--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] 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
incorporation or organization) Identification No.)
1980 POST OAK BLVD., HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 625-8100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1 PAR VALUE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of March 11, 2002, 16,751,240 shares of Common Stock, $1 par value,
and 1,050,012 shares of Class B Common Stock, $1 par value, were outstanding.
The aggregate market value as of such date of the Common Stock (based upon the
closing sales price of the Common Stock of Stewart Information Services
Corporation, as reported by the NYSE on March 1, 2002) held by non-affiliates of
the Registrant was approximately $318,441,073.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Proxy Statement"),
relating to the annual meeting of the Registrant's stockholders to be held April
26, 2002, are incorporated by reference in Parts III and IV of this document.
--------------------------------------------------------------------------------
FORM 10-K
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
ITEM
NO. PAGE
---- ----
1. Business .................................................... 1
2. Properties .................................................. 4
3. Legal Proceedings ........................................... 5
4. Submission of Matters to a Vote of Security Holders ......... 5
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ...................................... 6
6. Selected Financial Data ..................................... 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 7
7A. Quantitative and Qualitative Disclosures About Market Risk .. 10
8. Financial Statements and Supplementary Data ................. 11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................. 11
PART III
10. Directors and Executive Officers of the Registrant .......... 12
11. Executive Compensation ...................................... 12
12. Security Ownership of Certain Beneficial Owners and
Management ............................................... 12
13. Certain Relationships and Related Transactions .............. 12
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................. 13
Signatures .................................................. 14
PART I
ITEM 1. BUSINESS
We are a Delaware corporation formed in 1970. We and our predecessors have been
engaged in the title business since 1893.
Our primary business is title insurance. We issue policies through more than
5,800 issuing locations on homes and other real property located in all 50
states, the District of Columbia and several foreign countries. We also sell
electronically delivered real estate services and information, as well as
mapping products and geographic information systems, to domestic and foreign
governments and private entities.
Our two segments of business are title and real estate information ("REI"). The
segments significantly influence business to each other because of the nature of
their operations and their common customers. The segments provide services
through a network of offices, including both direct operations and agents,
throughout the United States. The operations in the several international
markets in which we do business are generally insignificant to consolidated
results.
The financial information related to these segments is discussed in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and is incorporated in this report by reference.
TITLE
The title segment includes the functions of searching, examining, closing and
insuring the condition of the title to real property.
Examination and closing. The purpose of a title examination is to ascertain the
ownership of the property being transferred, what debts are owed on it and what
the title policy coverage will be. This involves searching for and examining
documents such as deeds, mortgages, wills, divorce decrees, court judgments,
liens, paving assessments and tax records.
At the closing or "settlement", the seller executes a deed to the new owner. The
buyer typically signs new mortgage documents. Closing funds are then disbursed
to the seller, the prior mortgage company, real estate brokers, the title
company and others. The documents are then recorded in the public records. A
title policy is generally issued to both the lender and new owner.
Title policies. Lenders in the USA generally require title insurance as a
condition to making a loan on real estate, including securitized lending. This
is to assure lenders of the priority of their lien position. The purchasers of
the property want the assurance given in their policy against claims that may
arise against their ownership. The face amount of the policy is normally the
purchase price or the amount of the related loan.
Title insurance is substantially different from other types of insurance. Fire,
auto, health and life insurance protect against losses and events in the future.
In contrast, title insurance seeks to eliminate most risks through the
examination and settlement process.
Investments. We have established policies and procedures to manage our exposure
to changes in the fair value of our investments. These policies include
retaining an investment advisory firm, an emphasis on credit quality, management
of portfolio duration, maintaining or increasing investment income through high
coupon rates and actively managing profile and security mix depending on market
conditions. All of our investments are classified as available-for-sale.
Losses. Losses on policies occur because of a title defect not discovered during
the examination and settlement process. Other reasons for losses include
forgeries, misrepresentations, unrecorded construction liens, the failure to pay
off existing liens, mishandling of settlement funds, issuance by agents of
unauthorized coverages and other legal issues.
Some claimants seek damages in excess of policy limits. Those claims are based
on various legal theories usually alleging misrepresentation by an issuing
office. Although we vigorously defend against spurious claims, we have from time
to time incurred a loss in excess of policy limits.
Experience shows that most claims against policies and claim payments are made
in the first six years after the policy has been issued, although claims may be
made many years later. By their nature, claims are often complex, vary greatly
in dollar amounts and are affected by economic and market conditions and the
legal environment existing at the time of settlement of the claims. Estimating
future title loss payments is difficult because of the complex nature of title
claims, the long periods of time over which claims are paid, significantly
varying dollar amounts of individual claims and other factors.
-1-
Our liability for estimated title losses comprises both known claims and losses
expected to be reported in the future. The amount of our loss reserve represents
the aggregate future payments, net of recoveries, that we expect to incur on
policy losses and in costs to settle claims. Provisions are charged to income in
the same year the related premium revenues are recognized. The amounts provided
are based on reported claims, historical loss experience, title industry
averages, current legal environment and types of policies written.
Amounts shown as our estimated liability for future loss payments are
continually reviewed for reasonableness and adjusted as appropriate. Independent
actuaries also review the adequacy of the liability amounts on an annual basis.
In accordance with industry practice, the amounts have not been discounted to
their present values.
Factors affecting revenues. Title revenues are closely related to the level of
activity in the real estate market and the prices at which real estate sales are
made. Real estate sales are directly affected by the availability and cost of
money to finance purchases. Other factors include demand by buyers, consumer
confidence and family incomes. These factors may override the seasonal nature of
the title business. Generally, the third quarter is the most active in terms of
real estate sales and the first quarter is the least active.
Selected information for the national real estate industry follows (2001 amounts
are preliminary):
2001 2000 1999
------ ------ ------
Housing starts - millions .................... 1.60 1.57 1.64
Housing resales - millions ................... 5.25 5.11 5.21
Housing resales - median sales price in
$ thousands ................................ 147.5 139.0 133.3
In addition, when interest rates decline, the number of refinancing transactions
and associated revenues generally increase.
Customers. The primary sources of title business are attorneys, builders,
developers, lenders and real estate brokers. No one customer was responsible for
as much as ten percent of our title revenues in any of the last three years.
Titles insured included residential and commercial properties, undeveloped
acreage, farms and ranches.
Service, location, financial strength, size and related factors affect customer
acceptance. Increasing market share is accomplished primarily by providing
superior service. The parties to a closing are concerned with personal schedules
and the interest and other costs associated with any delays in the settlement.
The rates charged to customers are regulated to varying degrees by different
states.
Financial strength and stability of the title underwriter are important factors
in maintaining and increasing our agency network. Out of the nation's top four
title insurers, we earned the highest ratings awarded by the title industry's
leading rating companies. We received an A" from Demotech, Inc., an A+ from
Fitch, an A+ from Lace Financial and an A2 from Moodys.
Market share. Title insurance statistics are compiled annually by the title
industry's national association. Based on unconsolidated statutory net premiums
written for 2000 (2001 amounts are not yet available), Stewart Title Guaranty
Company ("Guaranty") is one of the leading individual title insurers in America.
Our principal competitors include Fidelity National Financial, Inc., The First
American Corporation and LandAmerica Financial Group, Inc. Like most title
insurers, we also compete with abstractors, attorneys who issue title opinions
and attorney-owned title insurance bar funds. We also compete with issuers of
alternative title insurance products, which typically provide more limited
coverage and less service for a smaller premium. A number of homebuilders,
financial institutions, real estate brokers and others own or control title
insurance agents, some of which issue policies underwritten by Guaranty. This
"controlled" business also provides competition for our agents.
-2-
Title revenues by state. The approximate amounts and percentages of consolidated
title revenues for the last three years were:
Amounts ($ millions) Percentages
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
California ..... 194 111 158 16 13 16
Texas .......... 190 176 167 16 20 17
Florida ........ 88 60 73 7 7 7
New York ....... 78 67 73 7 8 7
All others ..... 635 450 523 54 52 53
------ ------ ------ ------ ------ ------
1,185 864 994 100 100 100
====== ====== ====== ====== ====== ======
Offices. At December 31, 2001, we had 5,829 locations issuing policies, compared
to 5,354 a year earlier and 4,789 two years earlier. Of these totals 5,373,
4,952 and 4,425 were independent agents at December 31, 2001, 2000 and 1999,
respectively.
Regulations. Title insurance companies are subject to extensive state
regulations covering rates, agent licensing, policy forms, trade practices,
reserve requirements, investments and the flow of funds between an insurer and
its parent or its subsidiaries and any similar related party transaction.
Kickbacks and similar practices are prohibited by various state and federal
laws.
REAL ESTATE INFORMATION
The real estate information segment primarily provides electronic delivery of
data, products and services related to real estate transactions. Our services
related to the mortgage origination process include title information and
insurance, settlement services, flood zone determinations, property valuations,
electronic mortgage documents, credit reports and tax services. We also provide
document retrieval, preparation and recordation of assignments and lien
releases, recordation services, collateral reviews and loan pool certifications.
In addition, we provide diverse products and services related to I.R.C. Section
1031 tax-deferred exchanges; automated mapping projects and geodetic
positioning; real estate database conversion, construction, maintenance, and
access; office automation for government recording and registration; as well as
criminal, credit and motor vehicle background checks and pre-employment
screening services.
Factors affecting revenues. As in the title segment, REI revenues, particularly
those generated by mortgage information services and tax-deferred exchanges, are
also closely related to the level of activity in the real estate market.
Revenues related to many services are generated on a project basis. Contracts
for automating government recording and registration and mapping projects are
often awarded through a lengthy bid process.
Our principal competitors vary across the wide range of services. In the
mortgage-related products and services area, competitors include the major title
underwriters mentioned in the Title section, as well as entities known as vendor
management companies.
Customers. The primary sources of our REI business are residential mortgage
lenders and servicers. Our timeliness and accuracy in providing services are
critical to our customers. It directly affects the service they provide to their
customer, primarily the borrower. Delays and errors directly impact the cost of
originating or servicing the loan or the value of the loan asset. Our other
customers include title agencies, county clerks and recorders, municipalities,
real estate professionals and attorneys. Our financial strength, marketplace
presence and reputation as a technology innovator are important factors in
attracting new business.
GENERAL
Technology. Our automation products and services are increasing productivity in
the title office and speeding the real estate closing process for lenders, real
estate professionals and consumers. In the past, an order typically required
several individuals to search the title, retrieve and review documents and
finally create the actual commitment. Today, on a normal subdivision file, one
person can receive the order electronically and, on the same screen, view the
prior file, examine the index of documents, retrieve and review electronically
stored documents, prepare the commitment and deliver the product.
-3-
Trademarks. We have developed numerous automation products and processes which
are crucial to both our title and REI segments. These systems automate most
facets of the real estate transaction. Among these trademarked products and
processes are AIM(R), E-Title(TM), Landata Title Office(R), Landata Title
Plant(R), LANDSCAN(R), REI Mall(R), Single-Seat Technology(TM), SureClose(R),
Titlelogix(TM) and Virtual Underwriter(R). We consider these trademarks, which
are perpetual in duration, to be important in our business.
Employees. As of December 31, 2001, we and our subsidiaries employed 6,915
people. We consider our relationship with our employees to be good.
ITEM 2. PROPERTIES
We own or lease the following principal properties:
Location Type Use Size Acquired In
------------------------- ---------------------- ------------------------ ---------------- -----------
Houston, Texas Leased office building Executive office of the 250,077 sq. ft.
Registrant and Guaranty (1)
Houston, Texas Leased office building Office of Guaranty 52,000 sq. ft. (2)
Houston, Texas Leased office building Office of Guaranty 41,361 sq. ft. (3)
Los Angeles, California Leased office building Office of Guaranty 33,609 sq. ft. (4)
Dallas, Texas Leased office building Office of Guaranty 25,921 sq. ft (5)
Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (6)
San Antonio, Texas Leased office building Office of Guaranty 20,864 sq. ft. (7)
Concord, California Leased office building Office of Guaranty 18,916 sq. ft. (4)
Irvine, California Leased office building Office of Guaranty 15,502 sq. ft. (4)
Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905
Tucson, Arizona Owned office building Office of Guaranty 24,000 sq. ft. 1974
Phoenix, Arizona Owned office building Office of Guaranty 24,459 sq. ft. 1981
San Antonio, Texas Owned office building Office of Guaranty 26,769 sq. ft. 1980 & 1982
Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 1985
---------------------------
(1) This lease terminates in 2016.
(2) This lease terminates in 2006.
(3) This lease terminates in 2007.
(4) These leases terminate in 2004.
(5) This lease terminates in 2009.
(6) This lease terminates in 2003.
(7) This lease terminates in 2005.
We lease offices at approximately 473 locations. The average term for
all such leases is approximately five years. The leases expire from 2002 to
2016. We believe we will not have any difficulty obtaining renewals of leases as
they expire or, alternatively, leasing comparable property. The aggregate annual
rental expense under all leases was approximately $37,181,000 in 2001.
We consider all buildings and equipment that we own or lease to be well
maintained, adequately insured and generally sufficient for our purposes.
-4-
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of lawsuits incurred in connection with our
business, most of which are of a routine nature involving 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.
We do not expect that any of these proceedings will have a material adverse
effect on our consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-5-
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the New York Stock Exchange (NYSE) under
the symbol "STC". The following table sets forth the high and low sales prices
of our Common Stock for each fiscal period indicated, as reported by NYSE.
HIGH LOW
-------- -------
2001:
First quarter .................................. $ 22.25 $ 16.80
Second quarter ................................. 19.71 16.20
Third quarter .................................. 20.64 15.80
Fourth quarter ................................. 22.15 18.60
2000:
First quarter .................................. $ 15.88 $ 12.25
Second quarter ................................. 16.00 12.44
Third quarter .................................. 15.50 12.50
Fourth quarter ................................. 22.31 13.25
In March 2001, we filed a registration statement with the Securities
and Exchange Commission to sell from time to time up to $75 million of common
stock. In August we issued 2.5 million shares at $19 per share resulting in net
proceeds of $44.5 million, which are being used for acquisitions and to pay down
bank debt.
We paid regular quarterly cash dividends on our Common Stock from 1972
through 1999. During 1999, our Board of Directors approved a plan to repurchase
up to 5% (680,000 shares) of our outstanding Common Stock. The Board also
determined that our regular quarterly dividend should be discontinued in favor
of returning those and additional funds to stockholders through the stock
repurchase plan. Under this plan, we repurchased 116,900 shares of Common Stock
during 2000 and none in 2001. No cash dividends were paid during 2001 or 2000.
Our Certificate of Incorporation provides that no cash dividends may be paid on
the Class B Common Stock.
The number of shareholders of record as of December 31, 2001 was 3,101.
As of March 1, 2002, the price of one share of our Common Stock was $19.01.
-6-
ITEM 6. SELECTED FINANCIAL DATA
(Ten year summary)
2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
------- ------- -------- ------- ------- ------- ------- ------- ------ -------
IN MILLIONS OF DOLLARS
Total revenues ................ 1,271.6 935.5 1,071.3 968.8 708.9 656.0 534.6 611.1 683.6 540.7
Title segment:
Operating revenues ......... 1,185.4 863.9 993.7 899.7 657.3 609.4 496.0 599.5 672.9 530.3
Investment income .......... 19.9 19.1 18.2 18.5 15.9 14.5 13.6 12.4 10.3 10.3
Investment gains (losses) .. 0.4 0 0.3 0.2 0.4 0.1 1.0 (0.8) 0.4 0.1
Total revenues ............. 1,205.7 883.0 1,012.2 918.4 673.6 624.0 510.6 611.1 683.6 540.7
Pretax earnings ............ 75.2 5.6 43.6 73.2 29.2 22.5 10.8 13.8 37.6 21.2
REI segment: (1)
Revenues ................... 65.9 52.5 59.0 50.4 35.3 32.0 24.0
Pretax earnings (losses) ... 5.4 (4.4) 3.0 3.1 (5.5) 0.4 (0.1)
Title loss provisions ......... 51.5 39.0 44.2 39.2 29.8 33.8 29.6 40.2 58.6 54.1
% of title operating revenues.. 4.3 4.5 4.4 4.4 4.5 5.6 6.0 6.7 8.7 10.2
Goodwill expense .............. 3.0 1.8 1.7 1.2 1.0 0.9 0.6 0.3 0.2 0.4
Net earnings .................. 48.7 0.6 28.4 47.0 15.3 14.4 7.0 9.7 23.7 14.6
Cash flow from operations ..... 108.2 31.9 57.9 86.5 36.0 38.3 20.6 27.7 54.3 36.3
Total assets .................. 677.9 563.4 535.7 498.5 417.7 383.4 351.4 325.2 313.9 251.9
Long-term debt ................ 7.0 15.4 6.0 8.9 11.4 7.9 7.3 2.5 3.0 4.2
Stockholders' equity (2) ...... 394.5 295.1 284.9 260.4 209.5 191.0 174.9 156.4 156.2 128.6
PER SHARE DATA (3)
Average shares - diluted
(in millions) .............. 16.3 15.0 14.6 14.2 13.8 13.5 12.7 12.5 12.4 12.2
Net earnings - basic .......... 3.01 0.04 1.96 3.37 1.12 1.08 0.56 0.78 1.93 1.20
Net earnings - diluted ........ 2.98 0.04 1.95 3.32 1.11 1.07 0.55 0.77 1.90 1.20
Stockholders' equity (2) ...... 22.16 19.61 19.39 18.43 15.17 14.17 13.68 12.59 12.69 10.55
Market price:
High ...................... 22.25 22.31 31.38 33.88 14.63 11.32 11.25 10.71 10.17 7.25
Low ....................... 15.80 12.25 10.25 14.25 9.38 9.82 7.57 7.19 6.25 4.34
Year end .................. 19.75 22.19 13.31 29.00 14.50 10.38 10.75 7.69 10.00 6.84
(1) Prior to 1995, segment operations for real estate information services
were not reported separately from title operations and were less
significant.
(2) Includes unrealized gains and losses upon adoption of FAS 115 in 1993.
(3) Restated for two-for-one stock split in May 1999 and a three-for-two
stock split in April 1994, effected as stock dividends.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL. Our primary business is title insurance. We close transactions and
issue policies on homes and other real property located in all 50 states, the
District of Columbia and several foreign countries through more than 5,800
issuing locations. We also sell electronically delivered real estate services
and information, as well as mapping products and geographic information systems,
to domestic and foreign governments and private entities.
-7-
Our business has two main segments: title insurance and real estate
information, or REI. These segments are closely related due to the nature of
their operations and common customers. The segments provide services throughout
the United States through a network of offices, including both direct operations
and agents. Although we conduct operations in several international markets, at
current levels they are generally immaterial with respect to our consolidated
financial results.
Generally, the principal factors that contribute to increases in our
operating revenues for our title and REI segments include:
o declining mortgage interest rates, which usually increase home sales
and refinancing transactions;
o rising home prices;
o higher premium rates;
o increased market share; o additional revenues from our new offices; and
o increased revenues from our commercial transactions. Large commercial
transactions, although relatively few in number, typically yield higher
premiums.
CRITICAL ACCOUNTING POLICIES. We believe the accounting policies that are the
most critical to our financial statements, and that are subject to the most
judgment, are those relating to title loss reserves, premium revenue recognition
and recoverability of long-lived assets, such as goodwill and title plants. See
Note 1 to the consolidated financial statements for details.
RESULTS OF OPERATIONS
A comparison of the results of operations of the Company for 2001 with 2000 and
2000 with 1999 follows.
OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed mortgages, excluding points, for the year 2001 averaged 7.0% as
compared to 8.1% in 2000. Rates averaged 7.4% in 1999.
The rates in the first half of 1999 were rather steady at slightly
above or below the 7% mark. In June, they began a decided move upward. At
year-end 1999, rates were just over 8%. In 2000, the upward trend continued,
with rates reaching a peak of 8.5% in May. Rates then declined for seven
consecutive months. In 2001, rates held steady at close to 7% for most of the
year.
Operating in these mortgage interest rate environments and in good
general economies, real estate activity was strong in 2001 and weak in 2000.
Nationwide, refinancing transactions increased significantly in 2001. The ratio
of refinancings to total loan applications was 56.0% for 2001, 20.0% for 2000
and 30.6% for 1999. Existing home sales increased 2.7% in 2001 over 2000, while
decreasing 1.8% in 2000 from 1999.
TITLE REVENUES. Our revenues from premiums, fees and other revenues increased
37.2% in 2001 over 2000 while decreasing 13.1% in 2000 from 1999.
Revenues from direct business increased 41.8% in 2001 while decreasing
0.3% in 2000. The number of direct closings we handled increased 55.7% in 2001
while decreasing 7.4% in 2000. The average revenue per closing decreased 9.2% in
2001 due to the large number of refinancings with their lower premiums but
increased 9.0% in 2000 because of higher home prices, increased commercial
transactions and fewer refinancings as compared to 1999. There were no major
revenue rate changes in 2001, 2000 or 1999.
Premiums from agents increased 33.8% to $661.9 million in 2001 while
decreasing 20.6% to $494.6 million in 2000 from $623.3 million in 1999. The
increase in 2001 was primarily due to the increase in refinancings and regular
transactions. The largest increases were in California, Florida, Pennsylvania
and New York. The decrease in 2000 resulted primarily from declining
refinancings and regular transactions handled by agents nationwide. While
premiums in nearly all states declined in 2000, the largest decreases were in
California, Utah, Florida and Oregon.
Other revenues in 2000 included $1.6 million in losses in an equity
investee startup operation. In 1999 other revenues included a $1.3 million
pretax gain resulting from a settlement of a lawsuit and a related sale of an
equity ownership in a title agency.
-8-
TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated
title revenues for the last three years were:
Amounts ($ millions) Percentages
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
California .... 194 111 158 16 13 16
Texas ......... 190 176 167 16 20 17
Florida ....... 88 60 73 7 7 7
New York ...... 78 67 73 7 8 7
All others .... 635 450 523 54 52 53
------ ------ ------ ------ ------ ------
1,185 864 994 100 100 100
====== ====== ====== ====== ====== ======
REI REVENUES. Real estate information revenues were $65.9 million in 2001, $52.5
million in 2000 and $59.0 million in 1999. The increase in 2001 resulted
primarily from providing an increased number of post-closing services, flood
determinations and electronic mortgage documents resulting from the large volume
of real estate transactions. The decrease in 2000 resulted primarily from
decreased real estate transactions and fewer ongoing mapping and title plant
projects.
INVESTMENTS. Investment income increased 4.3% in 2001 primarily because of
increases in average balances invested, partially offset by lower yields.
Investment income increased 4.6% in 2000 primarily because of an increase in
yields. Investment gains in 2001, 2000 and 1999 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 81.5%, 81.2% and 80.9% in the years 2001, 2000 and 1999,
respectively. Amounts retained by title agents are based on contracts between
agents and our title underwriters. 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.
SELECTED COST RATIOS (BY SEGMENT). The following table shows employee costs and
other operating expenses as a percentage of related title and real estate
information operating revenues for the last three years.
Employee costs (%) Other operating (%)
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
Title .................... 27.5 29.7 25.1 16.0 18.3 15.4
REI....................... 59.3 68.8 57.5 19.1 28.4 26.9
These two categories of expenses are discussed below.
EMPLOYEE COSTS. Employee costs for the combined business segments increased
25.1% in 2001 and 3.3% in 2000. The number of persons we employed at December
31, 2001, 2000 and 1999 was approximately 6,900, 5,600 and 5,800, respectively.
The increase in staff in 2001 was primarily due to increased title and REI
volume and acquisitions of new offices. The decrease in staff in 2000 was
primarily the result of reductions in existing operations in response to
decreased volume. The reductions were offset partially by acquisitions and
expansion in national marketing and technology operations.
In the REI segment, employee costs increased in 2001 and 2000 primarily
due to a shift in focus to provide more post-closing services to lenders. These
services are considerably more labor intensive.
OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 16.9% in 2001 and 2.4% in 2000. The overall increase in other
operating expenses for the combined business segments in 2001 was in new
offices, search fees, premium taxes and rent. In 2000, the increase was in new
offices, rent, search fees and provisions for regulatory actions brought against
the Company. These were offset partially by reductions in premium taxes and
certain REI expenses in response to volume decreases.
Other operating expenses also include business promotion, title plant
expenses, telephone, supplies and policy forms. Most of these expenses follow,
to varying degrees, the changes in transaction volume and revenues.
Our 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 we handle.
-9-
TITLE LOSSES. Provisions for title losses, as a percentage of title premiums,
fees and other revenues, were 4.3%, 4.5% and 4.4% in 2001, 2000 and 1999,
respectively. The continued improvement in industry trends in claims and
increases in refinancing transactions, which generally result in lower loss
exposure, have led to lower loss ratios in recent years.
INCOME TAXES. The provision for federal, state and foreign income taxes
represented effective tax rates of 39.6%, 47.1% and 39.0% in 2001, 2000 and
1999, respectively. The 2000 effective rate was higher primarily due to state
income taxes, which were proportionately higher in relation to taxable income.
LIQUIDITY AND CAPITAL RESOURCES. In 2001, 2000 and 1999 we financed a portion of
the purchase price of certain acquisitions through the issuance of $3.2 million,
$4.9 million and $7.4 million, respectively, of our common stock. Acquisitions
during 2001, 2000 and 1999 resulted in additions to our goodwill of $19.3
million, $7.5 million and $8.8 million, respectively.
We filed a registration statement with the Securities and Exchange
Commission in March 2001 to sell from time to time up to $75 million of common
stock. In August we issued 2.5 million shares at $19 per share resulting in net
proceeds of $44.5 million, which are being used for acquisitions and to pay down
bank debt.
Cash provided by operations was $108.2 million, $31.9 million and $57.9
million in 2001, 2000 and 1999, respectively. Internally generated cash flow has
been the primary source of financing for additions to property and equipment,
expanding operations and other requirements. This source may be supplemented by
bank borrowings. We do not have any material source of liquidity and financing
that involves off-balance sheet arrangements.
A substantial majority of consolidated cash and investments is held by
Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers
between Guaranty and its subsidiaries and the Company are subject to certain
legal restrictions. See Notes 3 and 4 to the consolidated financial statements.
Our liquidity, excluding Guaranty and its subsidiaries, is comprised of
cash and investments aggregating $18.0 million and short-term liabilities of
$1.0 million at December 31, 2001. We know of no commitments or uncertainties
that are likely to materially affect our ability to fund cash needs.
We consider our capital resources, represented primarily by long-term
debt of $7.0 million and stockholders' equity of $394.5 million at December 31,
2001, to be adequate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion below about our risk management strategies includes
forward-looking statements that are subject to risk and uncertainties.
Management's projections of hypothetical net losses in fair value of our market
rate sensitive instruments should certain potential changes in market rates
occur, is presented below. While we believe that the potential market rate
changes are reasonably possible, actual results could differ.
Our only material market risk in investments in financial instruments
is in our debt securities portfolio. We invest primarily in marketable
municipal, U.S. Government, corporate and mortgage-backed debt securities. We do
not invest in financial instruments of a hedging or derivative nature.
We have established policies and procedures to manage our exposure to
changes in the fair value of our investments. These policies include retaining
an investment advisory firm, an emphasis upon credit quality, management of
portfolio duration, maintaining or increasing investment income through high
coupon rates and actively managing profile and security mix depending upon
market conditions. We have classified all of our investments as
available-for-sale.
-10-
The market value of our investments in debt securities at December 31,
2001 was $314.7 million. Debt securities at December 31, 2001 mature, according
to their contractual terms, as follows (actual maturities may differ because of
call or prepayment rights):
Amortized Market
Cost Value
--------- ---------
($000 Omitted)
In one year or less ......................... 14,546 14,722
After one year through two years ............ 21,947 22,393
After two years through three years ......... 21,729 22,626
After three years through four years ........ 19,307 20,050
After four years through five years ......... 45,135 46,265
After five years ............................ 162,179 163,599
Mortgage-backed securities .................. 24,458 25,002
--------- ---------
309,301 314,657
========= =========
We believe our investment portfolio is diversified and do not expect
any material loss to result from the failure to perform by issuers of the debt
securities we hold. Our investments are not collateralized. The mortgage-backed
securities are insured by agencies of the U.S. Government.
Based on our debt securities portfolio and interest rates at December
31, 2001, a 100 basis point increase in interest rates would result in a
decrease of approximately $14.6 million, or 4.5%, in the fair value of our
portfolio. Changes in interest rates may affect the fair value of the debt
securities portfolio and may result in unrealized gains or losses. Gains or
losses would only be realized upon the sale of the investments. Any other than
temporary declines in market values of securities are charged to earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be provided in this item is included in our
Consolidated Financial Statements, including the Notes thereto, attached hereto
as pages F-1 to F-16, and such information is incorporated in this report by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-11-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding our directors will be included in the proxy
statement for our 2002 Annual Meeting of Stockholders (the "Proxy Statement") to
be filed within 120 days after December 31, 2001, and is incorporated in this
report by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be included in the
Proxy Statement and is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information, if any, regarding beneficial ownership of our Common Stock
will be included in the Proxy Statement and is incorporated in this report by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions
will be included in the Proxy Statement and is incorporated in this report by
reference.
-12-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules filed as
part of this report are listed in the "Index to Consolidated Financial
Statements" on Page F-1 hereof. All other schedules are omitted, as the
required information is inapplicable or the information is presented in
the consolidated financial statements or related notes.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended
December 31, 2001.
(c) Exhibits
3.1 - Certificate of Incorporation of the Registrant, as amended
March 19, 2001 (incorporated by reference in this report from
Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
3.2 - By-Laws of the Registrant, as amended March 13, 2000
(incorporated by reference in this report from Exhibit 3.2 of
Annual Report on Form 10-K for the fiscal year ended December
31, 2000)
4. - Rights of Common and Class B Common Stockholders (incorporated
by reference to Exhibits 3.1 and 3.2 hereto)
* 10.1 - Summary of agreements as to payment of bonuses to certain
executive officers
* 10.2 - Deferred Compensation Agreements dated March 10, 1986, amended
July 24, 1990 and October 30, 1992, between the Registrant and
certain executive officers (incorporated by reference in this
report from Exhibit 10.2 of Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
* 10.3 - Stewart Information Services Corporation 1999 Stock Option
Plan (incorporated by reference in this report from Exhibit
10.3 of Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)
21. - Subsidiaries of the Registrant
23. - Consent of Independent Certified Public Accountant, including
consent to incorporation by reference of their reports into
previously filed Securities Act registration statements
*Indicates a management contract or compensation plan.
-13-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized.
STEWART INFORMATION SERVICES CORPORATION
(Registrant)
By: Malcolm S. Morris
----------------------------------------------------------
Malcolm S. Morris, Co-Chief Executive Officer
and Chairman of the Board of Directors
By: Stewart Morris, Jr.
----------------------------------------------------------
Stewart Morris, Jr. Co-Chief Executive Officer
President and Director
By: Max Crisp
----------------------------------------------------------
Max Crisp, Vice President-Finance, Secretary-Treasurer,
Director and Principal Financial and Accounting Officer
Dated: March 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed by the following persons on our behalf and in the
capacities and on the dates indicated:
Lloyd Bentsen, III Director March 18, 2002
------------------------ -------------------
(Lloyd Bentsen, III)
Max Crisp Director March 18, 2002
------------------------ -------------------
(Max Crisp)
Nita Hanks Director March 18, 2002
------------------------ -------------------
(Nita Hanks)
Director
------------------------ -------------------
(Paul Hobby)
Director
------------------------ -------------------
(E. Douglas Hodo)
Director
----------------------- -------------------
(John P. LaWare)
Malcolm S. Morris Director March 18, 2002
----------------------- -------------------
(Malcolm S. Morris)
Stewart Morris, Jr. Director March 18, 2002
----------------------- -------------------
(Stewart Morris, Jr.)
Director
----------------------- -------------------
(W. Arthur Porter)
-14-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Stewart Information Services Corporation and Subsidiaries'
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Statements of Earnings, Retained Earnings and Comprehensive
Earnings for the years ended December 31, 2001, 2000 and 1999 F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedules:
Schedule I - Financial Information of the Registrant (Parent Company) S-1
Schedule II - Valuation and Qualifying Accounts S-5
F-1
Independent Auditors' Report
To the Board of Directors and Stockholders
of Stewart Information Services Corporation:
We have audited the consolidated financial statements of Stewart Information
Services Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Stewart
Information Services Corporation and subsidiaries at December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedules when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Houston, Texas
February 13, 2002
F-2
CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE
EARNINGS
Years ended December 31 2001 2000 1999
----------------------- ---------- ---------- ----------
($000 Omitted)
REVENUES
Title premiums, fees and other revenues ................. 1,185,455 863,892 993,685
Real estate information services ........................ 65,852 52,463 59,039
Investment income ....................................... 19,922 19,107 18,264
Investment gains - net .................................. 356 23 266
---------- ---------- ----------
1,271,585 935,485 1,071,254
EXPENSES
Amounts retained by agents .............................. 539,369 401,761 504,201
Employee costs .......................................... 365,562 292,276 283,073
Other operating ......................................... 202,342 173,038 168,975
Title losses and related claims ......................... 51,454 38,999 44,187
Depreciation ............................................ 19,637 19,144 16,402
Goodwill ................................................ 3,011 1,807 1,666
Interest ................................................ 2,216 2,266 1,298
Minority interests ...................................... 7,414 5,048 4,887
---------- ---------- ----------
1,191,005 934,339 1,024,689
Earnings before taxes ....................................... 80,580 1,146 46,565
Income taxes ................................................ 31,894 540 18,143
---------- ---------- ----------
NET EARNINGS ................................................ 48,686 606 28,422
Retained earnings at beginning of year ...................... 210,060 209,454 190,363
Cash dividends on Common Stock ($.16 per share in 1999) ..... -- -- (2,158)
Stock dividend .............................................. -- -- (7,173)
---------- ---------- ----------
Retained earnings at end of year ............................ 258,746 210,060 209,454
========== ========== ==========
Average number of shares outstanding -
assuming dilution (000 omitted) ........................... 16,348 14,980 14,606
Earnings per share - basic .................................. 3.01 .04 1.96
EARNINGS PER SHARE - DILUTED ................................ 2.98 .04 1.95
========== ========== ==========
Comprehensive earnings:
Net earnings ................................................ 48,686 606 28,422
Changes in other comprehensive earnings, net
of taxes of $1,158, $2,985 and ($5,269) ................... 2,151 5,528 (9,850)
---------- ---------- ----------
COMPREHENSIVE EARNINGS ...................................... 50,837 6,134 18,572
========== ========== ==========
See notes to consolidated financial statements.
F-3
CONSOLIDATED BALANCE SHEETS
December 31 2001 2000
----------- ---------- ----------
($000 Omitted)
ASSETS
Cash and cash equivalents ........................................ 60,706 36,505
Short-term investments ........................................... 56,267 52,971
Investments in debt and equity securities, at market:
Statutory reserve funds ...................................... 239,084 206,150
Other ........................................................ 86,046 52,242
---------- ----------
325,130 258,392
Receivables:
Notes ........................................................ 8,923 17,184
Premiums from agents ......................................... 17,738 16,590
Other ........................................................ 30,039 28,392
Less allowance for uncollectible amounts...................... (4,664) (5,127)
---------- ----------
52,036 57,039
Property and equipment, at cost:
Land ......................................................... 2,402 2,172
Buildings .................................................... 7,823 7,779
Furniture and equipment ...................................... 146,108 133,288
Less accumulated depreciation and amortization ............... (107,561) (97,780)
---------- ----------
48,772 45,459
Title plants, at cost ............................................ 37,715 32,491
Real estate, at lower of cost or net realizable value ............ 4,126 2,196
Investments in investees, on an equity basis...................... 12,158 11,780
Goodwill, less accumulated amortization of $13,479 and $10,468 ... 52,971 36,693
Deferred income taxes ............................................ 4,288 7,352
Other assets ..................................................... 23,694 22,570
---------- ----------
677,863 563,448
========== ==========
LIABILITIES
Notes payable, including $6,966 and $15,439
long-term portion .............................................. 13,794 32,543
Accounts payable and accrued liabilities ......................... 57,752 38,617
Estimated title losses ........................................... 202,544 190,298
Minority interests ............................................... 9,233 6,901
Contingent liabilities and commitments
STOCKHOLDERS' EQUITY
Common - $1 par, authorized 30,000,000, issued and
outstanding 16,751,240 and 14,001,645 .......................... 16,868 14,118
Class B Common - $1 par, authorized 1,500,000, issued
and outstanding 1,050,012 ...................................... 1,050 1,050
Additional paid-in capital ....................................... 115,239 69,375
Retained earnings ................................................ 258,746 210,060
Accumulated other comprehensive earnings:
Unrealized investment gains .................................. 3,843 1,888
Foreign currency translation adjustments ..................... 306 110
Treasury stock - 116,900 Common shares, at cost .................. (1,512) (1,512)
---------- ----------
Total stockholders' equity ($22.16 and
$19.61 per share) ....................................... 394,540 295,089
---------- ----------
677,863 563,448
========== ==========
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 2001 2000 1999
----------------------- ---------- ---------- ----------
($000 Omitted)
Cash Provided by Operating Activities (Note) ..................... 108,186 31,913 57,875
Investing activities:
Purchases of property and equipment, title plants
and real estate net ....................................... (23,452) (19,191) (25,307)
Proceeds from investments matured and sold ................... 70,074 87,325 46,536
Purchases of investments ..................................... (135,579) (80,550) (81,713)
Increases in notes receivable ................................ (3,208) (10,535) (6,118)
Collections on notes receivable .............................. 11,531 1,733 5,826
Proceeds from sale of equity investment - net ................ -- -- 6,009
Cash paid for equity investees ............................... -- (6,863) (1,783)
Cash paid for acquisitions of subsidiaries - net ............. (13,016) (9,475) (5,243)
---------- ---------- ----------
Cash Used by Investing Activities ................................ (93,650) (37,556) (61,793)
Financing activities:
Dividends paid ............................................... -- -- (2,158)
Purchases of treasury stock .................................. -- (1,512) --
Distribution to minority interests ........................... (5,926) (4,814) (4,071)
Proceeds from exercise of stock options ...................... 337 19 65
Proceeds from stock offering - net ........................... 44,509 -- --
Proceeds of notes payable .................................... 6,597 16,856 10,056
Payments on notes payable .................................... (35,852) (5,829) (7,429)
---------- ---------- ----------
Cash Provided (Used) by Financing Activities ..................... 9,665 4,720 (3,537)
---------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents ................. 24,201 (923) (7,455)
========== ========== ==========
Note: Reconciliation of net earnings to the above amounts
Net earnings ................................................. 48,686 606 28,422
Add (deduct):
Depreciation and amortization ............................. 22,648 20,951 18,068
Provisions for title losses in excess of payments ......... 11,483 6,511 11,474
(Increase) decrease in receivables - net .................. (1,660) 576 (1,291)
Increase (decrease) in payables and accrued
liabilities - net ...................................... 18,450 (3,138) (3,039)
Minority interest expense ................................. 7,414 5,048 4,887
Equity in net (earnings) losses of investees .............. (1,345) 596 (1,072)
Dividends received from equity investees .................. 2,275 1,132 1,198
Other - net ............................................... 235 (369) (772)
---------- ---------- ----------
Cash provided by operating activities ......................... 108,186 31,913 57,875
========== ========== ==========
Supplemental information:
Income taxes paid ............................................. 14,615 528 16,018
Interest paid ................................................. 1,649 1,687 1,187
Net assets acquired (purchase method):
Goodwill ................................................... 19,312 7,528 8,805
Title plants ............................................... 5,056 5,239 354
Other ...................................................... 4,830 3,645 4,612
Liabilities assumed ........................................... (12,962) (2,000) (1,169)
Common Stock issued ........................................... (3,220) (4,937) (7,359)
---------- ---------- ----------
Cash paid for acquisitions ....................................... 13,016 9,475 5,243
========== ========== ==========
See notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Three years ended December 31, 2001)
NOTE 1
GENERAL. Stewart Information Services Corporation, through its subsidiaries
(collectively, the Company), is primarily engaged in the title insurance
business. The Company also provides real estate information services. The
Company operates through a network of direct and agent offices throughout the
United States. Approximately 32 percent of consolidated title revenues are
generated in Texas and California. The operations in the international markets
in which the Company does business are insignificant to consolidated results.
A. MANAGEMENT RESPONSIBILITY. The accompanying financial statements were
prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP), including
management's best judgments and estimates. Actual results could differ from
estimates.
B. NEW ACCOUNTING PRONOUNCEMENTS. In accordance with FAS 141 "Business
Combinations", the Company has used the purchase method of accounting for
business combinations after June 30, 2001. The effect on the Company's
consolidated financial position or results of operations was immaterial.
The Company will adopt FAS 142 "Goodwill and Other Intangible Assets"
effective January 1, 2002, as required, and will no longer amortize goodwill.
Instead, goodwill will be reviewed no less than annually and amounts determined
to be impaired will be expensed to current operations. The Company has not fully
determined the impact this will have on its consolidated financial position or
results of operations.
C. RECLASSIFICATIONS. Certain prior year amounts in the consolidated financial
statements have been reclassified for comparative purposes. Net earnings, as
previously reported, were not affected.
D. CONSOLIDATION. The consolidated financial statements include all subsidiaries
in which the Company owns more than 50% voting rights in electing directors.
Unconsolidated investees, owned 20% through 50%, and over which the Company
exercises significant influence, are accounted for by the equity method. All
significant intercompany accounts and transactions are eliminated and provisions
are made for minority interests.
E. STATUTORY ACCOUNTING. Stewart Title Guaranty Company (Guaranty) and other
title insurance underwriters owned by the Company prepare financial statements
in accordance with statutory accounting practices prescribed or permitted by
regulatory authorities.
In restating to GAAP, statutory premium reserve and reserve for
reported title losses are eliminated and, in substitution, amounts are
established for estimated title losses (see below). The net effect, after
providing for certain deferred income taxes, is included in consolidated
retained earnings. In calculating the amount owed on federal income tax returns,
the statutory premium reserve and reserve for reported title losses must be
discounted to their present values.
F. REVENUE RECOGNITION. Operating revenues from direct title operations are
considered earned at the time of the closing of the related real estate
transactions. Premiums on title insurance policies written by agents are
recognized primarily when policies are reported to the Company. The Company also
accrues for unreported policies where reasonable estimates can be made based on
historical reporting patterns of agents, current trends and known information
about agents.
Revenues from real estate information are considered earned at the time
the service is performed or the work product is delivered to the customer.
G. TITLE LOSSES AND RELATED CLAIMS. Estimating future title loss payments is
difficult because of the complex nature of title claims, the long periods of
time over which claims are paid, significantly varying dollar amounts of
individual claims and other factors.
The Company's liability for estimated title losses comprises both known
claims and other losses expected to be reported in the future. The amount of the
reserve represents the aggregate future payments, net of recoveries, that the
Company expects to incur on policy losses and in costs to settle claims.
Provisions are charged to income in the same year the related premium revenues
are recognized. The amounts provided are based on reported claims, historical
loss experience, title industry averages, current legal environment and types of
policies written.
Amounts shown as the Company's estimated liability for future loss
payments are continually reviewed for reasonableness and adjusted as
appropriate. Independent actuaries also review the adequacy of the liability
amounts on an annual basis. In accordance with industry practice, the amounts
have not been discounted to their present values.
F-6
H. INCOME TAXES. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the tax bases and the book
carrying values for certain assets and liabilities. Valuation allowances are
provided as may be appropriate. Enacted tax rates are used in calculating
amounts.
I. CASH EQUIVALENTS. Cash equivalents are highly liquid investments that are
convertible to cash or mature on a daily basis as part of the Company's
management of day-to-day operating cash.
J. SHORT-TERM INVESTMENTS. Short-term investments comprise time deposits with
banks and savings and loan associations, federal government obligations, money
market accounts and other investments maturing in less than one year.
K. INVESTMENTS. The Company has classified its investment portfolio as
available-for-sale. Realized gains and losses on sales of investments are
determined using the specific identification method. Net unrealized gains and
losses on securities, net of applicable deferred taxes, are included in
stockholders' equity. Any other than temporary declines in fair values of
securities are charged to earnings.
L. PROPERTY AND EQUIPMENT. Depreciation is computed principally using the
straight-line method at the following rates: buildings - 30 to 40 years and
furniture and equipment - 3 to 10 years. Maintenance and repairs are expensed as
incurred while improvements are capitalized. Gains and losses are recognized at
disposal.
M. TITLE PLANTS. Title plants include compilations of a county's official land
records, prior examination files, copies of prior title policies, maps and
related materials that are geographically indexed to a specific property. The
costs of acquiring existing title plants and creating new ones, prior to the
time such plants are placed in operation, are capitalized. Such costs are not
amortized because there is no indication of any loss of value. The costs of
maintaining and operating title plants are expensed as incurred. Gains and
losses on sales of copies of title plants or interests in title plants are
recognized at the time of sale.
N. GOODWILL. Goodwill is the excess of the purchase price over the fair value of
net assets of subsidiaries acquired. Prior to January 1, 2002, goodwill was
amortized using the straight-line method by charges to earnings generally over
20 to 40 years. Effective January 1, 2002, goodwill will not be amortized but
will be reviewed and, if determined to be impaired, will be expensed to current
operations. Goodwill impairment charges were $703,000 in 2001. There were no
such charges in 2000 and 1999. See Note 1B.
O. OTHER ACQUIRED INTANGIBLES. The Company does not have any significant
intangible assets, other than title plants and goodwill.
P. LONG-LIVED ASSETS. The Company reviews the carrying values of goodwill, title
plants and other long-lived assets if certain events occur that may indicate
impairment. Goodwill is reviewed no less than annually. Impairment is indicated
when projected undiscounted cash flows over the estimated life of the assets are
less than carrying values. If impairment is determined by management, the book
amounts are written down to fair value by calculating the discounted value of
projected cash flows. See Note 1B.
Q. FAIR VALUES. The fair values of financial instruments, including cash and
cash equivalents, short-term investments, notes receivable, notes payable and
accounts payable, are determined by reference to various market data and other
valuation techniques, as appropriate. The fair values of these financial
instruments approximate their carrying values. Investments in debt and equity
securities are carried at their fair values.
R. DERIVATIVES AND HEDGING. The Company does not invest in hedging or derivative
instruments. Accordingly, FAS 133 "Accounting for Derivative Instruments and
Hedging Activities", which was effective January 1, 2001 for the Company, had no
impact on the consolidated financial statements.
F-7
NOTE 2
INCOME TAXES. The following reconciles federal income taxes computed at the
statutory rate with income taxes as reported.
2001 2000 1999
-------- -------- --------
($000 Omitted)
Expected income taxes at 35% ................ 28,203 401 16,298
State income taxes .......................... 1,976 223 1,235
Foreign taxes - net of credits .............. 528 -- --
Tax effect of permanent differences:
Tax-exempt interest ..................... (1,966) (1,909) (1,951)
Meals and entertainment ................. 1,079 742 615
Goodwill ................................ 933 457 519
Equity (earnings) loses ................. (471) 208 (375)
Minority interests ...................... 2,595 1,767 1,710
Non-taxable income ...................... (1,434) (1,044) (469)
Other - net ............................. 451 (305) 561
-------- -------- --------
Income taxes ................................ 31,894 540 18,143
======== ======== ========
Effective income tax rate (%) ............... 39.6 47.1 39.0
======== ======== ========
Deferred income taxes at December 31, 2001 and 2000 were as follows:
2001 2000
-------- --------
($000 Omitted)
Deferred tax assets:
Book over tax title loss provisions ..... -- 2,498
Accruals not currently deductible ....... 874 939
Net operating loss carryforwards ........ 483 833
Allowance for uncollectible amounts ..... 891 1,001
Book over tax depreciation .............. 3,526 2,034
Investments in partnerships ............. 905 706
Foreign tax credit carryforward ......... 1,609 --
Other ................................... 1,804 1,922
-------- --------
10,092 9,933
Less valuation allowance ................ (608) (1,008)
-------- --------
9,484 8,925
Deferred tax liabilities:
Tax over book title loss provisions ..... (2,411) --
Unrealized gains on investments ......... (2,069) (1,017)
Other ................................... (716) (556)
-------- --------
(5,196) (1,573)
-------- --------
Net deferred income taxes ................... 4,288 7,352
======== ========
The Company's foreign tax credit carryforward expires in 2006. The
valuation allowance relates to certain net operating loss carryforwards and
other deferred tax assets. Management believes it is more likely than not that
future earnings will be sufficient to permit the Company to realize net deferred
income taxes.
Deferred tax expense was $2,012,000, $2,041,000 and $3,524,000 in 2001,
2000 and 1999, respectively.
NOTE 3
RESTRICTIONS ON CASH AND INVESTMENTS. The statutory reserve funds included in
the accompanying financial statements are maintained to comply with legal
requirements for statutory premium reserves and state deposits. These funds are
not available for any other purpose.
A substantial majority of investments and cash at each year end was
held by the Company's title insurer subsidiaries. Generally, the types of
investments a title insurer can make are subject to legal restrictions.
Furthermore, the transfer of funds by a title insurer to its parent or
subsidiary operations, as well as other related party transactions, are
restricted by law and generally require the approval of state insurance
authorities.
F-8
NOTE 4
STATUTORY INFORMATION. Surplus as regards policyholders for Guaranty was
$243,079,000 and $195,101,000 at December 31, 2001 and 2000, respectively.
Statutory net income for Guaranty was $11,195,000, $5,289,000 and $16,369,000 in
2001, 2000 and 1999, respectively.
Substantially all of the consolidated retained earnings at each year
end was represented by Guaranty, which owns directly or indirectly substantially
all of the subsidiaries included in the consolidation.
Guaranty cannot pay a dividend in excess of certain limits without the
approval of the Texas Insurance Commissioner. The maximum dividend which can be
paid without such approval in 2002 is $48,616,000. Guaranty paid dividends of
$1,390,000, $90,000 and $13,090,000 in 2001, 2000 and 1999, respectively.
Dividends from Guaranty were also voluntarily restricted primarily to
maintain statutory surplus and liquidity at competitive levels. The ability of a
title insurer to pay claims can significantly affect the decision of lenders and
other customers when buying a policy from a particular insurer.
NOTE 5
INVESTMENTS. The amortized costs and market values of debt and equity securities
at December 31 follow:
2001 2000
-------------------- -------------------
AMORTIZED MARKET Amortized Market
COST VALUE cost value
--------- ------- --------- --------
($000 Omitted)
Debt securities:
Municipal ................. 143,374 145,769 132,405 134,894
Mortgage-backed ........... 24,458 25,002 15,657 16,047
U.S. Government ........... 21,907 22,764 22,056 22,661
Corporate and utilities ... 119,562 121,122 80,096 78,683
Equity securities ............. 9,917 10,473 5,273 6,107
-------- -------- -------- --------
319,218 325,130 255,487 258,392
======== ======== ======== ========
Gross unrealized gains and losses at December 31 were:
2001 2000
------------------- -------------------
GAINS LOSSES Gains Losses
-------- -------- -------- --------
($000 Omitted)
Debt securities:
Municipal ................. 3,067 672 2,753 264
Mortgage-backed ........... 576 32 418 28
U.S. Government ........... 859 2 607 2
Corporate and utilities ... 2,971 1,411 1,427 2,840
Equity securities ............. 1,060 504 1,335 501
-------- -------- -------- --------
8,533 2,621 6,540 3,635
======== ======== ======== ========
Debt securities at December 31, 2001 mature, according to their
contractual terms, as follows (actual maturities may differ because of call or
prepayment rights):
Amortized Market
cost value
--------- --------
($000 Omitted)
In one year or less ......................... 14,546 14,722
After one year through five years ........... 108,118 111,334
After five years through ten years .......... 89,010 90,527
After ten years ............................. 73,169 73,072
Mortgage-backed securities .................. 24,458 25,002
-------- --------
309,301 314,657
======== ========
F-9
The Company believes its investment portfolio is diversified and
expects no material loss to result from the failure to perform by issuers of the
debt securities it holds. Investments made by the Company are not
collateralized. The mortgage-backed securities are insured by agencies of the
U.S. Government.
NOTE 6
INVESTMENT INCOME. Income from investments and realized gains and losses for the
three years follow:
2001 2000 1999
------ ------ ------
($000 Omitted)
Income:
Debt securities ..................... 15,614 13,770 12,837
Short-term investments, cash
equivalents and other ............ 4,308 5,337 5,427
------- ------- -------
19,922 19,107 18,264
======= ======= =======
Realized gains and losses:
Gains ............................... 1,308 823 536
Losses .............................. (952) (800) (270)
------- ------- -------
356 23 266
======= ======= =======
The sales of securities resulted in proceeds of $41,694,000 in 2001,
$51,066,000 in 2000 and $32,380,000 in 1999.
Expenses assignable to investment income were insignificant. There were
no significant investments at December 31, 2001 that did not produce income
during the year.
NOTE 7
NOTES PAYABLE.
2001 2000
------- -------
($000 Omitted)
Banks
Primarily unsecured and at LIBOR (1)
plus .75%, varying payments ............ 7,620 30,146
Other than banks .............................. 6,174 2,397
------- -------
13,794 32,543
======= =======
(1) 1.88% at December 31, 2001
The notes are due $6,828,000 in 2002, $2,834,000 in 2003, $1,431,000 in
2004, $2,019,000 in 2005, $384,000 in 2006 and $298,000 subsequent to 2006.
NOTE 8
ESTIMATED TITLE LOSSES. Provisions accrued, payments made and liability balances
for the three years follow:
2001 2000 1999
------- ------- -------
($000 Omitted)
Balances at January 1 ............ 190,298 183,787 171,763
Provisions ................... 51,454 38,999 44,187
Payments ..................... (39,721) (32,338) (32,628)
Reserve balances acquired .... 763 -- 550
Decreases in salvage ......... (250) (150) (85)
-------- -------- --------
Balances at December 31 .......... 202,544 190,298 183,787
======== ======== ========
F-10
Provisions include amounts related to the current year of approximately
$51,085,000, $38,815,000 and $43,869,000 for 2001, 2000 and 1999, respectively.
Payments related to the current year, including escrow and other loss payments,
were approximately $11,817,000, $8,515,000 and $8,501,000 in 2001, 2000 and
1999, respectively.
NOTE 9
COMMON STOCK AND CLASS B COMMON STOCK. Holders of Common and Class B Common
Stock have the same rights, except no cash dividends may be paid on Class B
Common Stock. The two classes of stock vote separately when electing directors
and on any amendment to the Company's certificate of incorporation that affects
the two classes unequally.
A provision of the by-laws requires an affirmative vote of at least
two-thirds of the directors to elect officers or to approve any proposal that
may come before the directors. This provision cannot be changed without a
majority vote of each class of stock.
Holders of Class B Common Stock may, with no cumulative voting rights,
elect four directors if 1,050,000 or more shares of Class B Common Stock are
outstanding; three directors if between 600,000 and 1,050,000 shares are
outstanding; and none if less than 600,000 shares of Class B Common Stock are
outstanding. Holders of Common Stock, with cumulative voting rights, elect the
balance of the nine directors.
Class B Common Stock may, at any time, be converted by its shareholders
into Common Stock on a share-for-share basis, but all of the holders of Class B
Common Stock have agreed among themselves not to convert their stock prior to
January 2005. Such conversion is mandatory on any transfer to a person not a
lineal descendant (or spouse, trustee, etc. of such descendant) of William H.
Stewart.
At December 31, 2001 and 2000, there were 145,820 shares of Common
Stock held by a subsidiary of the Company. These shares are considered retired
but may be issued from time to time in lieu of new shares.
In May 1999 the Company effected a two-for-one stock split recorded in
the form of a stock dividend. All share and per share data presented in the
consolidated financial statements have been restated for the effects of the
stock split.
F-11
NOTE 10
CHANGES IN STOCK, ADDITIONAL PAID-IN CAPITAL AND OTHER COMPREHENSIVE EARNINGS.
COMMON
AND CLASS B ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE
STOCK CAPITAL EARNINGS
----------- ---------- -------------
($000 Omitted)
Balances at December 31, 1998 .................. 7,065 56,695 6,320
Stock dividend (1) ......................... 7,173 -- --
Acquisitions ............................... 441 6,918 --
Stock bonuses and other .................... 14 599 --
Exercise of stock options .................. 3 62 --
Tax benefit of stock options exercised ..... -- 30 --
Unrealized investment losses ............... -- -- (9,785)
Foreign currency translation ............... -- -- (65)
------- ------- -------
Balances at December 31, 1999 .................. 14,696 64,304 (3,530)
Acquisitions ............................... 430 4,507 --
Stock bonuses and other .................... 41 545 --
Exercise of stock options .................. 1 18 --
Tax benefit of stock options exercised ..... -- 1 --
Unrealized investment gains ................ -- -- 5,544
Foreign currency translation ............... -- -- (16)
------- ------- -------
Balances at December 31, 2000 .................. 15,168 69,375 1,998
Stock offering ............................. 2,500 42,009 --
Acquisitions ............................... 198 3,022 --
Stock bonuses and other .................... 25 474 --
Exercise of stock options .................. 27 310 --
Tax benefit of stock options exercised ..... -- 49 --
Unrealized investment gains ................ -- -- 1,955
Foreign currency translation ............... -- -- 196
------- ------- -------
BALANCES AT DECEMBER 31, 2001 .................. 17,918 115,239 4,149
======= ======= =======
(1) Includes $525,000 of Class B Common Stock.
In August 2001 the Company issued 2,500,000 shares of its Common Stock at
a price of $19 per share. The net proceeds of the offering are being used for
acquisitions and to pay down bank debt.
NOTE 11
STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans
for the three years follows:
Exercise
Shares (1) prices (1)(2)
---------- -------------
($)
December 31, 1998 .... 313,600 10.84
Granted .......... 86,800 19.70
Exercised ........ (6,500) 10.08
Forfeited ........ (1,500) 10.00
-------- ------
December 31, 1999 .... 392,400 12.81
Granted .......... 86,100 13.00
Exercised ........ (1,500) 13.00
Forfeited ........ (6,800) 13.57
-------- ------
December 31, 2000 .... 470,200 12.83
Granted .......... 84,100 19.37
Exercised ........ (27,100) 12.43
Forfeited ........ (11,000) 18.81
-------- ------
DECEMBER 31, 2001 .... 516,200 13.79
======== ======
(1) Restated for a two-for-one stock split in May 1999.
(2) Weighted average
F-12
At December 31, 2001, 2000 and 1999 there were 516,200, 470,200 and
380,012 options, respectively, exercisable. The weighted average fair values of
options granted during the years 2001, 2000 and 1999 were $11.53, $7.51 and
$8.50, respectively.
The following summarizes information about fixed stock options
outstanding and exercisable at December 31, 2001:
Range of exercise prices ($)
9.75 to 16.97 to
4.59 13.00 20.22 Total
------ ------- ------- -------
Shares ................. 90,000 183,900 242,300 516,200
Remaining contractual
life - years (1) .... 1.0 4.2 6.5 4.5
Exercise price ($) (1) . 4.59 11.06 19.29 13.79
(1) Weighted average
The Company applies APB 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost is recognized for its fixed
stock option plans. Under FAS 123, compensation cost would be recognized for the
fair value of the employees' purchase rights, which is estimated using the
Black-Scholes model. The Company assumed a dividend yield of 0%, an expected
life of five to ten years for each option, expected volatility of 41.6% and
risk-free interest rates of between 4.0% and 6.0% for 2001.
Had compensation cost for the Company's plans been determined
consistent with FAS 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
2001 2000 1999
------ ------ -------
($000 Omitted)
Net earnings:
As reported ................... 48,686 606 28,422
Pro forma ..................... 48,056 186 27,943
Earnings per share:
Net earnings - basic ........... 3.01 .04 1.96
Net earnings - diluted ......... 2.98 .04 1.95
Pro forma - assuming dilution .. 2.94 .01 1.91
NOTE 12
EARNINGS PER SHARE. The Company's basic earnings per share was 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.
To calculate diluted earnings per share, the number of shares
determined above was increased by assuming the issuance of all dilutive shares
during the same reporting period. The treasury stock method was used in
calculating the additional number of shares. The only potentially dilutive
effect on earnings per share for the Company is related to its stock option
plans.
In calculating the effect of the options and determining diluted
earnings per share, the average number of shares used in calculating basic
earnings per share was increased by 153,000 in 2001, 106,000 in 2000 and 125,000
in 1999.
NOTE 13
LEASES. The Company's expense for leased office space was $37,181,000 in 2001,
$32,667,000 in 2000 and $28,194,000 in 1999. These are noncancelable, operating
leases expiring over the next fourteen years. The future minimum lease payments
are summarized as follows (stated in thousands of dollars):
2002 ......................... 32,677
2003 ......................... 27,414
2004 ......................... 19,822
2005 ......................... 12,483
2006 ......................... 10,085
2007 and after ............... 64,784
--------
167,265
========
F-13
NOTE 14
CONTINGENT LIABILITIES AND LAWSUITS. The Company is contingently liable for
disbursements of escrow funds held by agents in certain cases where specific
insured closing guarantees have been issued.
The Company routinely holds funds in segregated escrow accounts pending
the closing of real estate transactions. These accounts are not included in the
consolidated balance sheets. This resulted in a contingent liability to the
Company of approximately $696,000,000 at December 31, 2001.
The Company is a qualified intermediary in tax-deferred property
exchanges for customers pursuant to Section 1031 of the Internal Revenue Code.
The Company holds the proceeds from transactions until a qualifying exchange can
occur. This resulted in a contingent liability to the Company of approximately
$270,000,000 at December 31, 2001.
On December 31, 2001 the Company was contingently liable for guarantees
of indebtedness owed primarily to banks and others by unconsolidated equity
investees in the amount of $4,979,000 and by other third parties in the amount
of $8,287,000. Management believes adequate provisions have been made for any
losses that may result from these commitments.
In the normal conduct of its business, the Company is subject to
lawsuits, regulatory investigations and other legal proceedings that may involve
substantial amounts. Such matters are not predictable with complete assurance.
The Company believes the probable resolution of such contingencies will not
materially affect the financial condition of the Company.
NOTE 15
REINSURANCE. As is the industry practice, the Company cedes risks to other title
insurance underwriters. However, the Company remains liable if the reinsurer
should fail to meet its obligations. The Company also assumes risks from other
underwriters. Payments and recoveries on reinsured losses were insignificant
during the three years ended December 31, 2001. The total amount of premiums for
assumed and ceded risks was less than one percent of title premiums, fees and
other revenues in each of the last three years.
NOTE 16
EQUITY IN INVESTEES. Certain summarized aggregate financial information for
investees follows:
2001 2000 1999
------ ------ ------
($000 Omitted)
For the year:
Revenues ....................... 51,318 37,757 29,164
Net earnings ................... 3,617 602 3,278
As of December 31:
Total assets ................... 25,475 19,183
Notes payable .................. 6,823 5,820
Stockholders' equity ........... 15,457 10,026
Title premiums earned from policies issued by equity investees were
$7,705,000, $4,969,000 and $5,804,000 in 2001, 2000 and 1999, respectively.
The amount of earnings (losses) from equity investees was $1,345,000,
($596,000) and $1,072,000 in 2001, 2000 and 1999, respectively. These amounts
are included in title premiums, fees and other revenues in the consolidated
financial statements.
Equity investee goodwill was amortized for the three years ended
December 31, 2001 on a basis similar to other goodwill. Effective January 1,
2002, under FAS 142, such goodwill will not be amortized. Equity investments
will continue to be reviewed for impairment. See Note 1B.
F-14
NOTE 17
SEGMENT INFORMATION. The Company's two reportable segments are title and real
estate information (REI). The segments significantly influence business to each
other because of the nature of their operations and their common customers. Both
segments serve the real estate and mortgage industries.
The title segment provides services needed in transferring the title in
a real estate transaction. These services include searching, examining and
closing the title to real property. This segment of the Company also insures the
condition of the title.
The REI segment primarily provides services related to real estate
transactions through electronic delivery. These services include title reports,
flood determinations, property appraisals, mortgage documents, credit reports
and tax services. This segment also provides post-closing services to lenders,
including document retrievals, assignments, lien releases, recordations,
collateral reviews and loan pool certifications.
In addition, the REI segment provides services related to Section 1031
tax-deferred exchanges, mapping, and construction and maintenance of title
plants for county clerks, tax assessors and title agencies.
Under the Company's internal reporting system, most general corporate
expenses are incurred by and charged to the title segment. Technology operating
costs are also charged to the title segment, except for direct expenditures
related to the REI segment. All investment income is included in the title
segment as it is generated primarily from the investments of the title
underwriting operations.
Title REI Total
--------- ------ ---------
($000 Omitted)
2001:
Revenues ....................... 1,205,733 65,852 1,271,585
Intersegment revenues .......... 2,672 4,315 6,987
Depreciation and amortization .. 18,025 4,623 22,648
Pretax earnings ................ 75,184 5,396 80,580
Identifiable assets ............ 637,328 40,535 677,863
2000:
Revenues ....................... 883,022 52,463 935,485
Intersegment revenues .......... 581 3,661 4,242
Depreciation and amortization .. 16,283 4,668 20,951
Pretax earnings (losses) ....... 5,591 (4,445) 1,146
Identifiable assets ............ 525,045 38,403 563,448
1999:
Revenues ....................... 1,012,215 59,039 1,071,254
Intersegment revenues .......... 93 2,738 2,831
Depreciation and amortization .. 13,911 4,157 18,068
Pretax earnings ................ 43,615 2,950 (1) 46,565
(1) Includes a pretax charge of $1,319,000 resulting from the settlement of a
lawsuit.
F-15
NOTE 18
QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
($000 Omitted, except per share)
Revenues:
2001 .................... 244,301 314,247 338,741 374,296
2000 .................... 208,203 224,670 239,004 263,608
Net earnings (losses):
2001 .................... 3,073 15,438 13,003 17,172
2000 .................... (3,354) 1,874 1,758 328
Earnings per share - diluted:
2001 .................... .20 1.00 .78 .96
2000 .................... (.23) .13 .12 .02
Computations of per share amounts for quarters are made independently.
Therefore, the sum of per share amounts above may not agree with per share
amounts for the year as a whole.
F-16
STEWART TITLE GUARANTY COMPANY
STEWART TITLE INSURANCE COMPANY
Principal Underwriters of Stewart Information Services Corporation
UNCONSOLIDATED STATUTORY BALANCE SHEETS (UNAUDITED)
From statutory Annual Statements as filed
Stewart Title Stewart Title
December 31, 2001 Guaranty Company Insurance Company
----------------- ---------------- -----------------
($000 Omitted)
Admitted assets
Bonds ................................ 258,647 28,241
Stocks - investments in affiliates ... 173,539 2,293
Stocks - other ....................... 10,362 --
Cash and short-term investments ...... 34,177 2,388
Title plants ......................... 3,963 133
Title insurance premiums and fees
receivable ......................... 15,263 483
Other ................................ 16,493 1,409
--------- --------
512,444 34,947
========= ========
Liabilities, surplus and other funds
Reserve for title losses ............. 31,809 7,867
Statutory premium reserve ............ 211,876 10,734
Other ................................ 25,679 1,654
--------- --------
269,364 20,255
Surplus as regards policyholders
(Note) ................................ 243,080 14,692
--------- --------
512,444 34,947
========= ========
Consolidated stockholder's equity (unaudited), based on
accounting principles generally accepted in the United States
of America (GAAP), for Stewart Title Guaranty Company at
December 31, 2001 (000 omitted)................................... $300,853
========
Note: The amount shown above for stockholder's equity exceeds policyholders
surplus primarily because under GAAP the statutory premium reserve and reserve
for reported title losses are eliminated and estimated title loss reserves are
substituted, net of applicable income taxes.
F-17
SCHEDULE I
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
INCOME AND RETAINED EARNINGS INFORMATION
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Revenues
Investment income ............................................ $ 471 $ 374 $ 442
Other income ................................................. 80 11 1
---------- ---------- ----------
551 385 443
Expenses
Employee costs ............................................... 220 189 123
Other operating .............................................. 2,913 2,084 2,840
Depreciation and amortization ................................ 39 33 106
---------- ---------- ----------
3,172 2,306 3,069
Loss before taxes and equity in earnings of investees ........... (2,621) (1,921) (2,626)
Income taxes (benefit) .......................................... (678) (419) (811)
Equity in earnings of investees ................................. 50,629 2,108 30,237
---------- ---------- ----------
Net Earnings .................................................... 48,686 606 28,422
Retained earnings at beginning of year .......................... 210,060 209,454 190,363
Cash dividends on Common Stock ($.16 per share in 1999) ......... -- -- (2,158)
Stock dividend .................................................. -- -- (7,173)
---------- ---------- ----------
Retained earnings at end of year ................................ $ 258,746 $ 210,060 $ 209,454
========== ========== ==========
See accompanying note to financial statements.
(Schedule continued on following page.)
S-1
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
BALANCE SHEET INFORMATION
December 31,
-------------------------
2001 2000
---------- ----------
(In thousands)
Assets
Cash and cash equivalents ...................................................... $ 167 $ 376
Short-term investments ......................................................... 3,003 4,408
Investments in debt securities, at market ...................................... 14,975 --
Receivables:
Notes, including $32,859 and $4,300 from affiliates .......................... 33,032 4,869
Other, including $556 and $2,304 from affiliates ............................. 848 2,650
Less allowance for uncollectible amounts ..................................... (20) (20)
---------- ----------
33,860 7,499
Furniture and equipment at cost ................................................ 257 251
Less accumulated depreciation .................................................. (149) (145)
---------- ----------
108 106
Title plants, at cost .......................................................... 48 48
Investments in investees ....................................................... 340,029 280,544
Other assets ................................................................... 4,883 4,693
---------- ----------
$ 397,073 $ 297,674
========== ==========
Liabilities
Notes payable ................................................................ $ 329 $ 417
Accounts payable and accrued liabilities ..................................... 2,204 2,168
Contingent liabilities and commitments
Stockholders' equity
Common - $1 par, authorized 30,000,000, issued and
outstanding 16,751,240 and 14,001,645 ....................................... 16,868 14,118
Class B Common - $1 par, authorized 1,500,000 and outstanding 1,050,012 ........ 1,050 1,050
Additional paid-in capital ..................................................... 115,239 69,375
Retained earnings (1) .......................................................... 258,746 210,060
Accumulated other comprehensive earnings:
Unrealized investment gains ................................................ 3,843 1,888
Foreign currency translation adjustments ................................... 306 110
Treasury stock - 116,900 Common shares, at cost ................................ (1,512) (1,512)
---------- ----------
Total stockholders' equity ($22.16 and $19.61 per share) ................ 394,540 295,089
---------- ----------
$ 397,073 $ 297,674
========== ==========
(1) Includes undistributed earnings of subsidiaries of $264,434 in 2001 and
$213,805 in 2000.
See accompanying note to financial statements.
(Schedule continued on following page.)
S-2
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
CASH FLOWS INFORMATION
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Cash used by operating activities (Note) ... ...................... $ (279) $ (5,701) $ (2,978)
Cash flow from investing activities:
Proceeds from investments matured and sold .................... 3,484 2,354 4,677
Purchases of investments, excluding mortgage loans ............ (16,902) -- --
Dividends received from unconsolidated subsidiaries ........... 1,390 8,090 5,090
Increases in mortgages and other notes receivable ............. (29,603) (75) (542)
Collections on mortgages and other notes receivable ........... 1,440 56 303
Purchases of property and equipment - net ..................... (70) -- --
Cash paid for the acquisition of subsidiaries ................. (4,067) (2,175) (4,470)
---------- ---------- ----------
Cash (used) provided by investing activities ...................... (44,328) 8,250 5,058
---------- ---------- ----------
Cash flow from financing activities:
Dividends paid ................................................ -- -- (2,158)
Payments on notes payable ..................................... (448) (680) --
Proceeds from exercise of stock options ....................... 337 19 65
Proceeds from stock offering - net ............................ 44,509 -- --
Purchases of treasury stock ................................... -- (1,512) --
---------- ---------- ----------
Cash provided (used) by financing activities ...................... 44,398 (2,173) (2,093)
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents .................. $ (209) $ 376 $ (13)
========== ========== ==========
Note: Reconciliation of net income to the above amounts
Net earnings .................................................. $ 48,686 $ 606 $ 28,422
Add (deduct):
Depreciation and amortization ............................... 39 33 106
Decrease (increase) in accounts receivable - net ............ 1,606 (1,714) (727)
Increase (decrease) in accounts payable and
accrued liabilities - net ................................. 36 (1,863) 905
Equity in net earnings of investees ......................... (50,629) (2,108) (30,237)
Other - net ................................................. (17) (655) (1,447)
---------- ---------- ----------
Cash used by operating activities .............................. $ (279) $ (5,701) $ (2,978)
========== ========== ==========
Supplemental information:
Income taxes paid ............................................ -- -- --
Interest paid ................................................ -- -- --
Noncash transactions:
Forgiveness of debt from affiliate ............................ -- 4,913 --
See accompanying note to financial statements.
(Schedule continued on following page.)
S-3
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
NOTE TO FINANCIAL STATEMENT INFORMATION
We operate as a holding company transacting substantially all business
through our subsidiaries. Our consolidated financial statements are included in
Part II, Item 8 of Form 10-K. The Parent Company financial statements should be
read in conjunction with the aforementioned consolidated financial statements
and notes thereto and financial statement schedules.
Certain amounts in the 2000 and 1999 Parent Company financial
statements have been reclassified for comparative purposes. Net earnings, as
previously reported, were not affected.
Total dividends received from subsidiaries for 2001, 2000 and 1999 were
$1,390,000, $90,000 and $13,090,000, respectively.
S-4
SCHEDULE II
STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2001
Col. A Col. B Col. C Col. D Col. E
----------- -------------- ----------------------------- ------------ --------------
Additions
-----------------------------
Balance Charged Charged to
at to other Balance
beginning cost and accounts Deductions at end
Description of period expenses (described) (described) of period
----------- -------------- -------------- ----------- ------------ --------------
Stewart Information Services
Corporation and subsidiaries:
Year ended December 31, 1999:
Estimated title losses ............... $ 171,763,006 $ 44,186,778 $ 550,000 (C) $ 32,712,781 (A) $ 183,787,003
Allowance for uncollectible amounts .. 4,802,705 792,000 -- 1,215,232 (B) 4,379,473
Year ended December 31, 2000:
Estimated title losses ............... 183,787,003 38,999,295 -- 32,488,157 (A) 190,298,141
Allowance for uncollectible amounts .. 4,379,473 2,130,000 -- 1,382,655 (B) 5,126,818
Year ended December 31, 2001:
Estimated title losses ............... 190,298,141 51,453,895 $ 763,000 (C) 39,970,656 (A) 202,544,380
Allowance for uncollectible amounts .. 5,126,818 1,600,000 -- 2,062,348 (B) 4,664,470
Stewart Information Services
Corporation - Parent:
Year ended December 31, 1999:
Allowance for uncollectible amounts .. $ 20,000 -- -- -- $ 20,000
Year ended December 31, 2000:
Allowance for uncollectible amounts .. 20,000 -- -- -- 20,000
Year ended December 31, 2001:
Allowance for uncollectible amounts .. 20,000 -- -- -- 20,000
(A) Represents primarily payments of policy losses and loss adjustment expenses
during the year.
(B) Represents uncollectible accounts written off.
(C) Represents estimated title loss reserve acquired.
S-5
INDEX TO EXHIBITS
Exhibit
-------
3.1 - Certificate of Incorporation of the Registrant, as amended
March 19, 2001 (incorporated by reference in this report from
Exhibit 3.1 of Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
3.2 - By-Laws of the Registrant, as amended March 13, 2000
(incorporated by reference in this report from Exhibit 3.2 of
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
4. - Rights of Common and Class B Common Stockholders (incorporated
by reference to Exhibits 3.1 and 3.2 hereto)
10.1 - Summary of agreements as to payment of bonuses to certain
executive officers
10.2 - Deferred Compensation Agreements dated March 10, 1986, amended
July 24, 1990 and October 30, 1992, between the Registrant and
certain executive officers (incorporated by reference in this
report from Exhibit 10.2 of Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
10.3 - Stewart Information Services Corporation 1999 Stock Option Plan
(incorporated by reference in this report from Exhibit 10.3 of
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)
21. - Subsidiaries of the Registrant
23. - Consent of Independent Certified Public Accountant, including
consent to incorporation by reference of their reports into
previously filed Securities Act registration statements