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,June 30, 2000
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 74-1677330
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1980 Post Oak Blvd., Houston TX 77056
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(Address of principal executive offices, including zip code)
(713) 625-8100
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(Registrant's telephone number, including area code)
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common 13,765,52013,944,810
Class B Common 1,050,012
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31,June 30, 2000
TABLE OF CONTENTS
Item No. Page
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Part I
1. Financial Statements 1
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 56
3. Quantitative and Qualitative Disclosures About
Market Risk 68
Part II
1. Legal Proceedings 810
5. Other Information 810
6. Exhibits and Reports on Form 8-K 79
Signature 911
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE THREEQUARTERS AND SIX MONTHS ENDED
MARCH 31,JUNE 30, 2000 and 1999
THREESECOND QUARTER SIX MONTHS
ENDED--------------------- --------------------
2000 1999 2000 1999
---------- --------- -------- --------
($000 Omitted) ($000 Omitted)
Revenues
Title premiums, fees and other revenues 191,176 227,716206,270 275,117 397,446 502,833
Real estate information services 12,199 15,09113,028 16,225 25,227 31,316
Investment income 5,168 4,9075,319 4,885 10,487 9,792
Investment gains (losses) - net (340) 16453 (134) (287) 30
--------- -------- -------- ------
208,203 247,878224,670 296,093 432,873 543,971
Expenses
Amounts retained by agents 90,839 112,13489,418 142,262 180,257 254,396
Employee costs 68,674 69,49973,136 73,964 141,810 143,463
Other operating expenses 39,061 36,46142,487 43,116 81,548 79,577
Title losses and related claims 8,560 9,2669,547 11,920 18,107 21,186
Depreciation and amortization 5,091 3,8755,135 4,318 10,226 8,193
Interest 381 286486 310 867 596
Minority interests 944 9901,501 1,436 2,445 2,426
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213,550 232,511221,710 277,326 435,260 509,837
--------- -------- -------- -------
Earnings (loss) before taxes (5,347) 15,3672,960 18,767 (2,387) 34,134
Income taxes (benefit) (1,993) 5,7671,086 7,041 (907) 12,808
--------- -------- -------- -------
Net earnings (loss) (3,354) 9,6001,874 11,726 (1,480) 21,326
========= ======== ======== =======
Average number of shares outstanding -
assuming dilution (000) 14,811 14,33614,908 14,581 14,860 14,461
Earnings (loss) per share - basic (1) (0.23) 0.680.13 0.81 (0.10) 1.49
Earnings (loss) per share - diluted (1) (0.23) 0.670.13 0.80 (0.10) 1.47
========= ========= ======== =======
Comprehensive earnings:
Net earnings (loss) (3,354) 9,6001,874 11,726 (1,480) 21,326
Changes in unrealized investment gains,
net of taxes of $293$(80), $(2,060), $213
and $(1,190)$(3,250), respectively 544 (2,210)(148) (3,825) 396 (6,035)
--------- -------- -------- -------
Comprehensive earnings (loss) (2,810) 7,3901,726 7,901 (1,084) 15,291
========= ========= ======== =======
(1) Restated for a two-for-one stock split in May 1999.
-1-
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,JUNE 30, 2000 AND DECEMBER 31, 1999
MAR 31JUN 30 DEC 31
2000 1999
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($000 Omitted)
Assets
Cash and cash equivalents 30,73842,257 36,803
Short-term investments 57,604 67,45551,228 65,583
Investments - statutory reserve funds 185,706 185,087190,675 186,917
Investments - other 56,096 57,66951,664 57,711
Receivables 49,51847,416 48,580
Property and equipment 45,95347,602 45,900
Title plants 26,45527,247 26,258
Goodwill 35,08037,024 31,641
Deferred income taxes 12,11012,576 12,378
Other 26,01227,021 23,970
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525,272534,710 535,741
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Liabilities
Notes payable 22,23225,605 19,054
Accounts payable and accrued liabilities 29,264 41,30331,096 44,303
Estimated title losses 183,826186,302 183,787
Minority interests 6,8376,647 6,673
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 80,12581,450 79,126
Retained earnings 206,100207,974 209,454
Accumulated other comprehensive earnings (3,112)deficit (3,260) (3,656)
Treasury stock - 85,200 shares (1,104) -
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Total stockholders' equity ($19.1719.27 per share at
March 31,June 30, 2000) 283,113285,060 284,924
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525,272534,710 535,741
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-2-
STEWART INFORMATION SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2000 AND 1999
2000 1999
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($000 Omitted)
Cash (used) provided by operating activities (Note) (9,095) 9,8586,544 31,274
Investing activities:
Purchases of property and equipment and title plants - net (4,822) (4,874)(11,684) (12,756)
Proceeds from investments matured and sold 30,361 8,03441,187 15,426
Purchases of investments (19,059) (9,469)(24,222) (37,783)
Increases in notes receivable (2,281) (1,617)(2,389) (5,850)
Collections on notes receivable 338 350526 5,114
Proceeds from sale of equity investment 0 2,855- 8,140
Cash paid for the acquisition of subsidiaries - net (3,844) (1,038)(7,718) (3,050)
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Cash provided (used)used by investing activities 693 (5,759)(4,300) (30,759)
Financing activities:
Dividends paid 0 (527)- (1,069)
Repurchases of common stock (1,104) -
Distribution to minority interests (824) (530)(2,234) (1,696)
Proceeds from issuance of stock 0 104- 64
Proceeds of notes payable 4,488 2,3469,519 4,129
Payments on notes payable (1,327) (3,175)(2,971) (4,585)
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Cash provided (used) by financing activities 2,337 (1,782)3,210 (3,157)
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(Decrease) increaseIncrease (decrease) in cash and cash equivalents (6,065) 2,3175,454 (2,642)
========== ==========
NOTE: Reconciliation of net earnings (loss) to the above amounts -
Net earnings (loss) (3,354) 9,600(1,480) 21,326
Add (deduct):
Depreciation and amortization 5,091 3,87510,226 8,193
Provision for title losses in excess of payments 39 3742,515 4,618
Provision for uncollectible amounts - net 0 (160)(54) (300)
Decrease in accounts receivable - net 1,036 9,0703,149 3,833
Decrease in accounts payable and accrued liabilities - net (12,123) (12,802)(10,432) (6,603)
Minority interest expense 944 9902,445 2,426
Equity in net earningslosses (earnings) of investees (41) (274)110 (559)
Realized investment gains (losses)losses (gains) - net 340 (164)287 (30)
Gain on sale of equity investment - (1,145)
Stock bonuses 482 527541 588
Increase in other assets (1,893) (1,224)(1,428) (1,743)
Other - net 384 46665 670
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Cash (used) provided by operating activities (9,095) 9,8586,544 31,274
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-3-
STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Statements
The financial information contained in this report for the three and six month
periods ended March 31,June 30, 2000 and 1999, and as of March 31,June 30, 2000, 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 1999 condensed consolidated financial statements have
been reclassified for comparative purposes. Net earnings, as previously
reported, were 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:
Real Estate
Title Information Total
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($000 Omitted)
Revenues:
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Three months ended
3/31/6/30/00 196,004 12,199 208,203
3/31/211,642 13,028 224,670
6/30/99 232,787 15,091 247,878279,868 16,225 296,093
Six months ended
6/30/00 407,646 25,227 432,873
6/30/99 512,655 31,316 543,971
Pretax Earnings (Loss)(Losses):
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Three months ended
3/31/6/30/00 (3,656) (1,691) (5,347)
3/31/4,103 (1,143) 2,960
6/30/99 13,805 1,562 15,36718,071 696 18,767
Six months ended
6/30/00 447 (2,834) (2,387)
6/30/99 31,876 2,258 34,134
Identifiable Assets:
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3/31/6/30/00 484,746 40,526 525,272494,701 40,009 534,710
12/31/99 496,191 39,550 535,741
Note 3: Earnings Per Share
The Company's basic earnings (loss) per share figures were calculated by
dividing net earnings (losses) 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 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 95,000102,000 and 148,000124,000 for the three month
periods ending March 31,June 30, 2000 and 1999, respectively and 98,000 and 138,000 for
the six month periods ending June 30, 2000 and 1999, respectively.
-4-
Note 4: Contingent Liabilities and Commitments
The Company is presently named in a private class action brought under
California's Unfair Business Practices Act: Soriano v. Stewart Title. In a
related matter, The Company is an unnamed and unserved defendant in a large
class action filed by the California Attorney General against a class of all
title companies in the State of California. The lawsuit seeks restitution and
injunctive relief against an unidentified defendant class of all title companies
in the state, based on alleged title company practices concerning escheatment,
fees and banking services credits. The Company is in settlement discussion with
the California Attorney General. Although the ultimate disposition of these
lawsuits cannot be predicted with certainty, it is the opinion of the Company's
management and its outside counsel that the outcome of any claim, whether
individually or on a combined basis, will not have a materially adverse effect
on the consolidated financial condition of the Company.
-5-
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company's two segments of operations are title insurance ("Title") and real
estate information.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.
Mortgage interest rates, which averaged 6.9%7.0% in the first quarter of 1999, rose
over the rest of the year to about 7.9% at the end of the year. Rates in early
2000 increased again to an average of 8.3% for the first quarter.
Homesix months of 2000.
Existing and new home sales declined about 9%5.8% in the first quartersix months of 2000
compared with the first quartersix months of 1999. Refinancing transactions decreased
during the second half of 1999 and the first quartersix months of 2000. Refinance
activity dropped from representing 5833.9 percent of total applications in the
first threesix months of 1999 to 2514.2 percent in the same period of 2000, as reported
by industry experts.
A comparison of the results of operations of the Company for the first threesix
months of 2000 with the first threesix months of 1999 follows.
REVENUES
Revenues from title premiums and fees decreased $36.5$105.4 million, or 16.0%21.0%, from a
year ago. Mortgage interest rates were significantly higher in the early partfirst six
months of 2000 than in the same period a year ago, decreasing real estate sales
and refinancing transactions.
The number of closings handled by the Company decreased 24.4%18.1%. Closings
decreased in California, Texas, Arizona, Colorado and most other states. The
average revenue per closing increased in 2000 due to higher home prices and a
smaller number of refinancings, which generate lower premiums. Increases in
revenues from commercial transactions also contributed to higher revenues per
closing in 2000.
Other revenues in the first quartersix months of 1999 included a $1.1 million pretax
gain resulting from a settlement of a lawsuit and a related sale of an equity
ownership in a title agency.
Real estate information revenues were $12.2$25.2 million in 2000 and $15.1$31.3 million in
1999. The decrease was primarily due to the decline in real estate activity.
Investment income increased 5.3%7.1% in 2000 primarily due to an increase in the
average balances invested.
EXPENSES
Premiums earned from agents were $113.00$223.3 million in 2000 and $138.7$314.0 in 1999. The
amounts retained by agents, as a percentage of premiums, were 80.4%80.7% and 81.0%
for the six months ended June 30, 2000 and June 30, 1999, respectively.
Amounts retained by title agents are based on contracts between agents and the
title underwriters of the Company. The percentage that amounts retained by
agents bears to agent revenues may vary from year to year because of the
geographical mix of agent operations and the volume of title revenues.
Employee expenses for the combined business segments decreased $1.7 million, or
1.2%, in 2000 primarily because of a lower average number of employees during
the first six months of 2000 compared to a year ago.
Employee costs for the title segment decreased slightly, while employee costs
for the REI segment showed a small increase. The number of employees in existing
title offices at the end of the first six months of 2000 was reduced
approximately 7.7% from a year ago. The reduction in the number of employees was
offset, however, by significant increases in newly acquired and startup offices,
expansion of national marketing operations to gain market share and continued
expansion in technology.
-6-
Other operating expenses increased by $2.0 million, or 2.5%, in 2000. The
decreases in other operating expenses due to the reduction in Title and REI
business volume were more than offset by expenses that increased which include
expenses of new offices, rent and search fees. Other significant components of
other operating expenses are title plant expenses, supplies, computer costs,
business promotion, telephone, travel, premium taxes, cost of resale services
and products, policy forms bad debts and delivery costs.
Provisions for title losses and related claims were down $3.1 million, or 14.5%,
in 2000. As a percentage of title premiums, fees and related revenues, the
provision in the first six months of 2000 was 4.6% versus 4.2% in 1999.
The provision (benefit)for income taxes represented effective tax rates of 38.0%
and 37.5% in 2000 and 1999, respectively.
A comparison of the results of operations of the Company for the second quarter
of 2000 with the second quarter of 1999 follows.
REVENUES
Revenues from title premiums and fees decreased $68.8 million, or 25.0%, from a
year ago. Mortgage interest rates were significantly higher in the second
quarter of 2000 than in the same period a year ago, decreasing real estate sales
and refinancing transactions.
The number of closings handled by the Company decreased 11.9%. Closings
decreased in California, Texas, Arizona and most other states. The average
revenue per closing increased in 2000 due to higher home prices and a smaller
number of refinancings, which generate lower premiums.
Real estate information revenues were $13.0 million in 2000 and $16.2 million
in 1999. The decrease was primarily due to the decline in real estate activity.
Investment income increased 8.9% in 2000 primarily due to an increase in the
average balances invested and higher yields.
EXPENSES
Premiums earned from agents were $110.3 million in 2000 and $175.8 in 1999. The
amounts retained by agents, as a percentage of premiums, were 81.1% and 80.9%
for the three months ended March 31,second quarter of 2000 and March 31, 1999, respectively.
Amounts retained by title agents are based on contracts between agents and the
title underwriters of the Company. The percentage that amounts retained by
agents bears to agent revenues may vary from year to year because of the
geographical mix of agent operations and the volume of title revenues.
Employee expenses for the combined business segments decreased $0.8 million, or
1.2%1.1%, in 2000 primarily because of a lower average number of employees during
the firstsecond quarter of 2000 compared to a year ago. The decrease was partly
offset by higher average rates of compensation.
Employee costs for the title segment decreased slightly, while employee costs
for the REI segment increased slightly.showed a small increase. The number of employees in existing
title offices at the end of the first quartersix months of 2000 werewas reduced
by about 10%approximately 7.7% from a year ago. The decrease at the end of the first quarter of 2000 from the
peak reached in early 1999 was 13%. The decreasesreduction in the number of employees werewas
offset, however, by significant increases in newly acquired and startup offices,
expansion of national marketing operations to gain market share and continued
advancementsexpansion in technology.
Other operating expenses increaseddecreased by $2.6$0.6 million, or 7.1%1.5%, in 2000. ExpensesOther
operating expenses decreased due to the decrease in Title and REI business
volume offset by expenses that increased which include expenses of new offices
bad debts, rent and search fees.rent. Other significant components of other operating expenses are title
plant expenses, supplies, computer costs, business promotion, telephone, travel,
premium taxes, cost of resale services and products, policy forms, bad debts,
search fees and delivery costs.
-5-
Provisions for title losses and related claims were down $0.7$2.4 million, or 7.6%,19.9%
in 2000. As a percentage of title premiums, fees and related revenues, the
provision in the firstsecond quarter of 2000 increased to 4.5%4.6% versus 4.1%4.3% in 1999.
The provision (benefit) for income taxes represented effective tax rates of 37.3%36.7% and
37.5% in 2000 and 1999, respectively.
-7-
YEAR 2000 ISSUE
Information technology is a crucial part of the Company's business. Accordingly,
the Company has completed a comprehensive Year 2000 ("Y2K") readiness program that
addressed challenges associated with the Y2K issue. As a result of this program,
the Company encountered no major automation or business disruption due to Y2K
issues. The Company continues to operate normally across all business units and
geographies and will continue to monitor operations throughoutthrough 2000. The total
costs incurred for the Y2K readiness program were $3.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations representrepresents 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 threesix months of 2000, the Company financed a portion of various
acquisitions through the issuance of Common Stock totaling $0.4$1.8 million.
Acquisitions during the first threesix months of 2000 have resulted in additions toan increase in
goodwill of $3.9$6.3 million.
FORWARD LOOKING STATEMENTS
All statements included in this report, other than statements of historical
facts, 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.
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 Statement on Form 10-K for the year ended December 31, 1999.
-6--8-
PART II
Page
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Item 1. Legal Proceedings 810
Item 5. Other Information 810
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,June 30, 2000.
-7--9-
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 Board of Directors has approved a plan to repurchase up to 5
percent (680,000 shares) of the Company's currently issued and 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 purchase plan. On March 15, 1999,As of June 30, 2000, the
Registrant's BoardCompany had repurchased a total of Directors approved a
two-for-one split of the Registrant's Common Stock, $1.00 par value ("Common
Stock"), and Class B Common Stock, $1.00 par value, which was effected in the
form of a stock dividend. Each stockholder of record of the Registrant at the
close of business on May 7, 1999 received one additional share for each share
owned on that date. The stock dividend was paid on May 21, 1999.
-8-85,200 shares under this plan.
-10-
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
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(Registrant)
May 11,August 10, 2000
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Date
By:
/S/ MAX CRISP
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Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
-9--11-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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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