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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-12688 STEWART INFORMATION SERVICES CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 74-1677330 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1980 Post Oak Blvd., Houston TX 77056 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (713) 625-8100 ---------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common 6,483,555 Class B Common 525,006
FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 1998 TABLE OF CONTENTS Item No. Page - -------- ---- 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 9 6. Exhibits and Reports on Form 8-K 8 Signature 10
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1998 and 1997 <TABLE> <CAPTION> SECOND QUARTER SIX MONTHS -------------------- ------------------- 1998 1997 1998 1997 --------- --------- -------- ------- ($000 Omitted) ($000 Omitted) <S> <C> <C> <C> <C> Revenues Title premiums, fees and other revenues 218,543 162,408 399,527 297,598 Real estate information services 12,131 7,712 23,847 14,605 Investment income 4,502 3,861 8,776 7,588 Investment gains - net 263 25 331 181 --------- -------- -------- ------- 235,439 174,006 432,481 319,972 Expenses Amounts retained by agents 103,781 81,963 189,691 151,175 Employee costs 63,172 44,219 118,245 87,513 Other operating expenses 34,669 27,849 64,482 51,356 Title losses and related claims 10,024 7,544 18,239 14,103 Depreciation and amortization 3,591 2,843 6,861 5,619 Interest 396 313 783 566 Minority interests 1,527 643 2,429 910 --------- -------- -------- ------- 217,160 165,374 400,730 311,242 --------- -------- -------- ------- Earnings before taxes 18,279 8,632 31,751 8,730 Income taxes 7,021 3,104 11,868 3,138 --------- -------- -------- ------- Net earnings 11,258 5,528 19,883 5,592 ========= ======== ======== ======= Average number of shares outstanding (000) 7,064 6,860 7,042 6,848 Earnings per share - diluted 1.59 0.81 2.82 0.82 ========= ========= ======== ======= Comprehensive earnings: Net earnings 11,258 5,528 19,883 5,592 Changes in unrealized investment gains, net of tax 17 1,853 (611) (744) --------- -------- -------- ------- Comprehensive earnings 11,275 7,381 19,272 4,848 ========= ========= ======== ======= </TABLE> -1-
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 <TABLE> <CAPTION> JUNE 30 DEC 31 1998 1997 ---------- ---------- ($000 Omitted) <S> <C> <C> Assets Cash and cash equivalents 35,764 30,391 Short-term investments 48,525 35,761 Investments - statutory reserve funds 141,621 138,462 Investments - other 75,585 71,044 Receivables 36,533 31,868 Property and equipment 31,843 30,415 Title plants 23,215 21,778 Goodwill 18,637 18,427 Deferred income taxes 15,818 15,632 Other 23,309 23,913 ---------- ---------- 450,850 417,691 ========== ========== Liabilities Notes payable 19,576 19,087 Accounts payable and accrued liabilities 31,942 27,917 Estimated title losses 164,747 156,791 Minority interests 4,968 4,392 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 61,572 59,828 Retained earnings 164,120 145,140 Other comprehensive earnings 3,925 4,536 ---------- ----------- Total stockholders' equity ($32.76 per share at June 30, 1998) 229,617 209,504 ---------- ----------- 450,850 417,691 ========== =========== </TABLE> -2-
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 <TABLE> <CAPTION> 1998 1997 -------- -------- ($000 Omitted) <S> <C> <C> Cash provided by operating activities (Note) 35,205 7,711 Investing activities: Purchases of property and equipment and title plants - net (8,533) (5,988) Proceeds from investments matured and sold 24,365 24,390 Purchases of investments (45,438) (18,949) Increases in notes receivable (1,541) (1,743) Collections on notes receivable 1,029 435 Proceeds from issuance of stock 1,893 96 Cash paid for the acquisition of subsidiaries - net (823) (942) ---------- --------- Cash used by investing activities (29,048) (2,701) Financing activities: Dividends paid (903) (755) Proceeds of notes payable 3,134 4,868 Payments on notes payable (3,015) (2,087) ---------- --------- Cash (used) provided by financing activities (784) 2,026 ---------- --------- Increase in cash and cash equivalents 5,373 7,036 ========== ========== </TABLE> NOTE: Reconciliation of net earnings to the above amounts - <TABLE> <S> <C> <C> Net earnings 19,883 5,592 Add (deduct): Depreciation and amortization 6,861 5,619 Provision for title losses in excess of payments 7,169 2,161 Provision for uncollectible amounts - net (850) 199 Increase in accounts receivable - net (2,899) (3,261) Increase (decrease) in accounts payable and accrued liabilities - net 4,850 (1,804) Minority interest expense 2,429 910 Equity in net earnings of investees 15 (334) Realized investment gains - net (331) (181) Other - net (1,922) (1,190) ---------- --------- Cash provided by operating activities 35,205 7,711 ========== ========= </TABLE> -3-
STEWART INFORMATION SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Interim Financial Statements The financial information contained in this report for the six month periods ended June 30, 1998 and 1997, and as at June 30, 1998, 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. Certain amounts in the 1997 consolidated financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. -4-
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The Company provides title insurance and related services through more than 4,000 issuing locations in the United States and several international markets. A leading provider of real estate information technology and connectivity, Stewart meets the needs of the real estate and mortgage industry through the electronic delivery of services needed for settlement. These services include title reports, flood determinations, property appraisals, document preparation, credit reports and other real estate information. In addition, Stewart provides expertise in tax-deferred exchanges, surveys and field services. 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. A comparison of the results of operations of the Company for the first six months of 1998 with the first six months of 1997 follows: REVENUES Revenues from title premiums and fees increased $101.9 million, or 34.3%, from a year ago. Mortgage interest rates were lower in the early part of 1998 than in the same period a year ago, increasing real estate transactions. Refinancing transactions, in particular, were higher in 1998. The number of closings handled by the Company increased 50.6%. Closings increased in California, Texas, Colorado and most other states. The average revenue per closing decreased slightly in 1998 due, in part, to a larger number of refinancings with their lower premiums. Increases in commercial transactions and revenues from agents also contributed to higher revenues in 1998. A 3% reduction in Texas title premiums becomes effective August 1, 1998. However, the Company is experiencing new home equity business in Texas that did not exist before 1998. Real estate information revenues were $23.8 million in 1998 and $14.6 million in 1997. The increase was primarily due to a significant number of new businesses started by the Company in 1997. Investment income increased 15.7% in 1998 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Amounts retained by agents increased $38.5 million, or 25.5%, over the comparable period in 1997. The percentage of retention by agents to the amounts of revenues from agents was 80.0% and 80.7% for the six months ended June 30, 1998 and June 30, 1997, respectively. Employee expenses increased $30.7 million, or 35.1%, in 1998 primarily because of a higher average number of employees during 1998 compared to a year ago and increased average rates of compensation. The Company continued to maintain higher staff levels in comparison with a year ago. Increases were 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 automated operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. Other operating expenses increased by $13.1 million, or 25.6%, primarily because of the increase in transaction volume. Expenses that increased include appraisal fees, premium taxes, expenses of new offices, business promotion, rent and search fees. Other operating expenses also include supplies, travel, policy forms, delivery costs, title plant expenses and telephone. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Provisions for title losses and related claims were up $4.1 million, or 29.3% in 1998. As a percentage of title premiums, fees and related revenues, the provision in 1998 decreased to 4.6% versus 4.7% in 1997. The provision for income taxes represented effective tax rates of 37% and 36% in 1998 and 1997, respectively. -5-
A comparison of the results of operations of the Company for the second quarter of 1998 with the second quarter of 1997 follows: REVENUES Revenues from title premiums and fees increased $56.1 million, or 34.6%, from a year ago. Mortgage interest rates were lower in the early part of 1998 than the same period a year ago, increasing real estate transactions. Refinancing transactions, in particular, were higher in 1998. The number of closings handled by the Company increased 51.2%. Closings increased in California, Texas, Colorado and most other states. The average revenue per closing decreased slightly in 1998 due, in part, to a larger number of refinancings with their lower premiums. Increases in commercial transactions and revenues from agents also contributed to higher revenues in 1998. A 3% reduction in Texas title premiums becomes effective August 1, 1998. However, the Company is experiencing new home equity business in Texas that did not exist before 1998. Real estate information revenues were $12.1 million in 1998 and $7.7 million in 1997. The increase was primarily due to a significant number of new businesses started by the company in 1997. Investment income increased 16.6% in 1998 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Amounts retained by agents increased $21.8 million, or 26.6%, over the comparable period in 1997. The percentage of retention by agents to the amounts of revenues by agents was 80.1% and 80.9% for the three months ended June 30, 1998 and June 30, 1997, respectively. Employee expenses increased $19.0 million, or 42.9%, in 1998 primarily because of a higher average number of employees during 1998 compared to a year ago and increased average rates of compensation, including bonuses and profit sharing. The Company continued to maintain higher staff levels in comparison with a year ago. Increases were 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 automated operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. Other operating expenses increased by $6.8 million, or 24.5%, primarily because of the increase in transaction volume. Expenses that increased include premium taxes, appraisal fees, search fees, telephone and rent. Other operating expenses also include supplies, travel, policy forms, delivery costs, title plant expenses and business promotion. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. Provisions for title losses and related claims were up $2.5 million, or 32.9% in 1998. As a percentage of title premiums, fees and related revenues, the provision in the second quarter of 1998 decreased to 4.6% versus 4.7% in the second quarter of 1997. The provision for income taxes represented effective tax rates of 38% and 36% in 1998 and 1997, respectively. The 1998 effective tax rate was higher primarily because nontaxable income from municipal bonds was significantly less in relation to pretax profits. -6-
YEAR 2000 ISSUE Currently, significant attention is being given by companies to the problem of how their computer operations may be adversely affected by the rollover of the calendar to the year 2000. The Company has taken steps to make software programs substantially compliant with the upcoming demands of the change. The Company is testing and reviewing the electronic data transfers conducted with business partners. The Company expects to substantially complete its work in this area in 1998. The related costs are being expensed as incurred and additional costs are expected to be insignificant. LIQUIDITY AND CAPITAL RESOURCES Operating margins 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. FORWARD LOOKING STATEMENTS All statements, other than statements of historical facts, included in this report which address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties including, among other things, changes in mortgage interest rates, employment levels, actions of competitors, changes in real estate markets, general economic conditions and legislation, primarily legislation related to insurance, and other risks and uncertainties discussed in the Company's filings with the Securities and Exchange Commission. -7-
PART II Page ---------- Item 1. Legal Proceedings 9 Item 6. Exhibits and Reports on Form 8-K (a) Index to exhibits (b) There were no reports on Form 8-K filed during the quarter ended June 30, 1998. -8-
ITEM 1. LEGAL PROCEEDINGS The Registrant is a party to routine lawsuits incidental to its business, most of which involve disputed policy claims. In many of these suits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agent of the Registrant. The Registrant does not expect that any of these proceedings will have a material adverse effect on its financial condition. -9-
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) August 10, 1998 - ---------------- Date /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -10-
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4. - Rights of Common and Class B Common Stockholders 27.0 - Financial data schedule 28.2 - Details of investments as reported in the Quarterly Report to Shareholders