart Settlements, L.C. ............ Virginia Stewart Services of Greater Virginia ............. Virginia Stewart Title - Shenandoah Valley, L.C. .......... Virginia Stewart Title & Settlement Services, Inc. ........ Virginia Stewart Title and Escrow, Inc. ................... Virginia Stewart Title Services of Virginia, L.C. ......... Virginia Pacific Northwest Holding Company ................ Washington Sheboygan Title Services, Inc. ................... Wisconsin Stewart Title of Gillette, Inc. .................. Wyoming INTERNATIONAL Landata Inc. of Belize ........................... Belize Stewart Costa Rica ............................... Costa Rica Stewart Information Hungary ...................... Hungary Stewart Title Guaranty de Mexico, ABC ............ Mexico Stewart Data Slovakia ............................ Slovakia Stewart Title Great Britain ...................... United Kingdom Stewart Title Insurance Company Limited .......... United Kingdom EX-23 4 CONSENTS OF INDEPENDENT CERT. PUBLIC ACCOUNTANTS 1 EXHIBIT 23 The Board of Directors Stewart Information Services Corporation: We consent to incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report dated February 10, 1999, relating to the consolidated balance sheets of Stewart Information Services Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings and retained earnings and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which report appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. /s/ KPMG LLP Houston, Texas March 19, 1999 2 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our reports which appear in the December 31, 1998 annual report of Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. Signed /s/ GRANT BENNETT ACCOUNTANTS ------------------------------ Sacramento, California March 8, 1999 3 The Board of Directors Stewart Information Services Corporation We consent to incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report, which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interests of Named Experts and Counsel" in such Registration Statements. /s/ WILKERSON & ARTHUR Wilkerson & Arthur, P.C. Fort Worth, Texas March 2, 1999 4 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. /s/ M. TIMOTHY O'ROARK - ----------------------------------- M. TIMOTHY O'ROARK El Paso, Texas January 20, 1999 5 The Board of Directors Stewart Information Services Corporation We consent to incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No.333-65971) on Form S-8 of Stewart Information Services Corporation of our reports, which appear in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interests of Named Experts and Counsel" in such Registration Statements. /s/ AARONSON, WHITE & COMPANY ------------------------------------ AARONSON, WHITE & COMPANY Houston, TX March 9, 1999 6 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our reports which appear in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. Signed /s/ GRATZER, CLEM & COMPANY, P.C. -------------------------------------- Lake Jackson, TX March 11, 1999 7 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. /s/ EDGAR, KIKER & CROSS EDGAR, KIKER & CROSS, LLP Certified Public Accountants and Consultants Beaumont, Texas March 3, 1999 8 The Board of Directors Stewart Information Services Corporation I consent to the use of my report incorporated herein by reference and to the reference to my firm under the heading "Interests of Named Experts and Counsel" in the Registration Statement. /s/ JIM S. WALKER - ----------------------------------- Jim S. Walker January 20, 1999 9 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. /s/ DOSHIER, PICKENS & FRANCIS, P.C. Doshier, Pickens & Francis, P.C. Amarillo, Texas March 8, 1999 10 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report which appear in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. Signed /s/ FANCHER & COMPANY ---------------------------- Corpus Christi, Texas Date 3/2/99 ---------------------- 11 The Board of Directors Stewart Information Services Corporation I consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Forms S-8 of Stewart Information Services Corporation of my report which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. I also consent to the reference to me under the heading "Interest of Named Experts and Counsel" in such Registration Statements. Signed /s/ JESUS YEPEZ CPA ---------------------------- Lubbock, Texas March 2, 1999 12 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No, 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report, which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. /s/ WILLIAMS & PEARCY - ------------------------------- Williams & Pearcy, P.C. Texarkana, USA February 3, 1999 13 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our reports which appear in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. /s/ FLUSCHE, VAN BEVEREN, KILGORE, P.C. FLUSCHE, VAN BEVEREN, KILGORE, P.C. Corpus Christi, Texas March 3, 1999 14 The Board of Directors Stewart Information Services Corporation We consent to the incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075 and No. 333-65971) on Form S-8 of Stewart Information Services Corporation of our report which appears in the December 31, 1998 annual report on Form 10-K of Stewart Information Services Corporation. We also consent to the reference to us under the heading "Interest of Named Experts and Counsel" in such Registration Statements. Signed /s/ JENNINGS, HAWLEY & CO. P.C. ------------------------------------- Corpus Christi, Texas March 9, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 227,312 0 0 0 0 0 286,758 44,883 0 0 498,481 171,763 0 0 0 16,194 0 0 7,065 253,378 498,481 950,045 18,515 201 0 39,226 0 0 76,327 29,289 47,038 0 0 0 47,038 6.73 6.65 156,791 37,114 2,899 5,977 19,064 171,763 0 INCLUDES RESERVE BALANCE INCREASE OF $787 FROM THE ACQUISITION OF AN EXISTING UNDERWRITER.
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