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, 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 6,424,126 Class B Common 525,006 FORM 10-Q QUARTERLY REPORT Quarter Ended March 31, 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 8 6. Exhibits and Reports on Form 8-K 7 Signature 9 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1998 and 1997 THREE MONTHS ENDED -------------------- MAR 31 MAR 31 1998 1997 -------- -------- ($000 Omitted) Revenues Title premiums, fees and other revenues 180,984 135,190 Real estate information services 11,716 6,893 Investment income 4,274 3,727 Investment gains - net 68 156 -------- ------- 197,042 145,966 Expenses Amounts retained by agents 85,910 69,212 Employee costs 55,074 43,294 Other operating expenses 29,812 23,507 Title losses and related claims 8,215 6,559 Depreciation and amortization 3,270 2,776 Interest 387 253 Minority interests 902 267 -------- ------- 183,570 145,868 -------- ------- Earnings before taxes 13,472 98 Income taxes 4,847 34 -------- ------- Net earnings 8,625 64 ======== ======= Average number of shares outstanding (000) 7,015 6,837 Earnings per share - diluted 1.23 0.01 ======== ======= Comprehensive earnings: Net earnings 8,625 64 Changes in unrealized investment gains, net of tax (628) 2,616 -------- ------- Comprehensive earnings 7,997 2,680 ======== ======= -1- STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1997 MAR 31 DEC 31 1998 1997 ---------- ---------- ($000 Omitted) Assets Cash and cash equivalents 27,427 30,391 Short-term investments 36,409 35,761 Investments - statutory reserve funds 140,346 138,462 Investments - other 78,927 71,044 Receivables 36,393 31,868 Property and equipment 31,134 30,415 Title plants 22,573 21,778 Goodwill 19,335 18,427 Deferred income taxes 15,116 15,632 Other 24,366 23,913 ---------- ---------- 432,026 417,691 ========== ========== Liabilities Notes payable 21,462 19,087 Accounts payable and accrued liabilities 26,441 27,917 Estimated title losses 162,176 156,791 Minority interests 4,762 4,392 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 59,961 59,828 Retained earnings 153,316 145,140 Other comprehensive earnings 3,908 4,536 ---------- ----------- Total stockholders' equity ($31.31 per share at March 31, 1998) 217,185 209,504 ---------- ----------- 432,026 417,691 ========== =========== -2- STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 THREE MONTHS ENDED -------------------- MAR 31 MAR 31 1998 1997 -------- -------- ($000 Omitted) Cash provided (used) by operating activities (Note) 11,495 (1,998) Investing activities: Purchases of property and equipment and title plants - net (4,126) (2,189) Proceeds from investments matured and sold 16,900 22,887 Purchases of investments (28,214) (18,368) Increases in notes receivable (1,100) (506) Collections on notes receivable 517 174 Proceeds from issuance of stock 354 36 Cash (paid)received for the acquisition of subsidiaries - net (743) 26 ---------- --------- Cash (used) provided by investing activities (16,412) 2,060 Financing activities: Dividends paid (449) (377) Proceeds of notes payable 3,498 1,849 Payments on notes payable (1,096) (1,322) ---------- --------- Cash provided by financing activities 1,953 150 ---------- --------- (Decrease) increase in cash and cash equivalents (2,964) 212 ========== ========== NOTE: Reconciliation of net earnings to the above amounts - Net earnings 8,625 64 Add (deduct): Depreciation and amortization 3,270 2,796 Provision for title losses in excess of (less than) payments 4,265 (521) Provision for uncollectible amounts - net (508) 176 (Increase)decrease in accounts receivable - net (2,889) 969 Decrease in accounts payable and accrued liabilities - net (637) (5,005) Minority interest expense 902 267 Equity in net earnings of investees (320) 11 Realized investment gains - net (68) (156) Other, net (1,145) (599) ---------- --------- Cash provided (used) by operating activities 11,495 (1,998) ========== ========= -3- 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, 1998 and 1997, and as at March 31, 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'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. FIRST QUARTER COMPARISON A comparison of the results of operations of the Company for the first three months of 1998 with the first three months of 1997 follows. REVENUES Revenues from title premiums and fees increased $45.8 million, or 33.9%, 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 49.9%. 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 contributed to higher revenues in 1998. Real estate information revenues were $11.7 million in 1998 and $6.9 million in 1997. The increase was primarily due to a significant number of new businesses started in 1997. Investment income increased 14.7% in 1998 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Amounts retained by agents increased $16.7 million, or 24.1%, over the comparable period in 1997. The percentage of retention by agents to the amounts of revenues from agents was 80.0% and 80.4% for the three months ended March 31, 1998 and March 31, 1997, respectively. Employee expenses increased $11.8 million, or 27.2%, in 1998 primarily because of a higher average number of employees during the first quarter of 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 $6.3 million, or 26.8%, primarily because of the increase in transaction volume. Expenses that increased include appraisal fees, business promotion, expenses of new offices, rent and travel. Other operating expenses also include premium taxes, supplies, search fees, 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 $1.7 million, or 25.2% in 1998. As a percentage of title premiums, fees and related revenues, the provision in the first quarter of 1998 decreased to 4.5% versus 4.9% in the first quarter of 1997. The provision for the year 1997 was 4.5 percent. The provision for income taxes represented effective tax rates of 36% and 35% in 1998 and 1997, respectively. -5- 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. -6- PART II Page ---------- 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 March 31, 1998. -7- 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. -8- 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) April 30, 1998 - ---------------- Date /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -9- 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