-----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, CoDayeZY/sdvYJpcxJjl+iuC7YD3GKCjFo0WyEzYMZHG+vCzW07qfneBaIoVqDoM cf8Qvh6iFC37XyGVuQmRcg== 0000950129-03-003950.txt : 20030806 0000950129-03-003950.hdr.sgml : 20030806 20030806164947 ACCESSION NUMBER: 0000950129-03-003950 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030806 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: 03826735 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 h07976e10vq.txt STEWART INFORMATION SERVICES CORP.- JUNE 30, 2003 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 [ ] 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 2003. Common 16,849,618 Class B Common 1,050,012 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 2003 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 4. Submission of Matters to a Vote of Security Holders 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 SIX MONTHS ENDED JUNE 30, 2003 and 2002
SECOND QUARTER SIX MONTHS ------------------------- ------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ($000 Omitted) ($000 Omitted) Revenues Title insurance: Direct operations 241,181 152,823 434,474 299,228 Agency operations 298,836 232,271 522,838 412,543 Real estate information services 19,598 17,206 38,648 33,248 Investment income 4,535 4,739 9,318 9,642 Investment gains - net 542 89 338 441 ---------- ---------- ---------- ---------- 564,692 407,128 1,005,616 755,102 Expenses Amounts retained by agencies 245,652 188,560 430,401 336,849 Employee costs 147,178 105,979 279,180 210,544 Other operating 72,599 59,107 139,447 114,311 Title losses and related claims 22,711 16,702 40,667 31,068 Depreciation 6,168 5,243 12,077 10,628 Interest 146 260 361 515 Minority interests 4,144 2,534 6,482 4,064 ---------- ---------- ---------- ---------- 498,598 378,385 908,615 707,979 ---------- ---------- ---------- ---------- Earnings before taxes 66,094 28,743 97,001 47,123 Income taxes 25,064 11,032 36,096 18,068 ---------- ---------- ---------- ---------- Net earnings 41,030 17,711 60,905 29,055 ========== ========== ========== ========== Average number of shares outstanding - assuming dilution (000 omitted) 17,951 17,935 17,895 17,945 Earnings per share - basic 2.30 1.00 3.42 1.63 Earnings per share - diluted 2.29 0.99 3.40 1.62 ========== ========== ========== ========== Comprehensive earnings: Net earnings 41,030 17,711 60,905 29,055 Changes in other comprehensive earnings, net of taxes of $3,107, $1,983, $3,576 and $729 5,770 3,684 6,642 1,354 ---------- ---------- ---------- ---------- Comprehensive earnings 46,800 21,395 67,547 30,409 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. -1- STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 AND DECEMBER 31, 2002
JUN 30 DEC 31 2003 2002 ---------- ---------- ($000 Omitted) Assets Cash and cash equivalents 168,190 139,156 Short-term investments 50,610 50,673 Investments - statutory reserve funds 350,744 306,501 Investments - other 66,470 69,260 Receivables 69,957 69,041 Property and equipment 65,762 60,592 Title plants 41,823 40,307 Goodwill 79,366 66,885 Other 42,213 39,858 ---------- ---------- 935,135 842,273 ========== ========== Liabilities Notes payable 21,086 14,195 Accounts payable and accrued liabilities 72,617 82,248 Estimated title losses 248,149 230,058 Deferred income taxes 16,971 11,284 Minority interests 12,156 10,896 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 137,943 134,927 Retained earnings 414,132 353,226 Accumulated other comprehensive earnings 15,986 9,344 Treasury stock - 325,669 shares (3,905) (3,905) ---------- ---------- Total stockholders' equity (17,887,000 shares outstanding at June 30, 2003) 564,156 493,592 ---------- ---------- 935,135 842,273 ========== ==========
See notes to condensed consolidated financial statements. -2- STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
SIX MONTHS ENDED -------------------------- JUN 30 JUN 30 2003 2002 ---------- ---------- ($000 Omitted) Cash provided by operating activities (Note) 84,911 42,585 Investing activities: Purchases of property and equipment and title plants - net (16,898) (10,918) Proceeds from investments matured and sold 87,439 56,600 Purchases of investments (115,542) (68,385) Increases in notes receivable (434) (1,202) Collections on notes receivable 846 1,551 Cash (paid) received for the acquisitions of subsidiaries - net (13,562) 190 ---------- ---------- Cash used by investing activities (58,151) (22,164) Financing activities: Distribution to minority interests (5,096) (3,395) Proceeds from exercise of stock options 2,228 122 Proceeds of notes payable 9,691 1,452 Payments on notes payable (4,549) (2,728) ---------- ---------- Cash provided (used) by financing activities 2,274 (4,549) ---------- ---------- Increase in cash and cash equivalents 29,034 15,872 ========== ========== NOTE: Reconciliation of net earnings to the above amounts - Net earnings 60,905 29,055 Add (deduct): Depreciation and amortization 12,077 10,628 Provision for title losses in excess of payments 16,909 7,422 Provision for uncollectible amounts - net 1,564 918 (Increase) Decrease in accounts receivable - net (1,787) 3,344 Decrease in accounts payable and accrued liabilities - net (10,826) (11,917) Minority interest expense 6,482 4,064 Equity in net earnings of investees (2,953) (1,417) Dividends received from equity investees 2,752 1,263 Realized investment gains - net (338) (587) Change in deferred taxes 2,084 4,434 Increase in other assets (2,090) (3,778) Other - net 132 (844) ---------- ---------- Cash provided by operating activities 84,911 42,585 ========== ========== Supplemental information: Net assets acquired (purchase method) Goodwill 11,692 1,699 Title plants 1,355 307 Other 4,981 (1,216) Liabilities assumed (4,466) (453) Common Stock acquired -- 2,721 Debt issued to sellers -- (3,248) ---------- ---------- Cash paid(received) for the acquisition of subsidiaries - net 13,562 (190) ========== ==========
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 six month periods ended June 30, 2003 and 2002, and as of June 30, 2003, 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, 2002. Certain amounts in the 2002 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 6/30/03 545,094 19,598 564,692 6/30/02 389,922 17,206 407,128 Six months ended 6/30/03 966,968 38,648 1,005,616 6/30/02 721,854 33,248 755,102 Pretax earnings: Three months ended 6/30/03 61,520 4,574 66,094 6/30/02 25,966 2,777 28,743 Six months ended 6/30/03 89,416 7,585 97,001 6/30/02 43,682 3,441 47,123 Identifiable assets: 6/30/03 887,199 47,936 935,135 12/31/02 797,854 44,419 842,273
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 118,000 and 158,000 for the three month periods ended June 30, 2003 and 2002, respectively and 107,000 and 152,000 for the six month periods ended June 30, 2003 and 2002, respectively. -4- Note 4: New Significant Accounting Pronouncement The Company has adopted the standards for how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity required by SFAS No. 150 for financial instruments entered into or modified after May 31, 2003, effective June 15, 2003. The effect on our consolidated financial position or results of operations was immaterial. Note 5: Stock-based Compensation The Company has two fixed stock-based employee compensation plans. The Company accounts for the plans under the intrinsic value method. Accordingly, no stock-based employee compensation cost is reflected in net earnings, as all options granted under the plans had an exercise price equal to the market value of the underlying Common Stock on the date of grant. The Company applies APB No. 25 and related Interpretations in accounting for its plans. Under SFAS No. 123, compensation cost would be 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%, an expected life of ten years for each option, expected volatility of 35.7% and 42.3% and a risk-free interest rate of 4.3% and 4.8% for the six months ended June 30, 2003 and 2002, respectively. Had compensation cost for the Company's plans been determined consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- JUN 30 JUN 30 JUN 30 JUN 30 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ($000 Omitted) ($000 Omitted) Net Earnings: As reported 41,030 17,711 60,905 29,055 Stock-based employee compensation determined under fair value method (134) (156) (663) (651) ---------- ---------- ---------- ---------- Pro forma 40,896 17,555 60,242 28,404 Earnings per share: Net earnings - basic 2.30 1.00 3.42 1.63 Pro forma - basic 2.29 0.99 3.39 1.60 Net earnings - diluted 2.29 0.99 3.40 1.62 Pro forma - diluted 2.28 0.98 3.37 1.58
Note 6: Equity in Investees The amount of earnings from equity investments was $1.8 million and $0.9 million for the quarter ended June 30, 2003 and 2002, respectively and $3.0 million and $1.4 million for the six month periods ended June 30, 2003 and 2002, respectively. These amounts are included in "title insurance revenues - direct operations" in the condensed consolidated statements of earnings and comprehensive earnings. Note 7: Contingent Liabilities and Commitments We adopted the disclosure requirements for guarantees required by FASB Interpretation No. 45 effective December 31, 2002. We have also adopted the initial recognition and measurement provision of the non-contingent aspects of guarantees issued or modified after December 31, 2002. On June 30, 2003 the Company was contingently liable for guarantees of indebtedness owed primarily to banks and others by unconsolidated equity investees and other third parties. The guarantees relate primarily to business expansion and generally expire no later than June 30, 2008. The maximum potential future payments on the guarantees amount to $1,691,000 for equity investees and $8,283,000 for other third parties. Management believes that the collateral available, primarily title plants and the guarantees of corporate stock, would enable the Company to recover the amounts paid under the guarantees. The Company believes no provision for losses is needed because no loss is expected on these guarantees. In the ordinary course of business the Company guarantees the third party indebtedness of its consolidated subsidiaries. On June 30, 2003 the maximum potential future payments on the guarantees is not more than the notes payable recorded on the consolidated balance sheets. -5- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL. Our primary business is title insurance. We close transactions and issue policies on homes and other real property located in all 50 states, the District of Columbia, U.S. territories and several foreign countries through more than 6,800 issuing locations. Our direct operations include affiliated agencies while agency operations include nonaffiliated agencies that have underwriting contracts with us. 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 insurance 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 agencies. Although we conduct operations in several international markets, at current levels non-USA operations are immaterial with respect to our consolidated financial results. 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 acquisitions; and o a higher ratio of commercial transactions that, although relatively few in number, typically yield higher premiums. These factors may override the seasonal nature of the title business. 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 and estimates, 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 and escrow 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 reserves are continually reviewed and adjusted, as appropriate. Independent actuaries review the adequacy of the reserves on an annual basis. Premium revenues 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. Premium revenues on title insurance policies written by agencies are recognized primarily when policies are reported to us. Revenues are recorded on a total premium basis versus net to the underwriter. We accrue for unreported policies where reasonable estimates can be made based on historical reporting patterns of agencies, current trends and known information about agencies. 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 the projected undiscounted cash flow over the estimated life of an asset is less than its carrying value. If impairment is determined by management, the book amount is written down to fair value by calculating the discounted value of the projected cash flow. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", goodwill for each reporting unit is tested for impairment annually by an independent valuation and goodwill determined to be impaired is expensed to current operations. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 OPERATING ENVIRONMENT. According to published industry data, interest rates for 30-year fixed rate mortgages, excluding points, for the first six months of 2003 averaged 5.7% as compared with 6.9% for the same period in 2002. Comparable rates averaged 6.5% in the full year 2002. In 2002 rates were steady at about 7% until April. Rates then declined through December 2002, reaching a low of 5.9%. At the end of June 2003, rates were at a level of about 5.2%. -6- Operating in these mortgage interest rate environments, real estate activity was much stronger in the first half of 2003 as compared with the first half of 2002. Nationwide, refinancing transactions remained strong in 2003. The ratio of refinancings to total loan applications was 75.8% for the first six months of 2003, compared with 46.5% for the same period in 2002. Refinancings usually have lower title insurance premium rates than real property sales. Existing home sales increased 3.4% in 2003 over 2002. TITLE REVENUES. Our revenues from title operations increased 34.5% in the first six months of 2003 over the first six months in 2002. Revenues from direct operations increased 45.2% in 2003, as the number of direct closings we handled increased 46.6%. The largest revenue increases in 2003 were primarily in California, Texas and Washington. Direct closings relate only to files closed by our underwriters and subsidiaries and do not include closings by agencies. The average revenue per closing decreased 1.4% in 2003. Premium revenues from agencies increased 26.7% to $522.8 million in 2003 from $412.5 million in 2002. The increase in 2003 was primarily due to the increases in both refinancings and real property sales. The largest revenue increases in both years were primarily in California, New York and Florida. REI REVENUES. Real estate information revenues were $38.6 million in 2003 and $33.2 million in 2002. The increase in 2003 resulted primarily from providing an increased number of product and service deliveries resulting from the large volume of real estate transactions. INVESTMENTS. Investment income decreased 3.4% in 2003 primarily because of lower yields, partially offset by increases in average balances invested. We realized a gain on the sale of investment real estate during the second quarter of 2002, but it was offset by a comparable after-tax loss of $1.2 million on the sale of WorldCom bonds. Certain investment gains and losses were realized as part of the on-going management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. The amounts retained by agencies, as a percentage of revenues from agency operations, were 82.3% and 81.7% in 2003 and 2002. Amounts retained by title agencies are based on contracts between the agencies and our title insurance underwriters. The percentage that amounts retained by agencies bear to agency revenues may vary from year to year because of the geographical mix of agency operations and the volume of title revenues. EMPLOYEE COSTS. Employee costs for the combined business segments increased 32.6% in 2003. The number of persons we employed at June 30, 2003 and June 30, 2002 was approximately 8,600 and 7,200, respectively. The increase in staff in 2003 was primarily due to the increased title and REI volume and the acquisition of new offices. In our REI segment, employee costs increased in 2003 and 2002 primarily due to the increase in REI volume. OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 22.0% in 2003. The increase was primarily in new offices, search fees, business promotion and supplies. Other operating expenses also include rent, premium taxes, telephone, title plant expenses and travel and auto. Most of these operating expenses follow, to varying degrees, the changes in transaction volume and revenues. Our employee costs 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 we handle. TITLE LOSSES. Provisions for title losses, as a percentage of title operating revenues, were 4.2% in 2003 and 4.4% in 2002. We continue to experience low loss ratios because of our improved practices. Also, increases in refinancing transactions, which generally result in lower loss exposure, have led to lower loss ratios. INCOME TAXES. The provision for federal, state and foreign income taxes represented effective tax rates of 37.2% and 38.3% in 2003 and 2002, respectively. The annual effective tax rate for 2003 is estimated to be approximately 37.5%. -7- THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 OPERATING ENVIRONMENT. According to published industry data, interest rates for 30-year fixed rate mortgages, excluding points, for the three months ended June 30, 2003 averaged 5.5% as compared with 6.8% for the same period in 2002. Operating in these mortgage interest rate environments, real estate activity was much stronger in the second quarter of 2003 as compared to the second quarter of 2002. Nationwide, refinancing transactions remained strong in 2003. The ratio of refinancings to total loan applications was 74.7% for the second quarter of 2003, compared with 42.7% for the same period in 2002. Refinancings usually have lower title insurance premium rates than real property sales. Existing home sales increased 4.7% in 2003 over 2002. TITLE REVENUES. Our revenues from title operations increased 40.2% in the second quarter of 2003 over the second quarter in 2002. Revenues from direct operations increased 57.8% in 2003, as the number of direct closings we handled increased 63.4%. The largest revenue increases in the second quarter of 2003 were primarily in California, Texas and Washington. Direct closings relate only to files closed by our underwriters and subsidiaries and do not include closings by agencies. The average revenue per closing decreased 3.2% in 2003. Premium revenues from agencies increased 28.7% to $298.8 million in for the second quarter of 2003 from $232.2 million in 2002. The increase in 2003 was primarily due to the increases in both refinancings and real property sales. The largest revenue increases in both years were primarily in California, Florida, New York and Virginia. REI REVENUES. Real estate information revenues were $19.6 million for the second quarter of 2003 and $17.2 million for the second quarter of 2002. The increase in 2003 resulted primarily from providing an increased number of product and service deliveries resulting from the large volume of real estate transactions. INVESTMENTS. Investment income decreased 4.3% in the second quarter of 2003 compared to the second quarter of 2002 primarily because of lower yields, partially offset by increases in average balances invested. We realized a gain on the sale of investment real estate during the second quarter of 2002, but it was offset by a comparable after-tax loss of $1.2 million on the sale of WorldCom bonds. Certain investment gains and losses were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues from agency operations, were 82.2% and 81.2% in the second quarters 2003 and 2002, respectively. Amounts retained by title agencies are based on contracts between agencies and our title underwriters. The percentage that amounts retained by agencies bears to agency revenues may vary from year to year because of the geographical mix of agency operations and the volume of title revenues. EMPLOYEE COSTS. Employee costs for the combined business segments increased 38.9% in 2003. The number of persons we employed at June 30, 2003 and June 30, 2002 was approximately 8,600 and 7,200, respectively. The increase in staff in 2003 was primarily due to the increased title and REI volume and the acquisition of new offices. In our REI segment, employee costs increased in 2003 primarily due the increase in REI volume. OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 22.8% in the second quarter of 2003. The increase was primarily in new offices, search fees, business promotion and premium taxes. Other operating expenses also include rent, supplies, telephone, title plant expenses and travel and auto. Most of these operating expenses follow, to varying degrees, the changes in transaction volume and revenues. Our employee costs 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 we handle. TITLE LOSSES. Provisions for title losses, as a percentage of title operating revenues, were 4.2% in second quarter 2003 and 4.3% in second quarter 2002. We continue to experience low loss ratios because of our improved practices. Also, increases in refinancing transactions, which generally result in lower loss exposure, have led to lower loss ratios. INCOME TAXES. The provisions for federal, state and foreign income taxes represented effective tax rates of 37.9% and 38.4% in the second quarters of 2003 and 2002, respectively. -8- LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $84.9 million and $42.6 million in 2003 and 2002, respectively. Cash flow from operations has been the primary source of financing for additions to property and equipment, expanding operations and other requirements. This source may be supplemented by bank borrowings. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements. 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 2 and 3 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. Our liquidity, excluding Guaranty and its subsidiaries, is comprised of cash and investments aggregating $11.2 million and short-term liabilities of $0.5 million at June 30, 2003. We know of no commitments or uncertainties that are likely to materially affect our ability to fund cash needs. We consider our capital resources to be adequate. Our capital resources are represented by a low debt-to-equity ratio, in which notes payable is $21.1 million and stockholders' equity is $564 million at June 30, 2003. We are not aware of any trends, either favorable or unfavorable, that would materially affect notes payable or 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 or stockholders' equity balances. Forward-looking statements. All statements included in this report, other than statements of historical fact, addressing activities, events or developments that we expect or anticipate 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, 2002. -9- Item 4. Controls and Procedures In 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"). We believe that our existing disclosure controls and procedures have been effective to accomplish these objectives. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Our Annual Meeting of Stockholders was held on April 25, 2003 for the purpose of electing our board of directors. (b) Proxies for the meeting were solicited pursuant to Section 14 (a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's solicitations. All of the Registrant's nominees were elected. (c) Stockholder votes with respect to the election of directors at our Annual Meeting were as follows: A. Directors Elected by Common Stockholders:
Number of Shares ---------------- Votes For Votes Withheld --------------- --------------- Lloyd Bentsen, III 15,130,790 168,452 Nita B. Hanks 15,088,907 210,335 Dr. E. Douglas Hodo 15,131,330 167,912 Gov. John P. LaWare 15,158,791 140,451 Dr. W. Arthur Porter 15,159,989 139,353
B. Directors Elected by Class B Common Stockholders:
Number of Shares ---------------- Votes For Votes Withheld --------------- --------------- Max Crisp 1,050,012 0 Paul W. Hobby 1,050,012 0 Malcolm S. Morris 1,050,012 0 Stewart Morris, Jr 1,050,012 0
There were no broker non-votes with respect to the election of directors. ITEM 5. OTHER INFORMATION We paid regular quarterly cash dividends on our common stock from 1972 through 1999. Our Board of Directors has approved a plan to repurchase up to 5 percent (up to 838,000 shares) of our outstanding common stock. Our Board 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, 2002 or in the first six months of 2003. In June 2003, the Board voted to recommence an annual dividend payout due to recent favorable tax law changes. The amount and timing of the dividend payout will be determined in the fourth quarter 2003. An additional 208,769 shares of treasury stock were acquired primarily in the second quarter of 2002. The majority of these shares were acquired as a result of the consolidation of a majority owned subsidiary that was previously held as an equity method investment. All of these shares were held by us at June 30, 2003. -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, 2002) * 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) 32.1 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 32.2 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 32.3 - Certificate of Chief Financial Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.1 - Details of Investments at June 30, 2003 and December 31, 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 July 25, 2003, reporting financial results for the three and six months ended June 30, 2003. -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) August 6, 2003 - ---------------- 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 quarterly 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: August 6, 2003 /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 quarterly 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: August 6, 2003 /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 quarterly 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: August 6, 2003 /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, 2002) * 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) 32.1 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 32.2 - Certificate of Co-Chief Executive Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 32.3 - Certificate of Chief Financial Officer pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 99.1 - Details of Investments at June 30, 2003 and December 31, 2002
* A management compensation plan, contract or arrangement. EX-4 3 h07976exv4.txt RIGHTS OF COMMON & CLASS B COMMON STOCKHOLDERS EXHIBIT 4 STEWART INFORMATION SERVICES CORPORATION RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS June 30, 2003 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-32.1 4 h07976exv32w1.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE SIX MONTHS ENDED JUNE 30, 2003 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 June 30, 2003, 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 August 6, 2003. /S/ MALCOLM S. MORRIS - -------------------------------- Name: Malcolm S. Morris Title: Chairman of the Board and Co-Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Stewart Information Services Corporation and will be retained by Stewart Information Services Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 h07976exv32w2.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 906 EXHIBIT 32.2 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE SIX MONTHS ENDED JUNE 30, 2003 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 June 30, 2003, 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 August 6, 2003. /S/ STEWART MORRIS, JR. - ----------------------------- Name: Stewart Morris, Jr. Title: President and Co-Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Stewart Information Services Corporation and will be retained by Stewart Information Services Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.3 6 h07976exv32w3.txt CERTIFICATE OF CFO PURSUANT TO SECTION 906 Exhibit 32.3 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CHIEF FINANCIAL OFFICER FOR THE SIX MONTHS ENDED JUNE 30, 2003 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 June 30, 2003, 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 August 6, 2003. /S/ MAX CRISP - ------------------------------------ Name: Max Crisp Title: Executive Vice President and Chief Financial Officer, Secretary- Treasurer, Director and Principal Financial and Accounting Officer A signed original of this written statement required by Section 906 has been provided to Stewart Information Services Corporation and will be retained by Stewart Information Services Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.1 7 h07976exv99w1.txt DETAILS OF INVESTMENTS AT JUNE 2003 & DEC. 2002 EXHIBIT 99.1 STEWART INFORMATION SERVICES CORPORATION DETAILS OF INVESTMENTS JUNE 30, 2003 AND DECEMBER 31, 2002
JUN 30 DEC 31 2003 2002 ---------- ---------- ($000 Omitted) Investments, at market, partially restricted: Short-term investments 50,610 50,673 U. S. Treasury and agency obligations 42,053 39,798 Municipal bonds 168,492 159,453 Foreign 53,189 34,748 Mortgage-backed securities 960 1,360 Corporate bonds 138,561 132,502 Equity securities 13,959 7,900 ---------- ---------- TOTAL INVESTMENTS 467,824 426,434 ========== ==========
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'. -----END PRIVACY-ENHANCED MESSAGE-----