-----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, MCIrkEseeYXxUV46PNAbkyL4/9079wLP1m2T/kOTvJSKGcQVa2WB4vvjjRnX1fyo Cg0ieCMTsbqV8d+ekGoDaQ== 0000950129-02-005398.txt : 20021105 0000950129-02-005398.hdr.sgml : 20021105 20021105162838 ACCESSION NUMBER: 0000950129-02-005398 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART INFORMATION SERVICES CORP CENTRAL INDEX KEY: 0000094344 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 741677330 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02658 FILM NUMBER: 02810007 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 CITY: HOUSTON STATE: TX ZIP: 77056 10-Q 1 h00885e10vq.txt STEWART INFORMATION SERVICES CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-12688 STEWART INFORMATION SERVICES CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 74-1677330 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1980 Post Oak Blvd., Houston TX 77056 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (713) 625-8100 ---------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2002. Common 16,676,882 Class B Common 1,050,012 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 2002 TABLE OF CONTENTS ----------------- Item No. Page - -------- ---- Part I - FINANCIAL INFORMATION 1. Financial Statements 1 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 3. Quantitative and Qualitative Disclosures About Market Risk 9 4. Controls and Procedures 10 Part II - OTHER INFORMATION 1. Legal Proceedings 11 5. Other Information 11 6. Exhibits and Reports on Form 8-K 12 Signature 13 Certifications Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 14 As used in this report, "we", "us", "our" and "Stewart" mean Stewart Information Services Corporation and our subsidiaries unless the context indicates otherwise. STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001
THIRD QUARTER NINE MONTHS ------------------- -------------------- 2002 2001 2002 2001 -------- -------- --------- -------- ($000 Omitted) ($000 Omitted) Revenues Title insurance: Direct operations 175,395 134,901 474,623 371,515 Agency operations 275,398 183,893 687,941 467,377 -------- -------- --------- -------- 450,793 318,794 1,162,564 838,892 Real estate information services 18,376 16,240 51,624 47,073 -------- -------- --------- -------- Total operating revenues 469,169 335,034 1,214,188 885,965 Investment income 5,665 4,748 15,161 14,793 Investment (losses) gains - net (1,421) 372 (834) 770 -------- -------- --------- -------- 473,413 340,154 1,228,515 901,528 Expenses Amounts retained by agents 228,384 151,830 565,233 383,145 Employee costs 114,898 94,453 325,442 264,721 Other operating expenses 65,925 50,241 180,236 142,570 Title losses and related claims 20,882 13,243 51,950 34,755 Depreciation 5,196 5,171 15,824 14,668 Goodwill - 540 - 1,909 Interest 246 605 761 2,048 Minority interests 2,445 1,792 6,509 5,188 -------- -------- --------- -------- 437,976 317,875 1,145,955 849,004 -------- -------- --------- -------- Earnings before taxes 35,437 22,279 82,560 52,524 Income taxes 13,840 9,276 31,908 21,010 -------- -------- --------- -------- Net earnings 21,597 13,003 50,652 31,514 ======== ======== ========= ======== Average number of shares outstanding - assuming dilution (000) 17,729 16,751 17,836 15,806 Earnings per share - basic 1.22 0.78 2.86 2.01 Earnings per share - diluted 1.22 0.78 2.84 1.99 ======== ========= ========= ======== Comprehensive earnings: Net earnings 21,597 13,003 50,652 31,514 Changes in other comprehensive earnings, net of taxes of $3,154, $1,418, $3,883 and $1,988 5,857 2,633 7,211 3,693 -------- -------- --------- -------- Comprehensive earnings 27,454 15,636 57,863 35,207 ======== ========= ========= ========
See notes to condensed consolidated financial statements. -1- STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
SEP 30 DEC 31 2002 2001 ---------- ---------- ($000 Omitted) Assets Cash and cash equivalents 98,470 60,706 Short-term investments 63,314 56,267 Investments - statutory reserve funds 290,041 239,084 Investments - other 67,454 86,046 Receivables 54,448 52,036 Property and equipment 49,673 48,772 Title plants 40,235 37,715 Goodwill 57,382 52,971 Deferred income taxes - 4,288 Other 42,605 39,978 ---------- ---------- 763,622 677,863 ========== ========== Liabilities Notes payable 18,189 13,794 Accounts payable and accrued liabilities 56,766 57,752 Deferred income taxes 6,661 - Estimated title losses 221,358 202,544 Minority interests 10,085 9,233 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 133,913 133,157 Retained earnings 309,195 258,746 Accumulated other comprehensive earnings 11,360 4,149 Treasury stock - 325,669 shares at September 30, 2002 and 116,900 shares at December 31, 2001, at cost (3,905) (1,512) ---------- ----------- Total stockholders' equity ($25.55 per share at September 30, 2002) 450,563 394,540 ---------- ----------- 763,622 677,863 ========== ===========
See notes to condensed consolidated financial statements. -2- STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 2002 2001 --------- --------- ($000 Omitted) Cash provided by operating activities (Note) 92,418 80,835 Investing activities: Purchases of property and equipment and title plants - net (17,835) (12,906) Proceeds from investments matured and sold 83,519 73,195 Purchases of investments (112,684) (135,283) Increases in notes receivable (3,013) (2,138) Collections on notes receivable 2,021 9,616 Cash paid for the acquisition of subsidiaries - net (2,185) (7,057) --------- --------- Cash used by investing activities (50,177) (74,573) Financing activities: Distribution to minority interests (5,526) (4,106) Proceeds from issuance of stock 122 44,727 Proceeds of notes payable 4,644 8,582 Payments on notes payable (3,717) (31,431) --------- --------- Cash (used) provided by financing activities (4,477) 17,772 --------- --------- Increase in cash and cash equivalents 37,764 24,034 ========= ========= NOTE: Reconciliation of net earnings to the above amounts - Net earnings 50,652 31,514 Add (deduct): Depreciation and amortization 15,824 16,577 Provision for title losses in excess of payments 18,640 8,033 Provision for uncollectible amounts - net 1,097 (82) (Increase) decrease in accounts receivable - net (2,164) 5,477 Increase in accounts payable and accrued liabilities - net 5,599 13,445 Minority interest expense 6,509 5,188 Equity in net earnings of investees (2,339) (1,619) Dividends from equity investees 1,837 1,279 Realized investment losses (gains) - net 834 (770) Stock bonuses 634 416 (Increase) decrease in other assets (4,396) 1,079 Other - net (309) 298 --------- --------- Cash provided by operating activities 92,418 80,835 ========= ========= Supplemental information: Assets acquired (purchase method) Goodwill 3,435 10,133 Title plants 537 4,906 Other 61 3,021 Liabilities assumed (4,068) (2,473) Common Stock acquired (issued) 2,220 (3,220) Debt issued to sellers - (5,310) --------- --------- Cash paid for the acquisition of subsidiaries - net 2,185 7,057 ========= =========
See notes to condensed consolidated financial statements. -3- STEWART INFORMATION SERVICES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Interim Financial Statements The financial information contained in this report for the three and nine month periods ended September 30, 2002 and 2001, and as of September 30, 2002, is unaudited. In the opinion of our management, all adjustments necessary for a fair presentation of this information for all unaudited periods, consisting only of normal recurring accruals, have been made. The results of operations for the interim periods are not necessarily indicative of results for a full year. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain amounts in the 2001 condensed consolidated financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. Note 2: Segment Information Our two reportable segments are title and real estate information. Selected financial information related to these segments follows:
Real estate Title information Total ----- ----------- ----- ($000 Omitted) Revenues: - --------- Three months ended 9/30/02 455,037 18,376 473,413 9/30/01 323,914 16,240 340,154 Nine months ended 9/30/02 1,176,891 51,624 1,228,515 9/30/01 854,455 47,073 901,528 Pretax earnings: - ---------------- Three months ended 9/30/02 32,064 3,373 35,437 9/30/01 20,322 1,957 22,279 Nine months ended 9/30/02 75,746 6,814 82,560 9/30/01 47,620 4,904 52,524 Identifiable assets: - -------------------- 9/30/02 724,742 38,880 763,622 12/31/01 639,282 38,581 677,863
Note 3: Earnings Per Share Our basic earnings per share figures were calculated by dividing net earnings by the weighted average number of shares of Common Stock and Class B Common Stock outstanding during the reporting period. The only potentially dilutive effect on earnings per share relates to our 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 92,000 and 151,000 for the three month periods ended September 30, 2002 and 2001, respectively and 96,000 and 149,000 for the nine months ended September 30, 2002 and 2001, respectively. -4- Note 4: Equity in Investees The amount of earnings from equity investments was $0.9 million and $0.5 million for the three month periods ended September 30, 2002 and 2001, respectively and $2.3 million and $1.6 million for the nine month periods ended September 30, 2002 and 2001, respectively. These amounts are included in "title insurance revenues - direct operations" in the condensed consolidated statements of earnings and comprehensive earnings. Note 5: Goodwill and Intangible Assets - Adoption of SFAS No. 142 We adopted SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002 and stopped amortizing goodwill prospectively. Selected financial information reflects the pro forma earnings assuming the provisions of SFAS No. 142 had been applied prior to January 1, 2002:
THIRD QUARTER NINE MONTHS -------------------- ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ ($000 Omitted, except earnings per share) Net Earnings: - ------------- Net earnings 21,597 13,003 50,652 31,514 Add back: Goodwill amortization, net of tax - 534 - 1,886 ------ ------ ------ ------ Pro forma net earnings 21,597 13,537 50,652 33,400 Basic earnings per share: - ------------------------- Net earnings 1.22 0.78 2.86 2.01 Add back: Goodwill amortization - 0.04 - 0.12 ------ ------ ------ ------ Pro forma net earnings 1.22 0.82 2.86 2.13 Diluted earnings per share: - --------------------------- Net earnings 1.22 0.78 2.84 1.99 Add back: Goodwill amortization - 0.03 - 0.12 ------ ------ ------ ------ Pro forma net earnings 1.22 0.81 2.84 2.11
-5- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Our primary business is title insurance. We issue policies on homes and other real property located in all 50 states, the District of Columbia and several foreign countries through more than 6,200 issuing locations. We also sell electronically delivered real estate services and information, as well as mapping products and geographic information systems, to domestic and foreign governments and private entities. Our business has two main segments: title and real estate information ("REI"). These segments are closely related due to the nature of their operations and common customers. The segments provide services throughout the United States through a network of offices, including both direct operations and agents. Although we conduct operations in several international markets, at current levels the contributions of the international markets are generally immaterial with respect to our consolidated financial results. CRITICAL ACCOUNTING POLICIES We believe the accounting policies that are the most critical to our financial statements, and that are subject to the most judgment, are those relating to title loss reserves, premium revenue recognition and recoverability of long-lived assets, such as goodwill and title plants. Title loss reserves represent the aggregate future payments, net of recoveries, that we expect to incur on policy losses and in costs to settle claims. Future title loss payments are difficult to estimate due to the complex nature of title claims, the length of time over which claims are paid, the significantly varying dollar amounts of individual claims and other factors. Loss provision amounts are based on reported claims, historical loss experience, title industry averages, the current legal environment and the types of policies written. The title loss reserve is continually reviewed and adjusted, as appropriate. Independent actuaries review the adequacy of the reserve on an annual basis. Premiums on title insurance written by our direct title operations are recognized as revenue at the time of the closing of the related real estate transaction. Premiums on title insurance policies written by agents are recognized primarily when policies are reported to us. We also accrue for unreported policies where reasonable estimates can be made based on historical reporting patterns of agents, current trends and known information about agents. We review the carrying values of title plants and other long-lived assets if certain events occur that may indicate impairment. Impairment is indicated when projected undiscounted cash flows over the estimated life of the assets are less than carrying values. If impairment is determined by management, the book amounts are written down to fair value by calculating the discounted value of projected cash flows. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", goodwill is tested for impairment annually and goodwill determined to be impaired is expensed to current operations. RESULTS OF OPERATIONS Generally, the principal factors that contribute to increases in our operating revenues for our title and REI segments include: o declining mortgage interest rates, which usually increase home sales and refinancing transactions; o rising home prices; o higher premium rates; o increased market share; o opening of new offices and o increased commercial transactions. 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. -6- NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 GENERAL. According to published industry data, interest rates for 30-year fixed mortgages, excluding points, for the nine months ended September 30, 2002 averaged 6.7% as compared to 7.0% for the same period a year earlier. The rates at year-end 2001 were just over 7%. In 2001, rates remained relatively stable, with rates reaching a high of 7.2% in May and reaching a low of 6.5% in November. Interest rates remained relatively stable in the first quarter of 2002 and steadily declined in the second and third quarters of 2002. In 2002, rates reached a high of 7.2% in March and a low of 6.0% in September. Operating in these mortgage interest rate environments, real estate activity in the first nine months of 2002 was strong. Refinancing transactions remained strong in the first three quarters of 2002 compared to the same period in 2001. Existing home sales increased 5.6% in the first nine months of 2002 over the same period in 2001. The ratio of refinancings to total loan applications was 53.7% for the first nine months of 2002 compared to 51.8% for the first nine months of 2001. TITLE REVENUES. Our revenues from the title segment increased 38.6% in the first nine months of 2002 over revenues for the same period in 2001. Revenues from direct operations increased 27.8% to $474.6 million for the first nine months of 2002 compared to the first nine months of 2001. The number of direct closings we handled in 2002 increased 29.3% over those we handled in 2001. Direct closings relate only to files closed by our underwriters and subsidiaries and do not include closings from agents. The average revenue per closing decreased 1.6% in 2002 because of the slight increase in refinancings, which have lower premiums than regular transactions. The largest increases were in California, Texas and New York. There were no major revenue rate changes in the first nine months of 2002 or in 2001. Effective November 1, 2002, policies written in Texas will be subject to a 6% reduction in the premium rate. The decrease will be offset somewhat by premiums that may be charged on a new policy endorsement. Although Texas policies provided 14.7% of our gross title revenues, we do not anticipate the change to have a significant adverse impact on gross revenues or earnings. Premiums from our agency operations increased 47.2% to $687.9 million in 2002. This increase resulted primarily from increased refinancings and regular transactions handled by agents nationwide. The largest increases were in California, New York, Texas, Pennsylvania, Virginia and Florida. REI REVENUES. Real estate information segment revenues were $51.6 million in the first nine months of 2002 and $47.1 million in the 2001 period. The increase in 2002 resulted primarily from providing an increased number of post-closing services, electronic mortgage documents and flood services resulting from the increase in real estate transactions. INVESTMENTS. Investment income increased 2.5% in 2002 primarily because of increases in average investment balances offset slightly by decreases in investment yields. We realized a gain on the sale of investment real estate during the second quarter, but it was offset by a comparable after-tax loss of $1.2 million on the sale of WorldCom bonds. We also recorded an after-tax loss on an equity investment in the amount of $0.5 million and an after-tax loss of $0.5 million on the impairment of equity securities during the third quarter. Certain investment gains in 2002 were realized as part of the on-going management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. The amount of revenues retained by agents, as a percentage of premiums from agents, was 82.2% and 82.0% in the years 2002 and 2001, respectively. Amounts retained by title agents are based on contracts between the agents and our title insurance underwriter subsidiaries. The percentage that amounts retained by agents bear to agent revenues may vary from year to year because of the geographical mix of agent operations and the volume of title revenues. EMPLOYEE COSTS. In 2002, employee costs for our combined business segments increased 22.9% over 2001 costs. The number of persons employed at September 30, 2002 and September 30, 2001 were approximately 7,400 and 6,600, respectively. This increase in staff in 2002 was primarily the result of additional staff in California and acquisitions of new offices. In our REI segment, employee costs increased in 2002 over 2001 primarily due to a continuing shift in focus to providing more post-closing services to lenders. These services are significantly more labor intensive than other REI services. -7- OTHER OPERATING EXPENSES. Other operating expenses for our combined business segments increased 26.4% in 2002. The overall increase in these other operating expenses in 2002 was in new offices, search fees, premium taxes and computer expenses. Other operating expenses for the combined business segments also include rent, business promotion, telephone, supplies, title plant expenses, auto and travel. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Our labor and certain other operating costs are sensitive to inflation. To the extent inflation causes an increase in the price of homes and other real estate, premium revenues from the sale of these properties also increase. Premiums are determined in part by the insured values of the transactions we handle. TITLE LOSSES. Provisions for title losses, as a percentage of title insurance revenues, were 4.5% in 2002 and 4.1% in 2001. The continued improvement in industry trends in claims and a significant amount of refinancing transactions, which result in lower loss exposure, have led to lower loss ratios in the last five years. INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 38.6% and 40.0% in 2002 and 2001, respectively. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 GENERAL. According to published industry data, interest rates for 30-year fixed mortgages, excluding points, for the three months ended September 30, 2002 averaged 6.3% as compared to 7.0% for the same period in 2001. Because of a favorable mortgage interest rate environment, real estate activity in the third quarter of 2002 was strong. Refinancing transactions remained strong in the third quarter of 2002 compared to the same period in 2001. The ratio of refinancings to total loan applications was 68.0% for the third quarter of 2002 compared to 51.2% for the third quarter of 2001. Existing home sales increased 2.8% in the third quarter of 2002 over the same period in 2001. TITLE REVENUES. Our revenues from the title segment increased 41.4% in the third quarter of 2002 over the same period in 2001. Revenues from direct operations increased 30.0% to $175.4 million for the third quarter of 2002 compared to the third quarter of 2001. The number of direct closings we handled increased 36.8% in the third quarter of 2002 compared to the same period in 2001. Direct closings relate only to files that our underwriters and subsidiaries close and do not include closings by agents. The average revenue per direct closing decreased 5.0% in the third quarter of 2002 compared to the same period in 2001 because of the slight increase in refinancings which have lower premiums than regular transactions. There were no major revenue rate changes in the third quarter of 2002 or 2001. Premiums from agency operations increased 49.8% to $275.4 million for the third quarter of 2002 compared to the same period in 2001. The increase primarily resulted from increased refinancings and regular transactions handled by agents nationwide. The largest increases were in California, Virginia, New York, Pennsylvania and Texas. REI REVENUES. Real estate information revenues were $18.4 million for the third quarter of 2002 and $16.2 million for the third quarter of 2001. The increase resulted primarily from providing an increased number of electronic mortgage documents, flood services and Section 1031 tax-deferred exchanges resulting from the increase in real estate transactions. INVESTMENTS. Investment income increased 19.3% in the third quarter of 2002 compared to the third quarter of 2001 primarily because of increases in average investment balances. We recorded an after-tax loss on an equity investment in the amount of $0.5 million and an after-tax loss of $0.5 million on the impairment of equity securities during the third quarter of 2002. Certain investment gains realized during this period were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. The amounts retained by agents, as a percentage of premiums from agents, were 82.9% and 82.6% in the third quarters of 2002 and 2001, respectively. Amounts retained by title agents are based on contracts between agents and our title insurance underwriter subsidiaries. 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. -8- EMPLOYEE COSTS. Employee costs for the combined business segments increased 21.6% in the third quarter of 2002 compared to the same period in 2001. The number of persons we employed at September 30, 2002 and September 30, 2001 was approximately 7,400 and 6,600, respectively. The increase in staff was primarily the result of additional staff in California and acquisitions of new offices. In the REI segment, employee costs increased in the third quarter of 2002 over 2001 primarily due to a continuing shift in focus to providing more post-closing services to lenders. These services are significantly more labor intensive. OTHER OPERATING EXPENSES. Other operating expenses for our combined business segments increased 31.2% in the third quarter of 2002. The increase in other operating expenses for the combined business segments during this period resulted from search fees, insurance, new offices and premium taxes. Other operating expenses also include rent, business promotion, telephone, supplies, title plant expenses, auto and travel. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Our 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 also increase. Premiums are determined in part by the insured values of the transactions we handle. TITLE LOSSES. For the third quarter, provisions for title losses, as a percentage of title insurance revenues, were 4.6% in 2002 and 4.2% in 2001. The continued improvement in industry trends in claims and increases in refinancing transactions, which result in lower loss exposure, have led to lower loss ratios in recent years. INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 39.1% and 41.6% in the third quarters of 2002 and 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations was $92,418 and $80,835 for the nine month periods ended September 30, 2002 and 2001, respectively. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations and other capital requirements. This source of financing may be supplemented by bank borrowings. We do not have any material source of liquidity and financing that involves off-balance sheet arrangements. A substantial majority of our consolidated cash and investments is held by Stewart Title Guaranty Company and its subsidiaries. Cash transfers between Stewart Title Guaranty Company and its subsidiaries are subject to certain legal restrictions. See notes 3 and 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. Our liquidity, excluding Stewart Title Guaranty Company and its subsidiaries, is comprised of cash and investments aggregating $15.6 million and short-term liabilities of $0.7 million at September 30, 2002. We know of no commitments or uncertainties that are reasonably likely to materially affect our ability, or the ability of our subsidiaries, to fund our short-term or long-term cash needs. We consider our capital resources, represented primarily by notes payable of $18.2 million and stockholders' equity of $450.6 million at September 30, 2002, to be adequate. We are not aware of any trends, either favorable or unfavorable that would materially affect the notes payable or the stockholders' equity and we do not expect any material changes to the cost of such resources. However, significant acquisitions in the future could materially affect the notes payable balance. FORWARD-LOOKING STATEMENTS. All statements included in this report, other than statements of historical fact, addressing activities, events or developments that we expect 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, legislation (primarily legislation related to title insurance) and other risks and uncertainties discussed in our filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in our Annual Statement on Form 10-K for the year ended December 31, 2001. -9- Item 4. Controls and Procedures In its recent Release No. 34-46427, effective August 29, 2002, the Securities and Exchange Commission, among other things, adopted rules requiring reporting companies to maintain disclosure controls and procedures to provide reasonable assurance that a registrant is able to record, process, summarize and report the information required in the registrant's quarterly and annual reports under the Securities Exchange Act of 1934 (the "Exchange Act"). While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area. Our principal executive officers and our principal financial officer, based upon their evaluation of our disclosure controls and procedures conducted as of a date within 90 days before the filing date of this quarterly report (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange Act), have concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could significantly affect these controls subsequent to their evaluation, nor were any corrective actions necessary with regard to significant deficiencies and material weaknesses. -10- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to routine lawsuits incidental to our 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. We do not expect that any of these proceedings will have a material adverse effect on our consolidated financial condition. ITEM 5. OTHER INFORMATION We paid regular quarterly cash dividends on our common stock from 1972 through 1999. During 1999, our Board of Directors approved a plan to repurchase up to 5 percent (680,000 shares) of our outstanding common stock. Our Board also decided to discontinue our regular quarterly dividend in favor of returning those and additional funds to stockholders' equity through the stock repurchase plan. Under this plan, we repurchased 116,900 shares of common stock during 2000. We did not repurchase any shares of our common stock in 2001 or in the first nine months of 2002. An additional 200,000 shares of treasury stock was acquired in the second quarter of 2002 as a result of the consolidation of a majority owned subsidiary which was previously held as an equity method investment. The treasury stock is held as collateral for a note payable by our subsidiary. An additional 8,769 shares of treasury stock were acquired in the third quarter of 2002 as a result of a litigation settlement. This settlement related to pre-acquisition liabilities and was paid to us by the former owners of our subsidiary. -11- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 3.1 - Certificate of Incorporation of the Registrant, as amended March 19, 2001 (incorporated by reference in this report from Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 3.2 - By-Laws of the Registrant, as amended March 13, 2000 (incorporated by reference in this report from Exhibit 3.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 4. - Rights of Common and Class B Common Stockholders * 10.1 - Summary of agreements as to payment of bonuses to certain executive officers (incorporated by reference in this report from Exhibit 10.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 2001) * 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 in this report from Exhibit 10.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) * 10.3 - Stewart Information Services Corporation 1999 Stock Option Plan (incorporated by reference in this report from Exhibit 10.3 of Annual Report on Form 10-K for the fiscal year ended December 31, 1999) * 10.4 - Stewart Information Services Corporation 2002 Stock Option Plan for Region Managers (incorporated by reference in this report from Exhibit 10.4 of Quarterly Report on Form 10-Q for the quarter ended March 31, 2002) 99.1 - Details of Investments at September 30, 2002 and December 31, 2001 99.2 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.3 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.4 - Certificate of Chief Financial Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 * A management compensation plan, contract or arrangement. During the quarterly period covered by this report, we filed a report on Form 8-K dated August 7, 2002, reporting sworn statements by our Co-Chief Executive Officers and our Chief Financial Officer. -12- SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized. Stewart Information Services Corporation ---------------------------------------- (Registrant) November 4, 2002 - ---------------- Date /s/ MAX CRISP ----------------------------------------------- Max Crisp (Executive Vice President and Chief Financial Officer, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -13- CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Malcolm S. Morris, certify that: 1. I have reviewed the quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed such controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2002 /s/ MALCOLM S. MORRIS ------------------------------------------ [Signature] Title: Chairman of the Board and Co-Chief Executive Officer -14- CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Stewart Morris, Jr., certify that: 1. I have reviewed the quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed such controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2002 /s/ STEWART MORRIS, JR. ----------------------------------------- [Signature] Title: President and Co-Chief Executive Officer -15- CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Max Crisp, certify that: 1. I have reviewed the quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed such controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2002 /s/ MAX CRISP ----------------------------------------- [Signature] Title: Executive Vice President and Chief Financial Officer, Secretary- Treasurer, Director and Principal Financial and Accounting Officer -16- INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 - Certificate of Incorporation of the Registrant, as amended March 19, 2001 (incorporated by reference in this report from Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 3.2 - By-Laws of the Registrant, as amended March 13, 2000 (incorporated by reference in this report from Exhibit 3.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 4. - Rights of Common and Class B Common Stockholders * 10.1 - Summary of agreements as to payment of bonuses to certain executive officers (incorporated by reference in this report from Exhibit 10.1 of Annual Report on Form 10-K for the fiscal year ended December 31, 2001) * 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 in this report from Exhibit 10.2 of Annual Report on Form 10-K for the fiscal year ended December 31, 1997) * 10.3 - Stewart Information Services Corporation 1999 Stock Option Plan (incorporated by reference in this report from Exhibit 10.3 of Annual Report on Form 10-K for the fiscal year ended December 31, 1999) * 10.4 - Stewart Information Services Corporation 2002 Stock Option Plan for Region Managers (incorporated by reference in this report from Exhibit 10.4 of Quarterly Report on Form 10-Q for the quarter ended March 31, 2002) 99.1 - Details of Investments at September 30, 2002 and December 31, 2001 99.2 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.3 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.4 - Certificate of Chief Financial Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
* A management compensation plan, contract or arrangement. EX-4 3 h00885exv4.txt RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS EXHIBIT 4 STEWART INFORMATION SERVICES CORPORATION RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS September 30, 2002 Common and Class B Common stockholders have the same rights, except (1) no cash dividend may be paid on Class B Common Stock and (2) the two classes of stock are voted separately in electing directors. A provision in the by-laws requires an affirmative vote of at least two-thirds of the directors to approve any proposal which may come before the directors. This by-law provision cannot be changed without a majority vote of each class of stock. Common stockholders, with cumulative voting rights, may elect five of the nine directors. Class B Common stockholders may, with no cumulative voting rights, elect four directors, if 1,050,000 or more shares of Class B Common stock are outstanding; three directors, if between 600,000 and 1,050,000 shares of Class B Common Stock are outstanding; if less than 600,000 shares of Class B Common Stock are outstanding, the Common Stock and the Class B Common Stock shall be voted as a single class upon all matters, with the right to cumulate votes for the election of directors. No change in the Certificate of Incorporation which would affect the Common Stock and the Class B Common Stock unequally shall be made without the affirmative vote of at least a majority of the outstanding shares of each class, voting as a class. Class B Common Stock may, at any time, be converted by its holders into Common Stock on a share-for-share basis. Such conversion is mandatory on any transfer to a person not a lineal descendant (or spouse, trustee, etc. of such descendant) of William H. Stewart. EX-99.1 4 h00885exv99w1.txt DETAILS OF INVESTMENTS EXHIBIT 99.1 STEWART INFORMATION SERVICES CORPORATION DETAILS OF INVESTMENTS SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
SEP 30 DEC 31 2002 2001 ------- ------- ($000 Omitted) Investments, at market, partially restricted: Short-term investments 63,314 56,267 U. S. Treasury and agency obligations 54,971 39,168 Municipal bonds 152,767 145,769 Mortgage-backed securities 1,748 8,598 Corporate bonds 140,625 121,122 Equity securities 7,384 10,473 ------- ------- TOTAL INVESTMENTS 420,809 381,397 ======= =======
NOTE: The total appears as the sum of three amounts on the condensed consolidated balance sheets presented on page 2: (1) 'short-term investments', (2) 'investments - statutory reserve funds' and (3) 'investments - other'. EX-99.2 5 h00885exv99w2.txt CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER EXHIBIT 99.2 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 The undersigned, being the Co-Chief Executive Officer of Stewart Information Services Corporation (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, filed with the United States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated November 4, 2002. /s/ MALCOLM S. MORRIS - -------------------------------- Name: Malcolm S. Morris Title: Chairman of the Board and Co-Chief Executive Officer EX-99.3 6 h00885exv99w3.txt CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER EXHIBIT 99.3 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 The undersigned, being the Co-Chief Executive Officer of Stewart Information Services Corporation (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, filed with the United States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated November 4, 2002. /s/ STEWART MORRIS, JR. - ----------------------------- Name: Stewart Morris, Jr. Title: President and Co-Chief Executive Officer EX-99.4 7 h00885exv99w4.txt CERTIFICATE OF CHIEF FINANCIAL OFFICER EXHIBIT 99.4 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CHIEF FINANCIAL OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 The undersigned, being the Chief Financial Officer of Stewart Information Services Corporation (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, filed with the United States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated November 4, 2002. /s/ MAX CRISP - ------------------------------------ Name: Max Crisp Title: Executive Vice President and Chief Financial Officer, Secretary- Treasurer, Director and Principal Financial and Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----