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, 2001 [ ] 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 14,177,137 Class B Common 1,050,012
2 FORM 10-Q QUARTERLY REPORT Quarter Ended March 31, 2001 TABLE OF CONTENTS <TABLE> <CAPTION> Item No. Page - -------- ---- <S> <C> Part I 1. Financial Statements 1 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 3. Quantitative and Qualitative Disclosures About Market Risk 6 Part II 1. Legal Proceedings 8 5. Other Information 8 6. Exhibits and Reports on Form 8-K 7 Signature 9 </TABLE>
3 STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2001 and 2000 <TABLE> <CAPTION> THREE MONTHS ENDED ------------------ 2001 2000 ------- ------ ($000 Omitted) <S> <C> <C> Revenues Title premiums, fees and other revenues 223,941 191,582 Real estate information services 14,462 12,199 Investment income 5,545 4,762 Investment gains (losses) -- net 353 (340) ------- ------- 244,301 208,203 Expenses Amounts retained by agents 101,044 90,839 Employee costs 79,352 68,674 Other operating expenses 42,150 39,061 Title losses and related claims 9,595 8,560 Depreciation and amortization 5,268 5,091 Interest 659 381 Minority interests 1,225 944 ------- ------- 239,293 213,550 ------- ------- Earnings (loss) before taxes 5,008 (5,347) Income taxes (benefit) 1,935 (1,993) ------- ------- Net earnings (loss) 3,073 (3,354) ======= ======= Average number of shares outstanding -- assuming dilution (000) 15,268 14,811 Earnings (loss) per share -- basic 0.20 (0.23) Earnings (loss) per share -- diluted 0.20 (0.23) ======= ======= Comprehensive earnings: Net earnings (loss) 3,073 (3,354) Changes in unrealized investment gains, net of taxes of $1,160 and $293, respectively 2,155 544 ------- ------- Comprehensive earnings (loss) 5,228 (2,810) ======= ======= </TABLE> -1-
4 STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 <TABLE> <CAPTION> MAR 31 DEC 31 2001 2000 ------ ------ ($000 Omitted) <S> <C> <C> Assets Cash and cash equivalents 44,985 35,728 Short-term investments 48,914 53,748 Investments -- statutory reserve funds 212,548 206,150 Investments -- other 48,750 52,242 Receivables 51,678 57,039 Property and equipment 44,753 45,459 Title plants 33,524 32,491 Goodwill 47,348 36,693 Deferred income taxes 7,318 7,352 Other 35,996 36,546 ------- ------- 575,814 563,448 ======= ======= Liabilities Notes payable 40,806 32,543 Accounts payable and accrued liabilities 33,086 38,617 Estimated title losses 191,725 190,298 Minority interests 7,129 6,901 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 87,404 84,653 Retained earnings 213,133 210,060 Accumulated other comprehensive earnings 4,043 1,888 Treasury stock (1,512) (1,512) ------- ------- Total stockholders' equity ($19.91 per share at March 31, 2001) 303,068 295,089 ------- ------- 575,814 563,448 ======= ======= </TABLE> -2-
5 STEWART INFORMATION SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 <TABLE> <CAPTION> 2001 2000 -------- -------- ($000 Omitted) <S> <C> <C> Cash provided (used) by operating activities (Note) 10,220 (9,095) Investing activities: Purchases of property and equipment and title plants -- net (3,803) (4,822) Proceeds from investments matured and sold 34,612 30,361 Purchases of investments (28,964) (19,059) Increases in notes receivable (897) (2,281) Collections on notes receivable 704 338 Cash paid for the acquisition of subsidiaries -- net (5,185) (3,844) ------- ------- Cash (used) provided by investing activities (3,533) 693 Financing activities: Distribution to minority interests (961) (824) Proceeds of notes payable 4,907 4,488 Payments on notes payable (1,376) (1,327) ------- ------- Cash provided by financing activities 2,570 2,337 ------- ------- Increase (decrease) in cash and cash equivalents 9,257 (6,065) ======= ======= NOTE: Reconciliation of net earnings (loss) to the above amounts -- Net earnings (loss) 3,073 (3,354) Add (deduct): Depreciation and amortization 5,268 5,091 Provision for title losses in excess of payments 1,427 39 Provision for uncollectible amounts -- net (149) 0 Decrease in accounts receivable -- net 5,969 1,036 Decrease in accounts payable and accrued liabilities -- net (5,686) (12,123) Minority interest expense 1,225 944 Equity in net earnings of investees (160) (41) Realized investment (gains) losses -- net (353) 340 Stock bonuses 356 482 Increase in other assets (801) (1,893) Other -- net 51 384 ------- ------- Cash provided (used) by operating activities 10,220 (9,095) ======= ======= Supplemental information: Assets acquired (purchase method) Goodwill 10,958 3,867 Title plants 1,019 88 Other 523 455 Liabilities assumed (4,815) (126) Common Stock issued (2,500) (440) -------- ------- Cash paid for acquisitions 5,185 3,844 ======== ======= </TABLE> -3-
6 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 month periods ended March 31, 2001 and 2000, and as of March 31, 2001, 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 2000 condensed consolidated financial statements have been reclassified for comparative purposes. Net loss, as previously reported, was not affected. Note 2: Segment Information The Company's two reportable segments are title and real estate information. Selected financial information related to these segments follows: <TABLE> <CAPTION> Real Estate Title Information Total ----- ----------- ----- ($000 Omitted) <S> <C> <C> <C> Revenues: - --------- Three months ended 3/31/01 229,839 14,462 244,301 3/31/00 196,004 12,199 208,203 Pretax Earnings (Loss): - ----------------------- Three months ended 3/31/01 4,345 663 5,008 3/31/00 (3,656) (1,691) (5,347) Identifiable Assets: - -------------------- 3/31/01 536,341 39,473 575,814 12/31/00 525,045 38,403 563,448 </TABLE> Note 3: Earnings (Loss) Per Share The Company's basic earnings (loss) 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 (loss) per share for the Company related to its 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 158,000 for the three month period ending March 31, 2001. Note 4: Changes in Accounting Principles The Company does not invest in hedging or derivative instruments nor does it intend to do so in the future. Accordingly, FAS 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended), which became effective January 1, 2001 for the Company, has no impact on the condensed consolidated financial statements. -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 quarter of 2001 with the first quarter of 2000 follows. GENERAL. The Company's two segments of operations are title and real estate information ("REI"). In general, the principal factors that contribute to increases in the Company's operating revenues for both segments include declining mortgage interest rates (which usually increase home sales and refinancing transactions), rising home prices, higher premium rates, increased market share, additional revenues from new offices and increased revenues from commercial transactions. Although relatively few in number, large commercial transactions typically yield higher premiums. According to published industry data, interest rates for 30-year fixed mortgages, excluding points, for the three months ended March 31, 2001 averaged 7.01% as compared to 8.26% for the same period a year earlier. The rates at year-end 1999 were just over 8%. In 2000, an upward trend continued, with rates reaching a peak of 8.5% in May. Then, rates declined for seven consecutive months. At year-end 2000 rates were 7.4%. Operating in these mortgage interest rate environments, real estate activity in the first three months of 2001 was very strong. Refinancing transactions increased significantly. Existing home sales increased 9.9% in the first quarter of 2001 over the same period in 2000. The ratio of refinancings to total loan applications was 56.9% for the first quarter of 2001 compared to 18.7% for the first quarter of 2000. TITLE REVENUES. The Company's revenues from premiums, fees and other revenues increased 16.9% the first three months of 2001 over the same period in 2000. Revenues from direct business increased 27.5% to $100.2 million. The number of direct closings handled by the Company increased 32.9% in 2001. Direct closings relate only to files closed by the Company's underwriters and subsidiaries and do not include closings from agents. The average revenue per closing decreased 4.4% in 2001 because of the significant increase in 2001 in the number of refinancings with their lower premiums. There were no major revenue rate changes in 2001 or 2000. Premiums from independent agents increased 9.5% to $123.7 million in 2001. The increase resulted primarily from increased refinancings and regular transactions handled by agents nationwide. The largest increases were in California, Florida and Texas. REI REVENUES. Real estate information revenues were $14.5 million in 2001 and $12.2 million in 2000. The increase in 2001 resulted primarily from providing an increased number of post-closing services, Section 1031 tax-deferred exchanges and electronic mortgage documents resulting from the increase in real estate transactions. INVESTMENTS. Investment income increased 16.4% in 2001 primarily because of increases in yields. Investment gains in 2001 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. The amounts retained by agents, as a percentage of premiums from agents, were 81.7% and 80.4% in the years 2001 and 2000, respectively. Amounts retained by title agents are based on contracts between agents and the title insurance underwriters of the Company. The percentage that amounts retained by agents bear to agent revenues may vary from year to year because of the geographical mix of agent operations and the volume of title revenues. EMPLOYEE COSTS. Employee costs for the combined business segments increased 15.5% in 2001. The number of persons employed by the Company at March 31, 2001 and March 31, 2000 was 5,873 and 5,614 respectively. The increase in staff in 2001 was primarily the result of acquisitions of new offices. In the REI segment, employee costs increased in 2001 and 2000 primarily due to a continuing shift in focus to providing more post-closing services to lenders. These services are significantly more labor intensive. OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 7.9% in 2001. The overall increase in other operating expenses for the combined business segments in 2001 was in new offices, computer costs, rent and search fees. These were offset partially by reductions in bad debts and products purchased for resale. Other operating expenses also include title plant expenses, travel, delivery costs, premium taxes, business promotion, REI expenses, telephone, supplies and policy forms. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. -5-
8 The Company's labor and certain other operating costs are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues are also increased. Premiums are determined in part by the insured values of the transactions handled by the Company. TITLE LOSSES. Provisions for title losses, as a percentage of title premiums, fees and other revenues, were 4.3% in 2001 and 4.5% in 2000. The continued improvement in industry trends in claims and increases in refinancing transactions, which result in lower loss exposure, have led to lower loss ratios in recent years. INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 38.6% and 37.3% in 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations represents 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. During the first three months of 2001, the Company financed a portion of various acquisitions through the issuance of Common Stock totaling $2.5 million. Acquisitions during the first three months of 2001 have resulted in additions to goodwill of $11.0 million. To facilitate further acquisitions, the Company filed a registration statement with the Securities and Exchange Commission to sell from time to time up to $75 million of common stock. The registration was filed on March 30, 2001 and has not yet become effective. This statement does not constitute an offer of any securities for sale. FORWARD-LOOKING STATEMENTS. All statements 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, 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the Company's investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Company's Annual Statements on Form 10-K for the year ended December 31, 2000. -6-
9 PART II <TABLE> <CAPTION> Page ---- <S> <C> Item 1. Legal Proceedings 8 Item 5. Other Information 8 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 March 31, 2001. </TABLE> -7-
10 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. ITEM 5. OTHER INFORMATION The Company paid regular quarterly cash dividends on its Common Stock from 1972 through 1999. During 1999, the Board of Directors approved a plan to repurchase up to 5 percent (680,000 shares) of the Company's outstanding Common Stock. The Board also determined that the Company's regular quarterly dividend should be discontinued in favor of returning those and additional funds to stockholders through the stock repurchase plan. Under this plan, the Company repurchased 116,900 shares of Common Stock during 2000. No repurchases have been made during the first three months of 2001. -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 11, 2001 - ---------------- Date By: /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -9-
12 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 4. - Rights of Common and Class B Common Stockholders 99.1 - Details of investments </TABLE>