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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 JuneSeptember 30, 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
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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 6,295,539
Class B Common 525,006
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended JuneSeptember 30, 1997
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 5
Part II
1. Legal Proceedings 8
6. Exhibits and Reports on Form 8-K 7
Signature 9
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STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE QUARTERS AND SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, 1997 and 1996
SECONDTHIRD QUARTER SIXNINE MONTHS
------------------------ --------------------------------------------- --------------------
1997 1996 1997 1996
-------- ------------------ --------- -------- --------
($000 Omitted) ($000 Omitted)
Revenues
Title premiums, fees and other revenues 87,561 85,465 160,802 160,10193,134 84,133 253,936 244,234
Investment income 3,861 3,523 7,588 6,9693,962 3,710 11,550 10,679
Investment gains - net 25 (124) 181 250124 (149) 305 101
Other income - net 596 855 226 403902 352 1,128 755
-------- -------- -------- --------
92,043 89,719 168,797 167,723-------
98,122 88,046 266,919 255,769
Expenses
Employee costs 44,219 42,977 87,513 83,72448,236 43,590 135,749 127,314
Other operating expenses 27,849 26,219 51,356 49,13329,580 25,693 80,936 74,826
Title losses and related claims 7,544 8,100 14,103 16,0608,035 8,484 22,138 24,544
Depreciation and amortization 2,843 2,714 5,619 5,1793,110 2,724 8,729 7,903
Interest 313 292 566 576400 277 966 853
Minority interests 643 507 910 743561 314 1,471 1,057
-------- -------- -------- --------
83,411 80,809 160,067 155,415-------
89,922 81,082 249,989 236,497
-------- -------- -------- ---------------
Earnings before taxes 8,632 8,910 8,730 12,3088,200 6,964 16,930 19,272
Income taxes 3,104 3,208 3,138 4,4312,713 2,507 5,851 6,938
-------- -------- -------- ---------------
Net earnings 5,528 5,702 5,592 7,8775,487 4,457 11,079 12,334
======== ======== ======== ===============
Average number of shares outstanding (000) 6,821 6,727 6,805 6,693 6,796 6,6806,696
Earnings per share 0.81 0.85 0.82 1.180.80 0.66 1.63 1.84
======== ========= ======== ======== ===============
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STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
JuneSEPTEMBER 30, 1997 AND DECEMBER 31, 1996
JUNESEPT 30 DEC 31
1997 1996
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($000 Omitted)
Assets
Cash and cash equivalents 25,52022,092 18,484
Short-term investments 27,00033,850 31,946
Investments - statutory reserve funds 130,014135,150 127,057
Investments - other 69,03969,277 73,456
Receivables 33,90433,547 31,616
Property and equipment 29,38930,215 28,185
Title plants 21,71922,142 21,096
Goodwill 16,75918,189 16,535
Deferred income taxes 16,74417,275 14,615
Other 21,22521,346 20,382
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391,313---------- ----------
403,083 383,372
======= ================= ==========
Liabilities
Notes payable 14,99017,763 12,324
Accounts payable and accrued liabilities 23,56222,660 25,452
Estimated title losses 152,492155,381 150,331
Minority interests 4,0563,987 4,275
Contingent liabilities and commitments
Stockholders' equity
Common and Class B Common Stock and
additional paid-in capital 58,70458,705 57,574
Net unrealized investment gains 1,1763,208 1,920
Retained earnings 136,333141,379 131,496
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Total stockholders' equity ($28.7729.81 per share at
JuneSeptember 30, 1997) 196,213203,292 190,990
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391,313---------- ----------
403,083 383,372
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STEWART INFORMATION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1997 AND 1996
1997 1996
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($000 Omitted)
Cash provided by operating activities (Note) 7,711 19,88815,533 27,692
Investing activities:
Purchases of property and equipment and title plants - net (5,988) (6,150)(9,612) (8,272)
Proceeds from investments matured and sold 24,390 47,42133,020 62,426
Purchases of investments (18,949) (56,864)(36,552) (77,592)
Increases in notes receivable (1,743) (386)(1,756) (886)
Collections on notes receivable 435 1,840594 2,472
Proceeds from issuance of stock 96 6071
Cash (paid) received for the acquisition of subsidiaries - net (942)(2,608) 276
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Cash used by investing activities (2,701) (13,803)(16,818) (21,505)
Financing activities:
Dividends paid (755) (742)(1,196) (1,115)
Proceeds of notes payable 4,868 1,4088,803 3,054
Payments on notes payable (2,087) (2,183)
------- -------(2,714) (3,988)
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Cash provided (used) by financing activities 2,026 (1,517)
------- -------4,893 (2,049)
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Increase in cash and cash equivalents 7,036 4,568
======= =======3,608 4,138
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NOTE: Reconciliation of net earnings to the above amounts -
Net earnings 5,592 7,87711,079 12,334
Add (deduct):
Depreciation and amortization 5,619 5,1798,729 7,903
Provision for title losses in excess of payments 2,161 5,8025,050 8,385
Provision for uncollectible amounts - net 199 204403 18
Increase in accounts receivable - net (3,261) (1,142)(4,477) (1,448)
(Decrease) increase in accounts payable and
accrued liabilities - net (1,804) 3,210(2,715) 3,711
Minority interest expense 910 7431,471 1,057
Equity in net earnings of investees (334) (392)(922) (733)
Realized investment gains - net (181) (250)(305) (101)
Other - net (1,190) (1,343)
------- -------(2,780) (3,434)
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Cash provided by operating activities 7,711 19,888
======= =======15,533 27,692
========== =========
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STEWART INFORMATION SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Statements
The financial information contained in this report for the sixnine month periods
ended JuneSeptember 30, 1997 and 1996, and as at JuneSeptember 30, 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.
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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 sixnine
months of 1997 with the first sixnine 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 increased $0.7$9.7 million, or 0.4%4.0%, from a
year ago. Mortgage interest rates were higher in the early part of 1997 than in
the same period a year ago but then rates began to decline in the second
quarter. Because of lower ratesquarter, causing increased real estate activity increased.activity. Refinancing transactions, which
had been at lower, more normal levels since mid 1996, also increased.
The number of closings handled by the Company decreased 12.1%5.0%. Closings decreased
in California, Florida, Texas and most other states.Texas. The average revenue per closing increased in
the first sixnine months of 1997 over the first sixnine months 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, which has the effect of
raising title premiums and fees. Increases in commercial transactions and
revenues from agents also contributed to higher revenues in 1997.
Investment income increased 8.9%8.2% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $3.8$8.4 million, or 4.5%6.6%, in 1997 primarily because of
a higher average number of employees during the first twothree quarters of 1997
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,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 $2.2$6.1 million, or 4.5%8.2%, primarily because
of increased rent, premium taxes, travel, business promotion and fees paid to
attorneys for examination and closing services, bad debt provisions and premium taxes.services. Other operating expenses also
include business promotion, supplies, policy forms, delivery costs, title plant expenses and
telephone.
Provisions for title losses and related claims were down $2.0$2.4 million, or 12.2%9.8%
in 1997. The Company's experience in claims continues to improve significantly.
As a percentage of title premiums, fees and related revenues, the provisions for
the first sixnine months of 1997 decreased to 8.8%8.7% versus 10.0% for the first sixnine
months of 1996. The provision for the year 1996 was 10.3
percent.
The provision for income taxes represented a 36.0%34.6% effective tax rate in both
1997
and 36.0% in 1996.
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.
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A comparison of the results of operations of the Company for the secondthird
quarter of 1997 with the secondthird quarter 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 increased $2.1$9.0 million, or 2.5%10.7%, from a
year ago. Mortgage interest rates were higher in the early part of the second
quarter of 1997 than the same time in 1996 but then rates began to decline.
Mortgage interest rates are now lower than one year ago. Because of lower rates,
real estate activity increased. Refinancing transactions, which had been at
lower, more normal levels since mid 1996, also began to increase.
The number of closings handled by the Company decreased 9.0%increased 10.3%. Closings
decreasedincreased in California, Florida,Arizona, Texas and most other states. The average
revenue per closing increased 10.4%slightly in 1997 overfrom 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, which has the effect of raising title
premiums and fees. Increases in commercial transactions and revenues from agents
also contributed to higher revenues in 1997.
Investment income increased 9.6%6.8% in 1997 due to an increase in the average
balances invested and the increased yield on the balances.
EXPENSES
Employee expenses increased $1.2$4.6 million, or 2.9%10.7%, in 1997 primarily because of
increased average rates of compensation. The average number of employees was
approximately the same3% higher in 1997 and 1996.1997.
In comparison with a year ago, the Company continued to maintain higher staff
levels 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
number of employees in title operations was lower in California Florida and TexasFlorida in
the secondthird quarter of 1997 compared to the secondthird quarter of 1996.
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 $1.6$3.9 million, or 6.2%15.1%, primarily because
of increased travel, fees paid to attorneys for examinationrent, business promotion and closing
services and rent.premium taxes. Other operating
expenses also include business promotion,travel, supplies, title plant expenses, telephone,
delivery costs insurance and telephone.insurance.
Provisions for title losses and related claims were down $0.6$0.4 million, or 6.9%5.3%
in 1997. The Company's experience in claims continues to improve significantly.
As a percentage of title premiums, fees and related revenues, the provision in
the secondthird quarter of 1997 decreased to 8.6% versus 9.5%10.1% in the secondthird quarter of
1996. The provision for the year 1996 was 10.3 percent.
The provision for income taxes represented a 36.0%33.1% effective tax rate in both
1997
and 36.0% in 1996. LIQUIDITY AND CAPITAL RESOURCES
Operating margins represent the primary source of financingThe effective tax rate for the Company,
but this may be supplemented by bank borrowings. The capital resourcesquarter ended September 30,
1997 is lower than the same quarter of last year because of refunds received in
the Company,current quarter for a federal net operating loss carryforward and a change
in the present debt-to-equity relationship, are considered
satisfactory.filing method for a certain state.
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PART II
Page
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Item 1. Legal Proceedings 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 JunePage
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Item 1. Legal Proceedings 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 September 30, 1997.
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ITEM 1. 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 pendingwas consolidated 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$1.9 million in fees and
expenses. The Courtsettlement 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.become final.
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 iswas one of eight similar suits
filed against various underwriters in Florida, including Guaranty. The alleged class would include all purchasersOn April 14,
1997, the United States District Court, Southern District of title insurance of
evidence of title in Florida, since 1990. Plaintiffs allege that Guaranty's
premium and cost sharing agreements withentered
its Florida agents, which are governed
by and set in accordance with rates promulgated byOmnibus Order dismissing the Florida Department of
Insurance, constitute violationsplaintiffs' complaints against the
underwriters, including the O'Briens' claims against Guaranty. Subsequent to the
entry of the Real Estate Settlement Procedures ActOmnibus Order, Guaranty and Florida law, including fraudulentthe other underwriters entered into a
final resolution of all claims between the underwriters 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.plaintiffs' class representatives. Dismissal of the claims against Guaranty has filed a motionare
final and there are no pending claims against Guaranty relating 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.
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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)
August 12,September 11, 1997
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Date
/S/ MAX CRISP
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Max Crisp
(Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and
Accounting Officer)
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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