-----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, GvGGL/zYxFkbQiEqY71/AESXgwbME8J1Q5iVxeVXMoLDG6QiKaGmDb268CAJCqT0 FW+FeMXLAFOzBVYly7gsdA== 0000950129-03-005329.txt : 20031104 0000950129-03-005329.hdr.sgml : 20031104 20031104153103 ACCESSION NUMBER: 0000950129-03-005329 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031104 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: 03976201 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 h10166e10vq.txt STEWART INFORMATION SERVICES CORP.- SEPT.30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (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, 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 October 31, 2003. Common 16,861,618 Class B Common 1,050,012 FORM 10-Q QUARTERLY REPORT Quarter Ended September 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 9 Part II - OTHER INFORMATION 1. Legal Proceedings 10 5. Other Information 10 6. Exhibits and Reports on Form 8-K 11 Signature 12
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, 2003 and 2002
THIRD QUARTER NINE MONTHS -------------------------- ------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ($000 Omitted) Revenues Title insurance: Direct operations 261,583 175,395 694,821 474,623 Agency operations 340,728 275,398 863,566 687,941 Real estate information services 21,683 18,376 61,567 51,624 Investment income 5,262 5,597 14,580 15,093 Investment gains (losses) - net 419 (1,421) 757 (834) ---------- ---------- ---------- ---------- 629,675 473,345 1,635,291 1,228,447 Expenses Amounts retained by agencies 279,965 228,384 710,366 565,233 Employee costs 157,192 114,898 436,372 325,442 Other operating 86,727 65,925 226,174 180,236 Title losses and related claims 25,894 20,882 66,561 51,950 Depreciation 6,422 5,196 18,499 15,824 Interest 202 178 563 693 Minority interests 4,755 2,445 11,237 6,509 ---------- ---------- ---------- ---------- 561,157 437,908 1,469,772 1,145,887 ---------- ---------- ---------- ---------- Earnings before taxes 68,518 35,437 165,519 82,560 Income taxes 26,450 13,840 62,546 31,908 ---------- ---------- ---------- ---------- Net earnings 42,068 21,597 102,973 50,652 ========== ========== ========== ========== Average number of shares outstanding - assuming dilution (000 omitted) 18,006 17,729 17,937 17,836 Earnings per share - basic 2.35 1.22 5.78 2.86 Earnings per share - diluted 2.34 1.22 5.74 2.84 ========== ========== ========== ========== Comprehensive earnings: Net earnings 42,068 21,597 102,973 50,652 Changes in other comprehensive earnings, net of taxes of $(1,247), $3,154, $2,330 and $3,883 (2,316) 5,857 4,326 7,211 ---------- ---------- ---------- ---------- Comprehensive earnings 39,752 27,454 107,299 57,863 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. -1- STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
SEP 30 DEC 31 2003 2002 ---------- ---------- ($000 Omitted) Assets Cash and cash equivalents 132,962 139,156 Short-term investments 118,986 50,673 Investments - statutory reserve funds 373,288 306,501 Investments - other 63,462 69,260 Receivables 71,101 69,041 Property and equipment 70,837 60,592 Title plants 41,793 40,307 Goodwill 76,873 66,885 Other 52,078 39,858 ---------- ---------- 1,001,380 842,273 ========== ========== Liabilities Notes payable 24,715 14,195 Accounts payable and accrued liabilities 79,164 82,248 Estimated title losses 258,479 230,058 Deferred income taxes 20,646 11,284 Minority interests 14,122 10,896 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 138,290 134,927 Retained earnings 456,199 353,226 Accumulated other comprehensive earnings 13,670 9,344 Treasury stock - 325,669 shares (3,905) (3,905) ---------- ---------- Total stockholders' equity (17,903,030 shares outstanding at September 30, 2003) 604,254 493,592 ---------- ---------- 1,001,380 842,273 ========== ==========
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, 2003 AND 2002
NINE MONTHS ENDED ---------------------- SEP 30 SEP 30 2003 2002 -------- -------- ($000 Omitted) Cash provided by operating activities (Note) 157,984 92,418 Investing activities: Purchases of property and equipment and title plants - net (28,192) (17,835) Proceeds from investments matured and sold 170,398 83,519 Purchases of investments (289,644) (112,684) Increases in notes receivable (406) (3,013) Collections on notes receivable 1,174 2,021 Cash paid for equity investees (7,000) -- Cash paid for the acquisitions of subsidiaries - net (see below) (13,582) (2,185) -------- -------- Cash used by investing activities (167,252) (50,177) Financing activities: Distribution to minority interests (8,272) (5,526) Proceeds from exercise of stock options 2,575 122 Proceeds of notes payable 14,649 4,644 Payments on notes payable (5,878) (3,717) -------- -------- Cash provided (used) by financing activities 3,074 (4,477) -------- -------- (Decrease) increase in cash and cash equivalents (6,194) 37,764 ======== ======== NOTE: Reconciliation of net earnings to the above amounts - Net earnings 102,973 50,652 Add (deduct): Depreciation and amortization 18,499 15,824 Provision for title losses in excess of payments 27,239 18,640 Provision for uncollectible amounts - net 872 1,097 Increase in accounts receivable - net (2,595) (2,164) Decrease in accounts payable and accrued liabilities - net (4,280) (1,586) Minority interest expense 11,237 6,509 Equity in net earnings of investees (5,353) (2,339) Dividends received from equity investees 4,577 1,837 Realized investment (gains) losses - net (757) 834 Stock bonuses 788 634 Change in deferred taxes 7,034 7,185 Increase in other assets (4,164) (4,396) Other - net 1,914 (309) -------- -------- Cash provided by operating activities 157,984 92,418 ======== ======== Supplemental information: Net assets acquired (purchase method) Goodwill 11,692 3,435 Title plants 1,355 537 Other 5,001 61 Liabilities assumed (4,466) (4,068) Common Stock acquired -- 2,220 -------- -------- Cash paid for the acquisitions of subsidiaries - net 13,582 2,185 ======== ========
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, 2003 and 2002, and as of September 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 September 30, 2003 607,992 21,683 629,675 September 30, 2002 454,969 18,376 473,345 Nine months ended September 30, 2003 1,573,724 61,567 1,635,291 September 30, 2002 1,176,823 51,624 1,228,447 Pretax earnings: Three months ended September 30, 2003 63,865 4,653 68,518 September 30, 2002 32,064 3,373 35,437 Nine months ended September 30, 2003 153,281 12,238 165,519 September 30, 2002 75,746 6,814 82,560 Identifiable assets: September 30, 2003 953,108 48,272 1,001,380 December 31, 2002 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 113,000 and 92,000 for the three month periods ended September 30, 2003 and 2002, respectively, and 111,000 and 96,000 for the nine month periods ended September 30, 2003 and 2002, respectively. -4- Note 4: 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 33.1% and 34.7% and a risk-free interest rate of 4.3% and 4.8% for the nine months ended September 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 NINE MONTHS ENDED -------------------------- -------------------------- SEP 30 SEP 30 SEP 30 SEP 30 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ($000 Omitted, except per share amounts) Net earnings: - ------------- As reported 42,068 21,597 102,973 50,652 Stock-based employee compensation determined under fair value method (47) (63) (710) (588) ---------- ---------- ---------- ---------- Pro forma 42,021 21,534 102,263 50,064 Earnings per share: - ------------------- Net earnings - basic 2.35 1.22 5.78 2.86 Pro forma - basic 2.35 1.22 5.74 2.82 Net earnings - diluted 2.34 1.22 5.74 2.84 Pro forma - diluted 2.33 1.21 5.70 2.81
Note 5: Equity in Investees The amount of earnings from equity investments was $2.4 million and $0.9 million for the quarters ended September 30, 2003 and 2002, respectively, and $5.4 million and $2.3 million for the nine month periods ended September 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 6: 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 September 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 December 15, 2006. The maximum potential future payments on the guarantees amount to $1,691,000 for equity investees and $8,211,000 for other third parties. Management believes that the related underlying assets and 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 September 30, 2003, the maximum potential future payments on the guarantees is not more than the notes payable recorded on the condensed 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 7,000 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. 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. 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 OPERATING ENVIRONMENT. According to published industry data, interest rates for 30-year fixed rate mortgages, excluding points, for the first nine months of 2003 averaged 5.8% as compared with 6.7% for the same period in 2002. Comparable rates averaged 6.5% for the full year 2002. -6- In 2002, rates were steady at about 7% until April. Rates then declined through December 2002, reaching a low of 5.9%. In 2003, rates began the year at 5.9%, decreasing to 5.6% in March and then increasing to 5.9% by the end of March. Rates fell in the second quarter until they reached a low of 5.2% in June. Rates then increased to 5.9% again in July. Rates continued to increase, reaching a high of 6.4% in September, but decreased to 6.0% by the end of September. Operating in these mortgage interest rate environments, real estate activity was much stronger in the first nine months of 2003 as compared with the first nine months of 2002. Nationwide, refinancing transactions remained strong in 2003. The ratio of refinancings to total loan applications was 69.7% for the first nine months of 2003, compared with 53.7% for the same period in 2002. Refinancings were lower in the third quarter of 2003 compared to the first two quarters, averaging 57.3% in the third quarter. Refinancings usually have lower title insurance premium rates than real property sales. New order counts in August 2003 began to show significant unfavorable comparisons with the same period in 2002. However, orders in the second quarter of 2003 provided strong volume in the third quarter. Existing home sales increased 8.7% in 2003 over the same period in 2002. TITLE REVENUES. Our revenues from title operations increased 34.0% in the first nine months of 2003 over the first nine months in 2002. Revenues from direct operations increased 46.4% in 2003, as the number of direct closings we handled increased 44.5%. 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 increased 1.3% in 2003. Premium revenues from agencies increased 25.5% to $863.6 million in 2003 from $687.9 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 2003 were primarily in California, Florida and New York. REI REVENUES. Real estate information revenues were $61.6 million in 2003 and $51.6 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 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 82.3% in 2003 and 82.2% in 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 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 34.1% in 2003. The number of persons we employed at September 30, 2003 and September 30, 2002 was approximately 8,700 and 7,400, respectively. The increase in staff in 2003 was primarily due to the increased title and REI volume and the acquisitions 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 25.5% in 2003. The increase was primarily due to 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. TITLE LOSSES. Provisions for title losses, as a percentage of title operating revenues, were 4.3% in 2003 and 4.5% 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 37.8% and 38.6% in 2003 and 2002, respectively. -7- THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002 OPERATING ENVIRONMENT. According to published industry data, interest rates for 30-year fixed rate mortgages, excluding points, for the three months ended September 30, 2003 averaged 6.0% as compared with 6.3% for the same period in 2002. In the third quarter of 2003, rates increased from 5.2% in June to 5.9% in July. Rates continued to increase in August and reached a high of 6.4% in September. Rates then decreased to 6.0% by the end of September. Operating in these mortgage interest rate environments, real estate activity was much stronger in the third quarter of 2003 as compared to the third quarter of 2002. Nationwide, refinancing transactions remained strong in the first half of the year 2003. The ratio of refinancings to total loan applications was 57.3% for the third quarter of 2003, compared with 68.0% for the same period in 2002. Refinancings usually have lower title insurance premium rates than real property sales. New order counts in August 2003 began to show significant unfavorable comparisons with the same period in 2002. However, orders in the second quarter of 2003 provided strong volume in the third quarter. Existing home sales increased 20.0% in 2003 over the same period in 2002. TITLE REVENUES. Our revenues from title operations increased 33.6% in the third quarter of 2003 over the third quarter of 2002. Revenues from direct operations increased 49.1% in 2003, as the number of direct closings we handled increased 41.1%. The largest revenue increases in the third 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 increased 4.8% in 2003. Premium revenues from agencies increased 23.7% to $340.7 million in the third quarter of 2003 from $275.4 million in 2002. The increase in 2003 were primarily due to the increases in both refinancings and real property sales. The largest revenue increases in 2003 was primarily in California, Florida and Ohio. REI REVENUES. Real estate information revenues were $21.7 million for the third quarter of 2003 and $18.4 million for the third 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 6.0% in the third quarter of 2003 compared to the third quarter of 2002 primarily because of lower yields, partially offset by increases in average balances invested. 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 82.9% in the third quarters of 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 36.8% in 2003. The number of persons we employed at September 30, 2003 and September 30, 2002 was approximately 8,700 and 7,400, respectively. The increase in staff in 2003 was primarily due to the increased title and REI volume and the acquisitions of new offices. In our REI segment, employee costs increased in 2003 primarily due to the increase in REI volume. OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 31.6% in the third quarter of 2003. The increase was primarily in search fees, new offices, premium taxes and business promotion. 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. TITLE LOSSES. Provisions for title losses, as a percentage of title operating revenues, were 4.3% in the third quarter of 2003 and 4.6% in the third 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 38.6% and 39.1% in the third quarters of 2003 and 2002, respectively. -8- LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $158.0 million and $92.4 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 $10.0 million and short-term liabilities of $0.8 million at September 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 $24.7 million and stockholders' equity is $604.3 million at September 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, that address 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. Item 4. Controls and Procedures Our principal executive officers and our principal financial officer, based upon their evaluation of our disclosure controls and procedures conducted as of September 30, 2003, 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, nor were any corrective actions necessary with regard to significant deficiencies and material weaknesses. -9- 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. 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 nine 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 of 2003. In 2002, primarily in the second quarter, we acquired 208,769 shares of treasury stock. 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 September 30, 2003. We had a book value per share of $33.75 and $27.84 at September 30, 2003 and December 31, 2002, respectively. At September 30, 2003, this measure is based on approximately $604.3 million in stockholders' equity and 17.9 million shares outstanding. At December 31, 2002, this measure was based on approximately $493.6 million in stockholders' equity and 17.7 million shares outstanding. -10- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
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) 31.1 - Certificate of Co-Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 - Certificate of Co-Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.3 - Certificate of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 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 September 30, 2003 and December 31, 2002
* A management compensation plan, contract or arrangement. (b) Reports on Form 8-K: 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 July 25, 2003. -11- 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, 2003 - ---------------- Date /s/ MAX CRISP --------------------------------------------- Max Crisp (Executive Vice President and Chief Financial Officer, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -12- 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) 31.1 - Certificate of Co-Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 - Certificate of Co-Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.3 - Certificate of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 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 September 30, 2003 and December 31, 2002
* A management compensation plan, contract or arrangement. EX-4 3 h10166exv4.txt RIGHTS OF COMMON & CLASS B COMMON STOCKHOLDERS EXHIBIT 4 STEWART INFORMATION SERVICES CORPORATION RIGHTS OF COMMON AND CLASS B COMMON STOCKHOLDERS September 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, but all of the holders of Class B Common Stock have agreed among themselves not to convert their stock prior to January 2005. Such conversion is mandatory on any transfer to a person not a lineal descendant (or spouse, trustee, etc. of such descendant) of William H. Stewart. EX-31.1 4 h10166exv31w1.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Malcolm S. Morris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2003 /s/ MALCOLM S. MORRIS ----------------------------------- [Signature] Title: Chairman of the Board and Co-Chief Executive Officer EX-31.2 5 h10166exv31w2.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Stewart Morris, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2003 /s/ STEWART MORRIS, JR. ------------------------------ [Signature] Title: President and Co-Chief Executive Officer EX-31.3 6 h10166exv31w3.txt CERTIFICATE OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.3 CERTIFICATIONS Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Max Crisp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Stewart Information Services Corporation (registrant); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2003 /s/ MAX CRISP ---------------------------------- [Signature] Title: Executive Vice President and Chief Financial Officer, Secretary- Treasurer, Director and Principal Financial and Accounting Officer EX-32.1 7 h10166exv32w1.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 November 4, 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 8 h10166exv32w2.txt CERTIFICATE OF CO-CEO PURSUANT TO SECTION 906 EXHIBIT 32.2 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CO-CHIEF EXECUTIVE OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 November 4, 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 9 h10166exv32w3.txt CERTIFICATE OF CFO PURSUANT TO SECTION 906 Exhibit 32.3 STEWART INFORMATION SERVICES CORPORATION CERTIFICATE OF CHIEF FINANCIAL OFFICER FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 November 4, 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 10 h10166exv99w1.txt DETAILS OF INVESTMENTS AT SEPT.2003 & DEC.2002 EXHIBIT 99.1 STEWART INFORMATION SERVICES CORPORATION DETAILS OF INVESTMENTS SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
SEP 30 DEC 31 2003 2002 ------- ------- ($000 Omitted) Investments, at market, partially restricted: Short-term investments 118,986 50,673 U. S. Treasury and agency obligations 34,661 39,798 Municipal bonds 185,887 159,453 Foreign 53,834 34,748 Mortgage-backed securities 851 1,360 Corporate bonds 147,104 132,502 Equity securities 14,413 7,900 ------- ------- TOTAL INVESTMENTS 555,736 426,434 ======= =======
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-----