1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended March 31, 1997 [ ] 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) (Zip Code) (713) 625-8100 -------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------ - -------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common 6,273,336 Class B Common 525,006
2 FORM 10-Q QUARTERLY REPORT Quarter Ended March 31, 1997 TABLE OF CONTENTS <TABLE> <CAPTION> Item No. Page - -------- - ---- <S> <C> <C> Part I 1. Financial Statements 1 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Part II 1. Legal Proceedings 8 6. Exhibits and Reports on Form 8-K 9 Signature 13 </TABLE>
3 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1997 and 1996 <TABLE> <CAPTION> ============================= THREE MONTHS ------ - ------------------- 1997 1996 - ------------------------- ($000 Omitted) ============================= <S> <C> <C> Revenues Title premiums, fees and other revenues 73,241 74,636 Investment income 3,727 3,446 Investment gains 156 374 Other income - net (370) (452) ------ - ------------------- 76,754 78,004 Expenses Employee costs 43,294 40,747 Other operating expenses 23,507 22,914 Title losses and related claims 6,559 7,960 Depreciation and amortization 2,776 2,465 Interest 253 284 Minority interests 267 236 ------ - ------------------- 76,656 74,606 Earnings before taxes 98 3,398 Income taxes 34 1,223 ------ - ------------------- Net earnings 64 2,175 ============================= Average number of shares outstanding (000) 6,787 6,666 Earnings per share 0.01 0.33 ============================= </TABLE> -1-
4 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND DECEMBER 31, 1996 <TABLE> <CAPTION> ============================ MAR 31 DEC 31 1997 1996 - ---------------------------- ($000 Omitted) ============================ <S> <C> <C> Assets Cash and cash equivalents 18,696 18,484 Short-term investments 27,771 31,946 Investments - statutory reserve funds 127,549 127,057 Investments - other 68,780 73,456 Receivables 30,875 31,616 Property and equipment 28,274 28,185 Title plants 20,983 21,096 Goodwill 16,515 16,535 Deferred income taxes 16,460 14,615 Other 20,737 20,382 - ---------------------------- 376,640 383,372 ============================ Liabilities Notes payable 12,738 12,234 Accounts payable and accrued liabilities 20,799 25,452 Estimated title losses 149,810 150,331 Minority interests 4,383 4,275 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 58,404 57,574 Net unrealized investment gains (losses) (677) 1,920 Retained earnings 131,183 131,496 - ---------------------------- Total stockholders' equity ($27.79 per share at March 31, 1997) 188,910 190,990 - ---------------------------- 376,640 383,372 ============================ </TABLE> -2-
5 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 <TABLE> <CAPTION> ============================= 1997 1996 - ----------------------------- ($000 Omitted) ============================= <S> <C> <C> Cash (used) provided by operating activities (Note) (1,998) 7,201 Cash flow from investing activities: Purchases of property and equipment and title plants - net (2,189) (2,086) Proceeds from investments matured and sold 26,286 30,732 Purchases of investments (21,767) (35,995) Increases in notes receivable (506) (373) Collections on notes receivable 174 706 Proceeds from issuance of stock 36 0 Cash received (paid) for the acquisitions of subsidiaries - net 26 (231) - ----------------------------- Cash provided (used) by investing activities 2,060 (7,247) Financing activities: Dividends paid (377) (369) Proceeds of notes payable 1,849 1,002 Payments on notes payable (1,322) (548) - ----------------------------- Cash provided by financing activities 150 85 - ----------------------------- Increase in cash and cash equivalents 212 39 ============================= NOTE: Reconciliation of net income to above amounts: Net income 64 2,175 Add (deduct): Depreciation and amortization 2,796 2,484 Provision for title losses (less than) in excess of payments (521) 3,972 Provision for uncollectible amounts - net 176 (110) Decrease (increase) in accounts receivable - net 969 (1,355) Decrease in accounts payable and accrued liabilities - net (5,005) (291) Minority interest expense 267 236 Equity in net earnings of investees 11 404 Realized investment gains - net (156) (374) Other, net (599) 60 - ----------------------------- Cash (used) provided by operating activities (1,998) 7,201 ============================= </TABLE> -3-
6 STEWART INFORMATION SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ============================================================ ==================== Note 1: Interim Financial Statements The financial information contained in this report for the three month periods ended March 31, 1997 and 1996, and as at March 31, 1997, is unaudited. In the opinion of management, all adjustments necessary for a fair presentation of this information for all unaudited periods, consisting only of normal recurring accruals, have been made. The results of operations for the interim periods are not necessarily indicative of results for a full year. -4-
7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------ - -------------------- A comparison of the results of operations of the Company for the first three months of 1997 with the first three months of 1996 follows: General The Company's dominant segment of operations is the land title business. In general, the principal factors which contribute to increases in title revenues include declining mortgage interest rates (which usually increase home sales), increases in refinancing transactions, rising home prices, higher premium rates, increased market share, additional revenues from new offices and increased revenue from non-residential commercial transactions. Although relatively few in number, large commercial transactions usually yield higher premiums. Revenues Revenues from title premiums and fees decreased $1.4 million, or 1.9%, from a year ago. Mortgage interest rates were higher in the early part of 1997 than in the same period a year ago, reducing real estate transactions. Refinancing transactions, in particular, were higher a year ago. But refi transactions fell to lower, more normal levels beginning in the second quarter of 1996. Refinancings have remained at the lower levels since then. The number of closings handled by the Company decreased 15.6%. Closings decreased in California, Florida, Texas and most other states. The average revenue per closing increased in the first quarter of 1996. Fewer refinancings, with their lower premiums, resulted in higher revenues per closing in 1997. Industry sources report an increase of 4-5% in home prices, and that has the effect of raising title fees and premiums. Increases in commercial transactions handled, revenues from agents and real estate information services offered by the Company also contributed to higher revenues in 1997. Investment income increased 8.2% in 1997 due to an increase in the average balances invested and the increased yield on the balances. Expenses Employee expenses increased $2.5 million, or 6.3%, in 1997 primarily because of a higher average number of employees, during the first quarter of 1997 compared to a year ago and increased average rates of compensation. Staff reductions were made in the first quarter of 1997 which lowered the quarter- end number of employees of the company to 4,064 or slightly below the staff levels at March 31, 1996. The reductions were made primarily in title office operations in California and Florida -5-
8 The Company continued to maintain higher staff levels, in comparison with a year ago, in areas of automating services rendered to customers and improving its own processes, real estate information services that are being developed and sold to customers and the expansion of its national marketing efforts The Company believes the development and sale of new products and services is important to its future. Through automating operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. Other operating expenses increased by $0.6 million, or 2.6%, in primarily because of increased bad debt provisions, rent and premium taxes. Other operating expenses also include business promotion, supplies, policy forms, delivery costs, title plant expenses, telephone and travel Provisions for title losses and related claims were down $1.4 million or 17.6% in 1997. The Company's experience in claims continues to improve significantly. As a percentage of title premiums, fees and related revenues, the provision for the first quarter of 1997 decreased to 9.0 percent versus 10.7 percent in the first quarter of 1996. The provision for the year 1996 was 10.3 percent. The provision for income taxes represented a 35.0% effective tax rate in 1997 and a 36.0% effective tax rate in 1996. Liquidity and capital resources Operating earnings represent the primary source of financing, for the Company, but this may be supplemented by bank borrowings. The capital resources of the Company, and the present debt-to-equity relationship, are considered satisfactory. -6-
9 PART II <TABLE> <CAPTION> - --------- Page - --------- - ---------- ------------------------------------------------- - ---------- <S> <C> <C> Item 1. Legal Proceedings 8 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4. - Rights of Common and Class B Common 9 Stockholders 27.0 - Financial data schedule 10 28.2 - Details of Investments as reported in the 12 Quarterly Report to Shareholders (b) There were no reports on Form 8-K filed during the quarter ended March 31, 1997 - ---------- ------------------------------------------------- - ---------- --------- </TABLE> -7-
10 ITEM 3. LEGAL PROCEEDINGS Guaranty and 18 other title insurers are defendants in a consolidated class action proceeding originating from complaints first filed in April 1990. The suit is currently pending in the United States District Court for the District of Arizona. The plaintiffs allege that the defendants violated federal antitrust law by participating in title insurance rating bureaus in Arizona and Wisconsin in the early 1980s through which they allegedly agreed upon the prices and other terms and conditions of sale for title search and examination services. The plaintiffs request treble damages in an unspecified amount, costs and attorneys' fees. The Court has certified the proceeding as a class action and approved a settlement pursuant to which members of the class would receive cash (not to exceed approximately $4.1 million from all defendants) and additional coverage under, and discounts on, title insurance policies. In addition, the Court has awarded counsel for certain plaintiffs the negotiated sum of $1.3 million in fees and expenses. The Court has awarded counsel for the remaining plaintiffs fees and expenses totaling $0.5 million. The Court has under advisement the motions of such plaintiff's counsel to amend and to reconsider that award. James C. O'Brien and Ingrid K. O'Brien vs. Stewart Title Guaranty Company, filed September 25, 1996, in the United States District Court, Southern District of Florida. This purported class action is one of eight similar suits filed against various underwriters in Florida, including Guaranty. The alleged class would include all purchasers of title insurance or evidence of title in Florida since 1990. Plaintiffs allege that Guaranty's premium and cost sharing agreements with its Florida agents, which are governed by and set in accordance with rates promulgated by the Florida Department of Insurance, constitute violations of the Real Estate Settlement Procedures Act and Florida law, including fraudulent and negligent misrepresentation. Plaintiffs seek injunctive relief and treble damages of at least $60 million based upon the title insurance premiums paid by the purported class. Guaranty has filed a motion to dismiss the complaint on various grounds, including the filed rate doctrine. The Court has deferred any action on the plaintiff's motion to certify the proceedings as a class action pending disposition of Guaranty's motion to dismiss. Guaranty believes that the plaintiff's allegations are without merit and intends to vigorously defend this suit. The Registrant is a party to routine lawsuits incidental to its business most of which involve disputed policy claims. In many of these suits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agent of the Registrant. -8-
11 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Stewart Information Services Corporation ---------------------------------------- (Registrant) May 13, 1997 - -------------- Date /s/ MAX CRISP ------------------------------------- Max Crisp (Vice President - Finance, Secretary- Treasurer, Director and Principal Financial and Accounting Officer) -13-
12 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4 - Rights of Common and Class B Common Stockholders 27 - Financial data schedule 28.2 - Details of Investments as reported in the Quarterly Report to Shareholders