1
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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
[NO FEE REQUIRED]
For the fiscal year ended December 31, 20002002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from __________ to ---------- ----------__________
Commission file number 1-12688
STEWART INFORMATION SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1677330
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization) 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 herein,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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of March 2, 2001, 14,001,637June 30, 2002, which was the last day of the second fiscal
quarter of 2002, 16,595,691 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 2, 2001)June 28, 2002) held by non-affiliates of the Registrant
was approximately $253,569,646.$341,040,628.
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
27, 2001,25, 2003, are incorporated by reference in Parts III and IV of this document.
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FORM 10-K
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 20002002
TABLE OF CONTENTS
PART I
ITEM
NO. PAGE
------ ---- ----
PART I
1. Business .................................................................................Business.................................................................... 1
2. Properties ...............................................................................Properties.................................................................. 4
3. Legal Proceedings ........................................................................Proceedings........................................................... 5
4. Submission of Matters to a Vote of Security Holders ......................................Holders......................... 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters .......................... 6
6. Selected Financial Data ..................................................................Data..................................................... 7
7. Management'sManagement Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................Operations................................................................. 7
7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk ...............................Risk.................. 10
8. Financial Statements and Supplementary Data ..............................................Data................................. 11
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................................Disclosure................................................................. 11
PART III
10. Directors and Executive Officers of the Registrant .......................................Registrant.......................... 12
11. Executive Compensation ...................................................................Compensation...................................................... 12
12. Security Ownership of Certain Beneficial Owners and Management ........................................ 12
13. Certain Relationships and Related Transactions ...........................................Transactions.............................. 12
14. Controls and Procedures..................................................... 12
PART IV
14.15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 13
Signatures .......................................................................................... 14
Signatures.................................................................. 15
Certifications Pursuant to Section 302(a) of the Sarbanes-Oxley Act of
2002........................................................................ 16
Forward-Looking Statements
All statements included in this report, other than statements of historical
facts, addressing activities, events or developments that we expect or
anticipate will or may occur in the future, are forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties including,
among other things, changes in mortgage interest rates, employment levels,
actions of competitors, changes in real estate markets, general economic
conditions, legislation (primarily legislation related to title insurance) and
other risks and uncertainties discussed in our filings with the Securities and
Exchange Commission.
As used in this report, "we", "us" and "our" mean Stewart Information Services
Corporation and our subsidiaries, unless the context indicates otherwise.
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PARTP A R T I
ITEM 1. BUSINESS
Stewart'sWe 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. Stewart issuesWe issue policies through more than
5,3006,400 issuing locations on homes and other real property located in all 50
states, the District of Columbia and several foreign countries. StewartWe also sellssell
electronically delivered real estate services and information, as well as
mapping products and geographic information systems, to domestic and foreign
governments and private entities.
The Company'sOur two segments of business are title and real estate information ("REI")(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,agencies,
throughout the United States. The operations in the several international
markets in which the Company doeswe do business are generally insignificant to consolidated
results.
The financial information related to these segments is discussed in Item 7 -
Management'sManagement Discussion and Analysis of Financial Condition and Results of
Operations and is incorporated herein by reference.Analysis.
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 that are owed on it and whatthe
scope of the title policy coverage will be.coverage. 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 the 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 policyinsurance against claims that may arise against their ownership.the ownership
of the property. 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. The Company hasWe have established policies and procedures to manage itsour exposure
to changes in the fair value of itsour investments. These policies include
retaining an investment advisory firm, an emphasis onupon credit quality,
management of portfolio duration, maintaining or increasing investment income
through high coupon rates and actively managing profile and security mix depending onbased
upon market conditions. The Company hasAll of our investments are classified all of its investments as
available-for-sale.
Losses. Losses on policies primarily 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
agentsagencies of unauthorized coverages and other legal issues.
Some claimants seek damages in excess of policy limits. SuchThose claims are based
on various legal theories usually alleging misrepresentation by an issuing office.agency.
Although the Companywe vigorously defendsdefend against spurious claims, it haswe 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.
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The Company'sOur liability for estimated title losses comprises both known claims and other
losses expected to be reported in the future. The amount of theour loss reserve
represents the aggregate future payments, net of recoveries, that the
Company expectswe expect to
incur on policy and escrow 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'sour 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 we serve 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. In
addition, when interest rates decline, the number of refinancing transactions
and associated revenues generally increase.
Selected information for the national real estate industry follows (2000(2002 amounts
are preliminary):
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2002 2001 2000
1999 1998
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Housing starts - millions ................... 1.59 1.67 1.62millions......................... 1.71 1.60 1.57
Housing resales - millions .................. 5.03 5.20 4.96millions........................ 5.56 5.30 5.15
Housing resales - median sales price
in $ thousands ............................... 138.4 133.0 128.0thousands.................................... 158.3 147.8 139.0
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 Stewart'sour title revenues in any of the last three years.
Titles insured included residential and commercial properties, undeveloped
acreage, farms, ranches and ranches.water rights.
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 the Company'sour agency network. Out of the nation's top four
title insurers, Stewartwe earned one of the highest ratings awarded by the title
industry's leading rating companies. Our principal underwriter, Stewart received anTitle
Guaranty Company (Guaranty) is currently rated A" fromby Demotech, Inc., an A2 from Moodys, an A+ fromby
Fitch, A+ by Lace Financial, A2 by Moodys and an A+ from Fitch.A- by Standard & Poors.
Market share. Title insurance statistics are compiled annually by the title
industry's national association. Based on unconsolidated statutory net premiums
written for 1999 (20002001 (2002 amounts are not yet available), Stewart Title Guaranty
Company ("Guaranty") is one of the
leading individual title insurers in America.
CompetitorsOur principal competitors include (names are abbreviated) Fidelity National Financial, Inc., The First
American Land
AmericaCorporation and Old Republic. As doLandAmerica Financial Group, Inc. Like most title
insurers, Stewartwe also competescompete 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 home builders,homebuilders,
financial institutions, real estate brokers and others own or control title
insurance agents,agencies, some of which issue policies underwritten by Guaranty. This
"controlled" business also provides competition for Stewart's agents.our agencies.
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Title revenues by state. The approximate amounts and percentages of consolidated
title operating revenues for the last three years were:
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Amounts ($ millions) Percentages
2002 2001 2000 2002 2001 2000
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California........................................ 305 194 111 18 16 13
Texas............................................. 234 190 176 14 16 20
Florida........................................... 119 88 60 7 7 7
New York.......................................... 109 78 67 6 7 8
All others........................................ 918 638 452 55 54 52
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1,685 1,188 866 100 100 100
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Offices. The number ofAt December 31, 2002, we had 6,466 locations issuing Stewart policies, was 5,354 at December
31, 2000, compared
to 4,7895,829 a year earlier and 4,2495,354 two years earlier. Of these totals 4,952, 4,4255,979,
5,373 and 3,9334,952 were independent agentsagencies at December 31, 2000, 19992002, 2001 and 1998,2000,
respectively.
Regulations. Title insurance companies are subject to extensive state
regulations covering premium rates, agentagency 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 certainvarious state and
federal laws.
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REAL ESTATE INFORMATION
The real estate information (REI) segment primarily provides electronic delivery
of data, products and services related to real estate transactions. TheseOur services
related to the mortgage origination process include title
reports, flood zone determinations,
property appraisals,valuations, electronic mortgage documents, creditproperty reports and tax
services. This segmentWe also provides post-closing services to
lenders, includingprovide document retrievals,retrieval, preparation and recordation of
assignments and lien releases, recordation services, collateral reviews and loan
pool certifications. In addition, this segment provideswe provide diverse products and services
related to I.R.C. Section 1031 tax-deferred exchanges,exchanges; automated mapping
projects and geodetic positioning; real estate database conversion,
construction, maintenance and maintenance of title plantsaccess; automation for county
clerks, tax assessorsgovernment recording and
title agencies.registration; and 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 under "-Title", as well as entities known as vendor
management companies.
Customers. The primary sources of our REI business are lenders. Otherresidential 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 offices,agencies, county clerks and recorders, municipalities,
real estate brokers, attorneys, municipalitiesprofessionals and courthouses. The mostattorneys. Our financial strength, marketplace
presence and reputation as a technology innovator are important factor affecting customer acceptance and market
share growth is superior customer service. Similar to the title operations, the
real estate information being provided by the companiesfactors in
this segment are a
part of the closing process which is driven by personal schedules and the
interest and other costs associated with any delays in the settlement.attracting new business.
GENERAL
Technology. Stewart'sOur 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,Before automation, an order typically
required several individuals to search the title, retrieve and review documents
and finally create the actualtitle policy commitment. Today, on a normal subdivision file, one
person can receive the order electronically and, on the same computer screen,
view the prior file, examine the index of documents, retrieve and review
electronically stored documents, prepare the title policy commitment and deliver
the product.
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Trademarks. Stewart hasWe have developed numerous automation products and processes whichthat
are crucial to both itsour 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(R), GlobeXplorer(R), Landata Title Office(R),
Landata Title Plant(R), LANDSCAN(R)Landscan(R), REI Mall(R),
RESource(R)REIMall(R), Single-Seat Technology(TM),
StarNet(R)SureClose(R), SureClose(R)TitleLogix(R) and Virtual Underwriter(R). We consider these
trademarks, which are perpetual in duration, to be important in our business.
Employees. StewartAs of December 31, 2002, we and itsour subsidiaries employed 5,627 people7,852
people. We consider our relationship with our employees to be good.
WEBSITE ACCESS TO REPORTS. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are
available free of charge on our web site at December 31,
2000.
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6www.stewart.com as soon as
reasonably practicable after we electronically file those reports with the SEC.
ITEM 2. PROPERTIES
The Registrant and its wholly-owned subsidiary, Stewart Title Guaranty
Company and its subsidiaries ("Guaranty"),We lease or own or lease the following principal properties:
Lease
entered into/
Location Type Use Size Acquired Inin
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Houston, Texas Leased office building Executive office of the 250,215236,643 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. (2)(3)
Los Angeles, California Leased office building Office of Guaranty 33,60922,466 sq. ft. (1)
San Diego, California Leased office building Office of Guaranty 28,363 sq. ft. (3)
Houston, Texas Leased office building Office of Guaranty 26,420 sq. ft. (4)(5)
Dallas, Texas Leased office building Office of Guaranty 25,92127,402 sq. ft (5)ft. (6)
Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (6)(7)
San Antonio, Texas Leased office building Office of Guaranty 20,864 sq. ft. (3)(4)
Seattle, Washington Leased office building Office of Guaranty 19,454 sq. ft. (2)
Concord, California Leased office building Office of Guaranty 18,916 sq. ft. (1)
Denver, Colorado Leased office building Office of Guaranty 15,935 sq. ft. (4)(5)
Irvine, California Leased office building Office of Guaranty 15,502 sq. ft. (1)(5)
San Antonio, Texas Leased office building Office of Guaranty 15,000 sq. ft. (3)
San Diego, California Leased office building Office of Guaranty 15,000 sq. ft. (4)
Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905
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 24,45917,500 sq. ft. 1981
Tucson,1985
Yuma, Arizona Owned office building Office of Guaranty 24,00023,000 sq. ft. 1974
Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 19852002
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(1) This lease terminates in 2016.
(2) These leases terminate in 2006.
(3) These leases terminate in 2007.
(4) These leases terminate in 2005.
(5) These leases terminate in 2004.
(2) This lease terminates in 2007.
(3) These leases terminate in 2005.
(4) These leases terminate in 2001.
(5)(6) This lease terminates in 2009.
(6)(7) This lease terminates in 2003.
The Registrant leasesWe lease offices at approximately 444540 locations. The average term for
all such leases is approximately four4 years. The leases expire from 20012003 to 2009. The Registrant believes it2016.
We believe we will not have any difficulty obtaining renewals of leases as they
expire or, alternatively, leasing comparable property.properties. The aggregate annual
rental expense under all office leases was approximately $32,667,000$40,663,000 in 2000.
All2002.
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We consider all buildings and equipment ownedthat we own or leased by the Registrant are
considered by the Registrantlease to be well
maintained, adequately insured and generally sufficient for the Registrant'sour purposes. Substantially all of the
Registrant's owned real property above is subject to mortgages.
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ITEM 3. LEGAL PROCEEDINGS
The Registrant isWe are a party to routinea number of lawsuits incidental to itsincurred in connection with our
business, most of which involveare 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 of the Registrant. The Registrant
doesagency. We do not expect that any of these proceedings will have a material
adverse effect on itsour consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PARTP A R T II
ITEM 5. MARKET FOR REGISTRANT'SOUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company'sOur 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 theour Common Stock for each fiscal period indicated, as reported by the NYSE. Amounts are restated for a two-for-one stock split in May 1999,
effected as a stock dividend.
HIGH LOW
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2000:2002:
First quarter ..................................quarter................................... $ 15.8820.23 $ 12.2516.40
Second quarter ................................. 16.00 12.44quarter.................................. 20.55 17.10
Third quarter .................................. 15.50 12.50quarter................................... 21.50 15.05
Fourth quarter ................................. 22.31 13.25
1999:quarter.................................. 22.50 19.29
2001:
First quarter ..................................quarter................................... $ 31.3822.25 $ 15.2516.80
Second quarter ................................. 21.94 15.50quarter.................................. 19.71 16.20
Third quarter .................................. 23.00 15.50quarter................................... 20.64 15.80
Fourth quarter ................................. 18.25 10.25quarter.................................. 22.15 18.60
The CompanyIn 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 2001 we issued 2.5 million shares at $19 per share resulting in
net proceeds of $44.5 million.
We paid regular quarterly cash dividends on itsour Common Stock from 1972
through 1999. During 1999 theour Board of Directors approved a plan to repurchase
up to 5 percent5% (680,000 shares) of the Company'sour outstanding Common Stock. The Board also
determined that the Company'sour regular quarterly dividend should be discontinued in favor
of returning those and additional funds to stockholders through the stock
repurchase plan. Under this plan, the Companywe repurchased 116,900 shares of Common Stock
during 2000.2000 and none in 2001 and 2002. No cash dividends were paid during 2002,
2001 or 2000. The Company'sOur Certificate of Incorporation provides that no cash dividends
may be paid on the Class B Common Stock.
An additional 208,769 shares of treasury stock were acquired primarily
in the second quarter of 2002. The majority of these shares were acquired as a
result of the consolidation of a majority owned subsidiary that was previously
held as an equity method investment. All of these shares were held by our Parent
Company at December 31, 2002.
The number of shareholders of record as of December 31, 20002002 was 2,684.3,457.
As of March 2, 2001,7, 2003, the price of one share of the Company'sour Common Stock was $18.11.$23.00.
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ITEM 6. SELECTED FINANCIAL DATA
(Ten year summary)
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2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
1992 1991
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In Millions of DollarsIN MILLIONS OF DOLLARS
Total revenues ................revenues.................. 1,779.7 1,271.6 935.5 1,071.3 968.8 708.9 656.0 534.6 611.1 683.6
540.7 385.5
Title segment:
Operating revenues ......... 861.2 991.6revenues........... 1,684.9 1,187.5 865.6 993.7 899.7 657.3 609.4 496.0 599.5 672.9
530.3 372.3
Investment income .......... 21.8 20.3income............ 20.7 19.9 19.1 18.2 18.5 15.9 14.5 13.6 12.4 10.3
10.3 11.1
Investment gaingains (losses) ....... 3.0 0.4 0 0.3 0.2 0.4 0.1 1.0 (0.8) 0.4
0.1 2.1
Total revenues ............. 883.0revenues............... 1,708.6 1,207.8 884.7 1,012.2 918.4 673.6 624.0 510.6 611.1 683.6
540.7 385.5
Pretax earnings ............ 5.6earnings.............. 145.1 75.3 5.8 43.6 73.2 29.2 22.5 10.8 13.8 37.6
21.2 1.1
REI segmentsegment: (1):
Revenues ................... 52.5
Revenues..................... 71.1 63.8 50.8 59.0 50.4 35.3 32.0 24.0
Pretax earnings ............ (4.4)(losses)..... 8.8 5.3 (4.7) 3.0 3.1 (5.5) 0.4 (0.1)
Title loss provisions .........provisions........... 75.9 51.5 39.0 44.2 39.2 29.8 33.8 29.6 40.2 58.6
54.1 40.7
% of title operating
revenuesrevenues................ 4.5 4.3 4.5 4.4 4.4 4.5 5.6 6.0 6.7 8.7
10.2 10.9Goodwill expense................ - 3.0 1.8 1.7 1.2 1.0 0.9 0.6 0.3 0.2
Net earnings (2) ..............earnings.................... 94.5 48.7 0.6 28.4 47.0 15.3 14.4 7.0 9.7 23.7
14.6 1.7
Cash flow from operations .....operations....... 162.6 108.2 31.9 57.9 86.5 36.0 38.3 20.6 27.7 54.3
36.3 18.6
Total assets ..................assets.................... 842.3 677.9 563.4 535.7 498.5 417.7 383.4 351.4 325.2 313.9
251.9 219.1
Long-term debt ................debt.................. 7.4 7.0 15.4 6.0 8.9 11.4 7.9 7.3 2.5 3.0
4.2 6.8
Stockholders' equity (3) ......equity............ 493.6 394.5 295.1 284.9 260.4 209.5 191.0 174.9 156.4 156.2
128.6 114.8
Per Share Data (4)PER SHARE DATA (2)
Average shares - diluted
(in millions) .............................. 17.8 16.3 15.0 14.6 14.2 13.8 13.5 12.7 12.5 12.4
12.2 12.2
Net earnings - basic (2) ......basic............ 5.33 3.01 0.04 1.96 3.37 1.12 1.08 0.56 0.78 1.93
1.20 0.14
Net earnings - diluted (2) ....diluted.......... 5.30 2.98 0.04 1.95 3.32 1.11 1.07 0.55 0.77 1.90
1.20 0.14
Stockholders' equity (3) ......equity............ 27.84 22.16 19.61 19.39 18.43 15.17 14.17 13.68 12.59 12.69
10.55 9.42
Market price:
High ......................High........................ 22.50 22.25 22.31 31.38 33.88 14.63 11.32 11.25 10.71 10.17
7.25 4.84
Low .......................Low......................... 15.05 15.80 12.25 10.25 14.25 9.38 9.82 7.57 7.19 6.25
4.34 2.59
Year end ..................end.................... 21.39 19.75 22.19 13.31 29.00 14.50 10.38 10.75 7.69 10.00
6.84 4.59
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(1) Prior to 1995, segment operations for real estate information services
were not reported separately from title operations and were less
significant.
(2) Includes a fresh start tax credit of $1.3 million, or $.11 per share, in
1991.
(3) Includes unrealized gains and losses upon adoption of FAS 115 in 1993.
(4) Restated for a 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'SMANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION ANDGENERAL. 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 6,400
issuing locations. Our direct operations include affiliated agencies while
agency operations include nonaffiliated agencies that have underwriting
contracts with us. 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 (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
agencies. Although we conduct operations in several international markets, at
current levels non-USA operations 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:
- declining mortgage interest rates, which usually increase home
sales and refinancing transactions;
- rising home prices;
- higher premium rates;
- increased market share;
- opening of new offices, acquisitions; and
- a higher ratio of commercial transactions that, although
relatively few in number, typically yield higher premiums.
These factors may override the seasonal nature of the title business.
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.
Title loss reserves represent the aggregate future payments, net of
recoveries, that we expect to incur on policy and escrow losses and in costs to
settle claims. Future title loss payments are difficult to estimate due to the
complex nature of title claims, the length of time over which claims are paid,
the significantly varying dollar amounts of individual claims and other factors.
Loss provision amounts are based on reported claims, historical loss experience,
title industry averages, the current legal environment and the types of policies
written. The title loss reserves are continually reviewed and adjusted, as
appropriate. Independent actuaries review the adequacy of the reserves on an
annual basis.
Premium revenues on title insurance written by our direct title
operations are recognized as revenue at the time of the closing of the related
real estate transaction. Premium revenues on title insurance policies written by
agencies are recognized primarily when policies are reported to us. Revenues are
recorded on a total premium basis versus net to the underwriter. We accrue for
unreported policies where reasonable estimates can be made based on historical
reporting patterns of agencies, current trends and known information about
agencies.
We review the carrying values of title plants and other long-lived
assets if certain events occur that may indicate impairment. Impairment is
indicated when the projected undiscounted cash flow over the estimated life of
an asset is less than its carrying value. If impairment is determined by
management and an independent valuation, the book amount is written down to fair
value by calculating the discounted value of the projected cash flow. In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", goodwill
for each reporting unit is tested for impairment annually and goodwill
determined to be impaired is expensed to current operations.
RESULTS OF OPERATIONS
A comparison of the results of operations of the Company for 2002 with 2001 and
2001 with 2000 with 1999 and
1999 with 1998 follows.
GENERAL. The Company's two segments of operations are title and real estate
information ("REI"). In general, the principal factors that contribute to
increases in the Company's operating revenues for both segments include
declining mortgage interest rates (which usually increase home sales and
refinancing transactions), rising home prices, higher premium rates, increased
market share, additional revenues from new offices and increased revenues from
commercial transactions. Although relatively few in number, large commercial
transactions typically yield higher premiums.
-7-
10OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed rate mortgages, excluding points, for the year 20002002 averaged 8.1%6.5%
as compared to 7.4%7.0% in 1999. Rates2001. Comparable rates averaged 6.9%8.1% in 1998.
The rates in 1998 were steady at slightly above or below the 7% mark
throughout the year.2000.
In 1999, rates stayed at about that same level until June
when they began a decided move upward. At year-end 1999,2000 interest rates were just over
8%. In 2000, theon an upward trend, continued, with rates reaching a
peak of 8.5% in May. Then, ratesRates then declined for seven consecutive months. At year-end 2000In 2001
rates were 7.4%held steady at close to 7% for most of the year. In 2002 rates continued
to hold steady at close to 7% until April. Rates then declined through December
2002, reaching a low of 5.9%.
Operating in these mortgage interest rate environments, and in strong
general economies, real estate
activity was strong in 1998 was very strong. In 1999,
existing home sales2002 and 2001. Nationwide, refinancing transactions
remained strong increasing about 4.6%. However, refinancing
transactions dropped significantly during the second halfin 2002. The ratio of 1999. In 2000,
existing home sales declined about 3.7% from 1999. Refinancing transactions also
continued to decline in 2000. The annual average for refinancingrefinancings to total loan applications
was 51.3%58.8% for 2002, 56.8% for 2001 and 21.3% for 2000. Refinancings usually have
lower title insurance premium rates than real property sales. Existing home
sales increased 5.0% in 1998, 31.3%2002 over 2001 and 2.8% in 1999 and 19.6% in2001 from 2000. At the end of
2000, however, refinancings had increased to about 40%.
TITLE REVENUES. The Company'sOur revenues from premiums, feestitle increased 41.9% in 2002 over 2001 and
other revenues
decreased 13.2%37.2% in 2000 over 1999, while increasing 10.2%2001 from 2000.
-8-
Revenues from direct operations increased 31.2% in 1999 over 1998.2002 and 41.7% in
2001. The number of direct closings we handled increased 31.8% in 2002 and 55.7%
in 2001. The largest revenue increases in both years were primarily in
California, Texas and Florida. Direct closings relate only to files closed by
the Company decreased 7.4% in
2000our underwriters and 10.1% in 1999.subsidiaries and do not include closings by agencies. The
average revenue per closing increased 8.8%decreased 0.8% in 20002002 and 14.7%9.3% in 1999 because of higher home prices, increased commercial
transactions, and2001 due to the
significant drop in 1999 in the numberhigher ratio of refinancings with their lower premiums. A 3% reduction in Texas title premium
rates became effective August 1, 1998. There were nothose years. In 2000 other major revenue rate
changes in 2000, 1999 or 1998.
Premiums from agents decreased 20.6% to $494.6 million in 2000 and
increased 14.4% to $623.3 million in 1999 from $545.1 in 1998. 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, Florida and Oregon. The increase
in 1999 was primarily attributable to the same factors affecting direct
operations mentioned above, along with the inherent delay in agents reporting
policies on 1998 transactions. At the end of 1998, refinancing transactions were
unusually high.
Other revenues in 2000 included
$1.6 million in losses in an equity investee startup operation.
In 1999 otherPremium revenues included a $1.3from agencies increased 50.4% to $995.3 million pretax gain resultingin
2002 and 33.8% to $661.9 million in 2001 from a settlement of a lawsuit$494.6 million in 2000. The
increases in 2002 and a related sale of an
equity ownership2001 were primarily due to the increases in a title agency.both
refinancings and property sales. The largest revenue increases in both years
were primarily in California, Pennsylvania, New York, Virginia and Texas.
TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated
title operating revenues for the last three years were:
- --------------------------------------------------------------------------------------------------------------
Amounts ($ millions) Percentages
2002 2001 2000 1999 19982002 2001 2000
1999 1998
------ ------ ------ ------ ------ ------- --------------------------------------------------------------------------------------------------------------
California ....................................... 305 194 111 18 16 13
Texas ................................................................. 234 190 176 167 16214 16 20
17 18
California ................ 111 158 156 13 16 17Florida .......................................... 119 88 60 7 7 7
New York ........................................................... 109 78 67 73 67 8 7 7
Florida ................... 59 72 67 76 7 8
All Others ................ 448 522 448others ....................................... 918 638 452 55 54 52
53 50
------ ------ ------ ------ ------ ------
861 992 900- --------------------------------------------------------------------------------------------------------------
1,685 1,188 866 100 100 100
====== ====== ====== ====== ====== ======- ----------------------------------------------------==========================================================
REI REVENUES. Real estate information revenues were $52.5$71.1 million in 2000, $59.02002, $63.8
million in 19992001 and $50.4$50.8 million in 1998.2000. The decreaseincreases in 20002002 and 2001
resulted primarily from decreasedproviding an increased number of post-closing services,
flood determinations and electronic mortgage documents resulting from the large
volume of real estate transactions and fewer ongoing mapping and
title plant projects. The increase in 1999 was primarily due to a significant
number of new businesses started and additional income earned from existing
operations. The increases in 1999 were partially offset by a decrease in
business volume due to increases in mortgage interest rates.transactions.
INVESTMENTS. Investment income increased 7.5%3.9% in 20002002 and 9.6%4.3% in 19992001 primarily
because of increases in average balances invested, partially offset by lower
yields. InvestmentCertain investment gains in 2000, 19992002, 2001 and 19982000 were realized as part of
the ongoing management of the investment portfolio for the purpose of improving
performance. -8-
11
AGENTWe realized a gain on the sale of investment real estate in 2002,
but it was offset by a comparable after-tax loss of $1.2 million on the sale of
WorldCom bonds. We also recorded gains in late 2002 when we sold certain
investments primarily to maximize tax benefits and manage portfolio duration.
AGENCY RETENTION. The amounts retained by agents,agencies, as a percentage of premiumsrevenues
from agents,agency operations, were 81.2%81.9%, 80.9%81.5% and 80.4%81.2% in the years 2000, 19992002, 2001 and
1998,2000, respectively. Amounts retained by title agentsagencies are based on contracts
between agentsagencies and theour title underwriters of the Company.underwriters. The percentage that amounts
retained by agentsagencies bears to agentagency revenues may vary from year to year because
of the geographical mix of agentagency 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 expensesoperating (%)
2002 2001 2000 1999 19982002 2001 2000
1999 1998
------ ------ ------ ------ ------ ------- -------------------------------------------------------------------------------------------------------
Title ......................................................... 24.5 27.6 29.7 25.1 24.6 18.4 15.4 14.413.8 15.6 18.2
REI ..................... 68.8 57.5 58.7 28.4 26.9 26.3
------ ------ ------ ------ ------ ------........................................ 57.0 59.6 69.4 26.8 26.1 30.0
- ----------------------------------------------=========================================================
These two categories of expenses are discussed below.below in terms of year-to-year
monetary increases.
EMPLOYEE COSTS. Employee costs for the combined business segments increased
3.3%24.0% in 20002002 and 12.8%25.1% in 1999.2001. The number of persons we employed by the Company at December
31, 2002, 2001 and 2000 1999was approximately 7,800, 6,900 and 1998 was 5,627, 5,751 and 5,638,5,600, respectively.
The decreaseincrease in staff in 20002002 and 2001 was primarily the result of reductions in existing
operations in responsedue to decreased volumes. These reductions were offset by
acquisitionsincreased title and expansion in national marketing and technology operations. In
1999 the increase was primarily the result of acquisitions, increased
REI volume and the expansionacquisitions of the Company's technology and national marketing operations.new offices.
In theour REI segment, employee costs (and cost ratios) increased in 20002002 and 2001 primarily
due to a shift in focus to provide more post-closing services to lenders. These
services are considerably more labor intensive. Certainintensive than other REI startup operations also increased expenses.services.
-9-
OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 2.4%24.0% in 20002002 and 18.3%16.9% in 1999.2001. The overall increase in other
operating expenses for the combined business segments in 20002002 was in search
fees, premium taxes, new offices and business promotion. In 2001 the overall
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. In 1999 the increase was
caused primarily by a higher volume of services and products purchased for
resale, rent, the expense of new offices, business promotion and other REI
expenses. The year 1999 also included a $1.3 million charge resulting from a
lawsuit settlement in an REI operation.rent.
Other operating expenses also include rent, telephone, supplies, title
plant expenses, travel delivery costs, telephone, supplies and policy forms.auto. Most of these operating expenses follow, to
varying degrees, the changes in transaction volume and revenues.
The Company's laborOur employee costs and certain other operating costs are sensitive to
inflation. To the extent inflation causes increases in the prices of homes and
other real estate, premium revenues are also increased. Premiums are determined
in part by the insured values of the transactions handled by the Company.we handle.
TITLE LOSSES. Provisions for title losses, as a percentage of title premiums,
fees and otheroperating
revenues, were 4.5%, 4.3% and 4.5% in 2002, 2001 and 4.4% in 2000, 1999 and 1998, 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.ratios.
INCOME TAXES. The provisionprovisions for federal, state and stateforeign income taxes
represented effective tax rates of 47.1%38.6%, 39.0%39.6% and 38.4%47.1% in 2000, 19992002, 2001 and
1998,2000, respectively. The 2000 effective rate was higher primarily due to state
income taxes, which were proportionately higher in relation to taxable income.
THE YEAR 2000 ISSUE. Information technology is a crucial part of the Company's
business. Accordingly, the Company completed a comprehensive Year 2000 ("Y2K")
readiness program that addressed challenges associated with the Y2K issue. The
Company encountered no major automation or business disruption due to Y2K issues
and continues to operate normally across all business units and geographies.
-9-
12
LIQUIDITY AND CAPITAL RESOURCES. In 2001 and 2000 we financed a portion of the
purchase price of certain acquisitions through the issuance of $3.2 million and
$4.9 million, respectively, of our Common Stock. Acquisitions during 2002, 2001
and 2000 resulted in additions to our goodwill of $11.7 million, $19.3 million
and $7.5 million, respectively.
We filed a registration statement with the Securities and Exchange
Commission and in August 2001 issued 2.5 million shares of Common Stock at $19
per share, resulting in net proceeds of $44.5 million.
Cash provided by operations was $162.6 million, $108.2 million and
$31.9 million $57.9 millionin 2002, 2001 and $86.5 million in 2000, 1999 and 1998, respectively. Internally
generated cashCash flow from operations
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
or 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 32 and 43 to the consolidated financial statements.
TheOur liquidity, of the Company itself, excluding Guaranty and its subsidiaries, is comprised of
cash and investments aggregating $4.8$10.9 million and short-term liabilities of
$0.9$1.6 million at December 31, 2000. The Company knows2002. We know of no commitments or uncertainties
whichthat are likely to materially affect theour ability of the Company and its subsidiaries to fund cash needs. The Company'sSee Note 17
to the consolidated financial statements.
We consider our capital resources to be adequate. Our capital resources
are represented primarily by a low debt-to-equity ratio, in which long-term debt of $15.4is $7.4
million and stockholders' equity of $295.1is $493.6 million at December 31, 2000,2002. We are
considered adequate.
FORWARD LOOKING STATEMENTS. All statements included in this report which address
activities, eventsnot aware of any trends, either favorable or developmentsunfavorable, that would materially
affect notes payable or stockholders' equity and we do not expect any material
changes to the Company expects or anticipates will
or may occurcost of such resources. However, significant acquisitions in the
future are forward-looking statements. Such forward-looking
statements are subject to risks and uncertainties including, among other things,
changes in mortgage interest rates, employment levels, actions of competitors,
changes in real estate markets, general economic conditions and legislation,
primarily legislation related to insurance, and other risks and uncertainties
discussed incould materially affect the Company's filings with the Securities and Exchange Commission.notes payable or stockholders' equity
balances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion below about the Company'sour risk management strategies includes
forward-looking statements that are subject to riskrisks and uncertainties.
Management's projections of hypothetical net losses in fair value of the
Company'sour market
rate sensitive financial instruments, should certain potential changes in market
rates occur, is presented below. While the Company believeswe believe that the potential market rate
changes are reasonably possible, actual resultsrate changes could differ.
The Company'sOur only material market risk in investments in financial instruments
is in itsour debt securities portfolio. The Company investsWe invest primarily in marketable municipal,
USU.S. Government, corporate and mortgage-backed debt securities. The Company doesWe do not invest
in financial instruments of a hedging or derivative nature.
The Company has-10-
We have established policies and procedures to manage itsour exposure to
changes in the fair value of itsour 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. The Company hasWe have classified all of itsour investments as
available-for-sale.
The fairmarket value of the Company'sour investments in debt securities at December 31,
20002002 was $252.3$367.9 million. Debt securities at December 31, 20002002 mature, according
to their contractual terms, as follows (actual maturities may differ because of
call or prepayment rights):
Amortized Fair
Cost Value
--------- --------Market
cost value
------------------------
($000 Omitted)
In one year or less ..................... 10,078 10,174less........................................... 28,696 28,999
After one year through two years.............................. 16,313 16,869
After two years through three years........................... 26,280 27,390
After three years through four years.......................... 44,007 45,454
After four years through five years ....... 66,975 68,253years........................... 32,770 34,611
After five years through ten years ...... 99,738 101,404
After ten years ......................... 57,766 56,407years.............................................. 203,756 213,178
Mortgage-backed securities .............. 15,657 16,047
--------- --------
250,214 252,285
========= ========securities.................................... 1,324 1,360
------- -------
353,146 367,861
======= =======
The Company believes itsWe believe our investment portfolio is diversified and expects nodo not expect
any material loss to result from the failure to perform by issuers of the debt
securities it holds. Investments made by the Companywe hold. Our investments are not collateralized. The mortgage-backed
securities are insured by agencies of the USU.S. Government.
-10-
13
Based on the Company'sour debt securities portfolio and interest rates at December
31, 2000,2002, a 100 basis point increase (decrease) in interest rates would result
in a decrease (increase) of approximately $12.4$16.1 million, or 4.8%4.4%, in the fair
value of itsour 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 theour
Consolidated Financial Statements, of the Company, including the Notes thereto, attached hereto
as pages F-2F-1 to F-16,F-17, and such information is incorporated hereinin this report by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-11-
14
PARTP A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The information regarding theour directors of the Company will be included in the proxy
statement for the 2001our 2003 Annual Meeting of Stockholders (the "Proxy Statement") to
be filed within 120 days after December 31, 2000,2002, and is incorporated hereinin this
report by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be included in the
Proxy Statement and is incorporated hereinin this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information if any, regarding beneficial ownership of theour Common Stock will be
included in the Proxy Statement and is incorporated hereinin this report by reference.
The table below describes our compensation plans under which equity
securities are authorized for issuance, as of December 31, 2002.
- -----------------------------------------------------------------------------------------------------------------------------
Number of securities Number of securities
to be issued upon Weighted-average remaining available
exercise of exercise price of for future issuance
outstanding options, outstanding options, under equity
Plan category warrants and rights warrants and rights compensation plans
- -----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by security
holders 504,700 16.31 1,282,122
Equity compensation plans not approved by security
holders - - 460,601(1)
- -----------------------------------------------------------------------------------------------------------------------------
Total 504,700 16.31 1,742,723
- -------------------------------------------------------======================================================================
(1) The Company has a Service Award Program under which shares may be granted
to employees who achieve specified length of service milestones. No specific
number of shares have been reserved for issuance under this program.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions
will be included in the Proxy Statement and is incorporated hereinin this report by
reference.
ITEM 14. CONTROLS AND PROCEDURES
In its recent Release No. 34-46427, effective August 29, 2002, the
Securities and Exchange Commission, among other things, adopted rules requiring
reporting companies to maintain disclosure controls and procedures to provide
reasonable assurance that a registrant is able to record, process, summarize and
report the information required in the registrant's quarterly and annual reports
under the Securities Exchange Act of 1934 (the "Exchange Act"). While we believe
that our existing disclosure controls and procedures have been effective to
accomplish these objectives, we intend to continue to examine, refine and
formalize our disclosure controls and procedures and to monitor ongoing
developments in this area.
Our principal executive officers and our principal financial officer,
based upon their evaluation of our disclosure controls and procedures conducted
as of a date within 90 days before the filing date of this annual report (as
defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange Act), have
concluded that those disclosure controls and procedures are effective.
-12-
15
PARTThere have been no changes in our internal controls or in other factors
known to us that could significantly affect these controls subsequent to their
evaluation, nor were any corrective actions necessary with regard to significant
deficiencies and material weaknesses.
-13-
P A R T IV
ITEM 14.15. 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.of this document. 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
NoWe did not file any reports on Form 8-K were filed during the three months ended
December 31, 2000.2002.
(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 the 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 the 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 hereinin this report from
Exhibit 10.2 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997)
Stewart Information Services Corporation 2002 Stock
Option Plan for Region Managers (incorporated by
reference in this report from Exhibit 10.4 of the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002)
* 10.3 - Stewart Information Services Corporation 1999 Stock
Option Plan (incorporated by reference hereinin 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
99.1 - Certificate of Co-Chief Executive Officer pursuant to
Section 906(a) of the Sarbanes-Oxley Act of 2002
99.2 - Certificate of Co-Chief Executive Officer pursuant to
Section 906(a) of the Sarbanes-Oxley Act of 2002
99.3 - Certificate of Chief Financial Officer pursuant to
Section 906(a) of the Sarbanes-Oxley Act of 2002
*Indicates a management contract or compensation plan.
-13--14-
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant haswe have duly caused this report to be signed on itsour 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, Executive Vice President-Finance,President and Chief Financial
Officer, Secretary-Treasurer, Director and Principal
Financial and Accounting Officer
Dated: March 19, 200117, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed by the following persons on our behalf of the Registrant and in the
capacities and on the dates indicated:
Lloyd Bentsen III Director March 17, 2003 John P. LaWare Director March 17, 2003
- ------------------------ -----------------------
(Lloyd Bentsen III) (John P. LaWare)
Max Crisp Director March 19, 200117, 2003 Malcolm S. Morris Director March 17, 2003
- ------------------------------------- -------------------------------------- -----------------------
(Max Crisp) (Malcolm S. Morris)
Nita B. Hanks Director March 19, 200117, 2003 Stewart Morris, Jr. Director March 17, 2003
- ------------------------------------- -------------------------------------- -----------------------
(Nita B. Hanks) (Stewart Morris, Jr.)
Paul Hobby Director March 17, 2003 W. Arthur Porter Director March 17, 2003
- ------------------------ -----------------------
(Paul Hobby) (W. Arthur Porter)
E. Douglas Hodo Director March 19, 200117, 2003
- ------------------------------------- --------------------------------------
(E. Douglas Hodo)
Malcolm S. Morris Director March 19, 2001
- ------------------------------------- --------------
(Malcolm S. Morris)
Stewart Morris, Jr. Director March 19, 2001
- ------------------------------------- --------------
(Stewart Morris, Jr.)
-14--15-
CERTIFICATIONS
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Malcolm S. Morris, certify that:
1. I have reviewed the annual report on Form 10-K of Stewart Information
Services Corporation (registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed
such controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared; (b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and (c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions): (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and (b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/S/ MALCOLM S. MORRIS
-------------------------------------
[Signature]
Title: Chairman of the Board and
Co-Chief Executive Officer
-16-
CERTIFICATIONS
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Stewart Morris, Jr., certify that:
1. I have reviewed the annual report on Form 10-K of Stewart Information
Services Corporation (registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed
such controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared; (b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and (c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions): (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and (b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/S/ STEWART MORRIS, JR.
-------------------------------------
[Signature]
Title: Co-Chief Executive Officer,
President and Director
-17-
CERTIFICATIONS
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Max Crisp, certify that:
1. I have reviewed the annual report on Form 10-K of Stewart Information
Services Corporation (registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a and 15d-14) for the registrant and we have (a) designed
such controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared; (b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and (c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions): (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and (b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/S/ MAX CRISP
-------------------------------------
[Signature]
Title: Executive Vice President and
Chief Financial Officer, Secretary-
Treasurer, Director and Principal
Financial and Accounting Officer
-18-
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, 2000, 19992002, 2001 and 19982000 F-3
Consolidated Balance Sheets as of December 31, 20002002 and 19992001 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 19992002, 2001 and 19982000 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
18
Independent Auditors' Report
To the Stockholders and Board of Directors and Stockholders
of Stewart Information Services Corporation: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, 20002002 and 1999,2001,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 20002002 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/As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
KPMG LLP
Houston, Texas
February 13, 200114, 2003
F-2
19
CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE
EARNINGS
Year- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 ............................................2002 2001 2000
1999 1998
---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------------
($000 Omitted)
REVENUES
Title premiums, fees and other revenues ....................... 861,185 991,649 899,673insurance:
Direct operations..................................................... 689,588 525,543 370,992
Agency operations..................................................... 995,283 661,943 494,614
Real estate information services .............................. 52,463 59,039 50,372services......................................... 71,119 63,821 50,749
Investment income ............................................. 21,814 20,300 18,515income........................................................ 20,694 19,922 19,107
Investment gains - net ........................................net................................................... 3,032 356 23
266 201
---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------------
1,779,716 1,271,585 935,485 1,071,254 968,761
EXPENSES
Amounts retained by agents ....................................agencies........................................... 814,651 539,369 401,761
504,201 438,338
Employee costs ................................................costs......................................................... 453,304 365,562 292,276 283,073 250,966
Other operating expenses .................................................................................... 250,933 202,342 173,038 168,975 142,826
Title losses and related claims ...............................claims........................................ 75,920 51,454 38,999
44,187 39,226
Depreciation and amortization ................................. 20,951 18,068 14,584
Interest ......................................................Depreciation........................................................... 21,383 19,637 19,144
Goodwill............................................................... - 3,011 1,807
Interest............................................................... 725 2,216 2,266
1,298 1,424
Minority interests ............................................interests..................................................... 8,940 7,414 5,048
4,887 5,070
---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------------
1,625,856 1,191,005 934,339 1,024,689 892,434
Earnings before taxes .............................................taxes...................................................... 153,860 80,580 1,146
46,565 76,327
Income taxes ......................................................taxes............................................................... 59,380 31,894 540
18,143 29,289
---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS ......................................................EARNINGS............................................................... 94,480 48,686 606 28,422 47,038
Retained earnings at beginning of year ............................year..................................... 258,746 210,060 209,454
190,363 145,140
Cash dividends on Common Stock ($.00, $.16 and $.14 per share) .... -- (2,158) (1,815)
Stock dividend .................................................... -- (7,173) --
---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------------
Retained earnings at end of year ..................................year........................................... 353,226 258,746 210,060
209,454 190,363
========== ========== ==========- -----------------------------------------------------------------------------------===========================================
Average number of shares outstanding - assuming dilution
(000 omitted) ............................................................................................................. 17,826 16,348 14,980 14,606 14,154
Earnings per share - basic ........................................basic................................................. 5.33 3.01 .04 1.96 3.37
EARNINGS PER SHARE - DILUTED ......................................DILUTED............................................... 5.30 2.98 .04
1.95 3.32
========== ========== ==========- -----------------------------------------------------------------------------------===========================================
Comprehensive earnings:
Net earnings ......................................................earnings............................................................... 94,480 48,686 606 28,422 47,038
Changes in unrealized investment gains (losses),other comprehensive earnings, net of taxes
of $2,985, ($5,269)$2,797, $1,158 and $858 ...................................... 5,544 (9,785) 1,593
---------- ---------- ----------$2,985............................................ 5,195 2,151 5,528
- ------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE EARNINGS ............................................ 6,150 18,637 48,631
========== ========== ==========EARNINGS..................................................... 99,675 50,837 6,134
- -----------------------------------------------------------------------------------===========================================
See notes to consolidated financial statements.
F-3
20
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------
December 31 2000 19992002 2001
- ----------- -------- ---------------------------------------------------------------------------------------------------------------------
($000 Omitted)
ASSETS
Cash and cash equivalents ..................................................... 35,728 36,803equivalents.............................................. 139,156 60,706
Short-term investments ........................................................ 53,748 65,583investments................................................. 50,673 56,267
Investments in debt and equity securities, at market:
Statutory reserve funds ................................................... 206,150 186,917
Other ..................................................................... 52,242 57,711
-------- --------
258,392 244,628funds............................................ 306,501 239,084
Other.............................................................. 69,260 86,046
- -------------------------------------------------------------------------------------------------------------
375,761 325,130
Receivables:
Notes ..................................................................... 17,184 8,429Notes.............................................................. 5,817 8,923
Premiums from agents ...................................................... 16,590 17,478
Other ..................................................................... 28,392 27,052agencies............................................. 33,348 17,738
Other.............................................................. 35,184 30,039
Less allowance for uncollectible amounts .................................. (5,127) (4,379)
-------- --------
57,039 48,580amounts........................... (5,308) (4,664)
- -------------------------------------------------------------------------------------------------------------
69,041 52,036
Property and equipment, at cost:
Land ...................................................................... 2,172 2,062
Buildings ................................................................. 7,779 6,531Land............................................................... 5,566 2,402
Buildings.......................................................... 8,913 7,823
Furniture and equipment ................................................... 133,288 118,047equipment............................................ 169,483 146,108
Less accumulated depreciation and amortization ............................ (97,780) (81,671)
-------- --------
45,459 44,969amortization..................... (123,099) (107,561)
- -------------------------------------------------------------------------------------------------------------
60,863 48,772
Title plants, at cost ......................................................... 32,491 26,258cost.................................................. 40,036 37,715
Real estate, at lower of cost or net realizable value ......................... 2,196 2,073value.................. 2,598 4,126
Investments in investees, on an equity basis .................................. 11,780 5,370basis........................... 10,674 12,158
Goodwill, less accumulated amortization of $10,468 and $8,661 ................. 36,693 30,963$13,479..................... 66,885 52,971
Deferred income taxes ......................................................... 7,352 12,378taxes.................................................. - 4,288
Other assets .................................................................. 22,570 18,136
-------- --------
563,448 535,741
======== ========assets........................................................... 26,586 23,694
- -------------------------------------------------------------------------------------------------------------
842,273 677,863
- ------------------------------------------------------------------------------------=========================
LIABILITIES
Notes payable, including $15,439$7,354 and $5,971$6,966 long-term portion ................. 32,543 19,054portion........... 14,195 13,794
Accounts payable and accrued liabilities ...................................... 38,617 41,303liabilities............................... 82,248 57,752
Estimated title losses ........................................................ 190,298 183,787losses................................................. 230,058 202,544
Deferred income taxes.................................................. 11,284 -
Minority interests ............................................................ 6,901 6,673interests..................................................... 10,896 9,233
Contingent liabilities and commitments
STOCKHOLDERS' EQUITY
Common - $1 par, authorized 30,000,000, issued and outstanding
14,001,64516,681,212 and 13,645,527 .................................................. 14,118 13,64616,751,240............................................. 17,007 16,868
Class B Common - $1 par, authorized 1,500,000, issued and outstanding
1,050,012 ..................................................................1,050,012............................................................. 1,050 1,050
Additional paid-in capital .................................................... 69,485 64,430capital............................................. 116,870 115,239
Retained earnings ............................................................. 210,060 209,454earnings...................................................... 353,226 258,746
Accumulated other comprehensive earnings (loss) ............................... 1,888 (3,656)earnings:
Unrealized investment gains.......................................... 9,039 3,843
Foreign currency translations........................................ 305 306
Treasury stock - 325,669 and 116,900 Common shares, at cost ...............................cost............ (3,905) (1,512)
--
-------- --------- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity ($19.6127.84 and $19.39$22.16 per share) ............... 295,089 284,924
-------- --------
563,448 535,741
======== ========........ 493,592 394,540
- -------------------------------------------------------------------------------------------------------------
842,273 677,863
- ------------------------------------------------------------------------------------=========================
See notes to consolidated financial statements.
F-4
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2002 2001 2000
1999 1998
- ---------------------- -------- -------- -------------------------------------------------------------------------------------------------------------------------------------
($000 Omitted)
Cash provided by operating activities (note) ..................................CASH PROVIDED BY OPERATING ACTIVITIES (NOTE)............................... 162,551 108,186 31,913 57,875 86,467
Investing activities:
Purchases of property and equipment, and title plants - net ....................and real estate-
net................................................................ (30,165) (23,452) (19,191) (25,307) (20,473)
Proceeds from investments matured and sold ................................sold............................. 163,737 70,074 87,325 46,536 65,770
Purchases of investments .................................................. (80,702) (82,338) (104,017)investments............................................... (197,748) (135,579) (80,550)
Increases in notes receivable .............................................receivable.......................................... (3,198) (3,208) (10,535) (6,118) (2,316)
Collections on notes receivable ...........................................receivable........................................ 6,305 11,531 1,733 5,826 2,141
Proceeds from sale of equity investment - net ............................. -- 6,009 --
Cash paid for equity in investees .........................................investees......................................... - - (6,863) (1,783) (80)
Cash paid for acquisitions of subsidiaries - net ..........................(see below)........... (12,502) (13,016) (9,475)
(5,243) (5,806)
-------- -------- --------
Cash used by investing activities ............................................. (37,708) (62,418) (64,781)- -----------------------------------------------------------------------------------------------------------------------------
CASH USED BY INVESTING ACTIVITIES.......................................... (73,571) (93,650) (37,556)
Financing activities:
Dividends paid ............................................................ -- (2,158) (1,815)
Purchases of treasury stock ...............................................stock............................................ - - (1,512)
-- --
DistributionDistributions to minority interests ........................................interests.................................... (7,713) (5,926) (4,814) (4,071) (4,031)
Proceeds from issuanceexercise of stock ...........................................options................................ 467 337 19
65 1,543
Proceeds offrom stock offering - net..................................... - 44,509 -
Proceeds from notes payable .................................................payable............................................ 4,259 6,597 16,856 10,056 9,150
Payments on notes payable .................................................payable.............................................. (7,543) (35,852) (5,829)
(7,429) (12,041)
-------- -------- --------
Cash provided (used) by financing activities ..................................- -----------------------------------------------------------------------------------------------------------------------------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES............................... (10,530) 9,665 4,720
(3,537) (7,194)
-------- -------- --------
(Decrease) increase in cash and cash equivalents .............................. (1,075) (8,080) 14,492
-------- -------- --------- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 78,450 24,201 (923)
- ------------------------------------------------------------------------------------=========================================
Note: Reconciliation of net earnings to the above amounts
Net earnings ..............................................................earnings........................................................... 94,480 48,686 606 28,422 47,038
Add (deduct):
Depreciation and amortization ..........................................amortization....................................... 21,383 22,648 20,951 18,068 14,584
Provisions for title losses in excess of payments ......................payments................... 27,306 11,483 6,511
11,474 14,185
Decrease (increase)(Increase) decrease in receivables - net ...............................net............................ (18,785) (1,660) 576
(1,291) (13,222)
(Decrease) increaseIncrease (decrease) in payables and accrued liabilities - net .........21,878 18,450 (3,138) (3,039) 17,176
Minority interest expense ..............................................expense........................................... 8,940 7,414 5,048
4,887 5,070
Equity in netNet (earnings) losses (earnings) of investees ...........................from equity investees......................... (3,420) (1,345) 596
(1,072) (1,477)Dividends received from equity investees............................ 2,892 2,275 1,132
Provisions for deferred income taxes................................ 12,775 1,897 2,041
Other - net ............................................................ 763 426 3,113
-------- -------- --------net......................................................... (4,898) (1,662) (2,410)
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities .......................................activities...................................... 162,551 108,186 31,913
57,875 86,467
======== ======== ========- ------------------------------------------------------------------------------------=========================================
Supplemental information:
Income taxes paid .......................................................... 528 16,018 26,511
Interest paid .............................................................. 1,687 1,187 1,478
AssetsNet assets acquired (purchase method):
Goodwill ................................................................Goodwill............................................................. 11,739 19,312 7,528
8,805 6,637
Title plants ............................................................plants......................................................... 537 5,056 5,239
354 484
Other ...................................................................Other................................................................ 4,580 4,830 3,645
4,612 2,899
Liabilities assumed ........................................................assumed..................................................... (6,574) (12,962) (2,000)
(1,169) (2,514)
Common Stock issued ........................................................stock issued..................................................... - (3,220) (4,937)
(7,359) (1,700)
-------- -------- --------Treasury stock acquired................................................. 2,220 - -
Cash paid for acquisitions ....................................................of subsidiaries - net........................ 12,502 13,016 9,475
5,243 5,806
======== ======== ========- -----------------------------------------------------------------------------------------------------------------------------
Income taxes paid....................................................... 23,645 14,615 528
Interest paid........................................................... 730 1,649 1,687
- ------------------------------------------------------------------------------------=========================================
See notes to consolidated financial statements.
F-5
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Three years ended December 31, 2000)2002)
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 agentagency offices throughout the
United States. Approximately 3332 percent of consolidated title revenues are
generated in TexasCalifornia and California.Texas. The operations in the international markets
in which the Company does business are generally insignificant to consolidated results.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.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 SIGNIFICANT ACCOUNTING PRONOUNCEMENTS. The Company adopted SFAS No. 142
"Goodwill and Other Intangible Assets" effective January 1, 2002, as required,
and no longer amortizes goodwill. Instead, goodwill and other intangibles are
reviewed no less than annually and amounts determined to be impaired will be
expensed to current operations. The effect on the Company's results of
operations is described in Note 7.
In accordance with SFAS No. 141 "Business Combinations", the Company
has used the purchase method of accounting for business combinations occurring
after June 30, 2001. The effect on the Company's consolidated financial position
or results of operations was immaterial.
The Company adopted the stock-based compensation disclosure
requirements of SFAS No. 148. See Note 1S. The impact the on the Company's
financial position or results of operations for the change in the fair value
method of accounting for stock-based compensation, if adopted, is expected to be
immaterial.
The Company adopted the disclosure requirements for guarantees required
by FASB Interpretation No. 45 effective December 31, 2002. The Company will
adopt the initial recognition and measurement provision of the non-contingent
aspects of guarantees issued or modified after December 31, 2002 and currently
anticipates no significant effect on the Company's consolidated financial
position or results of operations.
The Company will adopt the requirements of consolidation of variable
interest entities created or obtained after January 31, 2003 and related
disclosures required by FASB Interpretation No. 46, effective June 15, 2003. The
effect on the Company's consolidated financial position or results of operations
is expected to be immaterial.
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.
C.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 provision
isprovisions
are made for minority interests.
D.E. STATUTORY ACCOUNTING. The accounts of Stewart Title Guaranty Company (Guaranty) and other
title insurance underwriters owned by the Company are
maintained on a statutory basis,prepare financial statements
in accordance with statutory accounting practices prescribed or permitted by
regulatory authorities.
The statutory accounts are restated in
consolidation to conform to GAAP.
In restating to GAAP, the amounts for statutory premium reserve and the reserve for
reported title losses are eliminated and, in substitution, amounts are
established for estimated title losses (see below)Note 1G). 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.
E.F. REVENUE RECOGNITION. Operating revenues from direct title operations are
considered earned at the time of the closing of the related real estate
transactions. Premiumstransaction. Premium revenues on title insurance policies written by agentsagencies
are recognized primarily when policies are reported to the Company. The Company
with certain
accrualsaccrues for unreported policies. Accruals arepolicies where reasonable estimates can be made based primarily on
historical reporting patterns of agentsagencies, current trends and other relevant factors.known information
about agencies.
F-6
Revenues from services rendered in providing real estate information services are considered earned at
the time the service is performed or the work product is delivered to the
customer.
F.G. TITLE LOSSES AND RELATED CLAIMS. Estimating future title loss payments is
difficult because of the complex nature of title claims, the long periodslength of time over
which claims are paid, the 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
reservereserves represents the aggregate future payments, net of recoveries, that the
Company expects to incur on policy and escrow 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.
G. 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.
H. 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.
F-6
23
I. 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. The
carrying values of the investments approximate their fair values.
J. 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.
K. 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.
L. 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 whichthat 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.
M. GOODWILL. Goodwill is the excess of the purchase price over the fair value of
net assets of subsidiaries acquired and isacquired. 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 is not amortized but is reviewed no less
than annually and, if determined to be impaired, is expensed to current
operations. Goodwill impairment charges were $703,000 in 2001. There were no
such charges in 2002 and 2000. See Note 1B.
N. OTHER ACQUIRED INTANGIBLES. The Company does not have any significant
acquired intangible assets, other than title plants and goodwill.
O. LONG-LIVED ASSETS. The Company continuously reviews the carrying values of goodwill, title
plants and other long-lived assets for possibleif certain events occur that may indicate
impairment. In
reviewing for impairment, the Company considers adverse market orGoodwill is reviewed no less than annually. Impairment of all other
conditions. Impairmentlong-lived assets is indicated when projected undiscounted cash flows over the
estimated lifelives of the assets are less than carrying values. If impairment is
determined by management, the book amounts are written down to fair valuevalues by
calculating the discounted valuevalues of projected cash flows. O.See Note 1B.
P. 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.
P. ESCROW FUNDS. Funds are routinely held in segregated escrow bank accounts
pending the closing of real estate transactions. This results in a contingent
liability to the Company. These accounts are not included in the consolidated
balance sheets.
Q. DERIVATIVES AND HEDGING. The Company does not invest in hedging or derivative
instruments nor does it intend to do so in the future.instruments. Accordingly, FASSFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (as amended), which iswas effective January 1, 2001 for the Company,
is expected to havehad no impact on the consolidated financial statements.
F-7
24
NOTE 2R. 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.
S. STOCK-BASED COMPENSATION. The following reconciles federal income taxes computed atCompany has two fixed stock-based employee
compensation plans. The Company accounts for the statutoryplans under the intrinsic value
method. Accordingly, no stock-based employee compensation cost is reflected in
net earnings, as all options granted under the plans had an exercise price equal
to the market value of the underlying Common Stock on the date of grant. See
Note 13.
The Company applies APB No. 25 and related Interpretations in
accounting for its plans. Under SFAS No. 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 38.0% to 41.6% and a risk-free interest rate of 4.8% to 6.0% for the three
years ended December 31, 2002.
Had compensation cost for the Company's plans been determined
consistent with income taxes as reported.FAS 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
- -----------------------------------------------------------------------------------------------------------
2002 2001 2000
1999 1998
------- ------- -------- -----------------------------------------------------------------------------------------------------------
($000 Omitted)
Expected income taxes at 35% ................. 401 16,298 26,714
State income taxes ........................... 343 1,900 2,932
Tax effect of permanent differences:
Tax-exempt interest ...................... (1,909) (1,951) (1,779)
Nondeductible items ...................... 745 616 661
Equity loss (income) ..................... 208 (375) (517)
Minority interests ....................... 1,767 1,710 1,775
Non-taxable income ....................... (1,044) (469) (703)
OtherNet earnings:
As reported............................................................ 94,480 48,686 606
Stock-based employee compensation
determined under fair value method.................................... (616) (630) (420)
- net .............................. 29 414 206
------- ------- -------
Income taxes ................................. 540 18,143 29,289
======= ======= =======
Effective income tax rate (%) ................ 47.1 39.0 38.4
======= ======= =======-----------------------------------------------------------------------------------------------------------
Pro forma.............................................................. 93,864 48,056 186
- -------------------------------------------------------------------------------============================
Earnings per share:
Net earnings - basic.................................................... 5.33 3.01 .04
Pro forma - basic...................................................... 5.29 2.97 .01
Net earnings - diluted.................................................. 5.30 2.98 .04
Pro forma - diluted..................................................... 5.27 2.94 .01
- -------------------------------------------------------------------------------============================
Deferred tax assets and liabilities at December 31, 2000 and 1999 were as
follows:
2000 1999
------- -------
($000 Omitted)
Deferred tax assets:
Book over tax title loss provisions ......... 2,498 5,942
Unrealized losses on investments ............ -- 1,968
Accruals not currently deductible ........... 939 964
Net operating loss carryforwards ............ 833 892
Allowance for uncollectible amounts ......... 1,001 655
Book over tax depreciation .................. 2,034 1,499
Investments in partnerships ................. 706 68
Other ....................................... 1,922 2,064
------- -------
9,933 14,052
Less valuation allowance .................... (1,008) (1,008)
------- -------
8,925 13,044
Deferred tax liabilities:
Unrealized gains on investments ............. (1,017) --
Other ....................................... (556) (666)
------- -------
(1,573) (666)
------- -------
Net deferred tax asset .......................... 7,352 12,378
======= =======
The Company's valuation allowance relates to portions of certain
subsidiary 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 tax assets.
Deferred tax expense was $2,041,000, $3,524,000 and $4,142,000 in 2000,
1999 and 1998, respectively.
NOTE 32
RESTRICTIONS ON CASH AND INVESTMENTS. The statutoryStatutory 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.
F-8
25
A substantial majority of consolidated 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.
NOTE 43
DIVIDEND RESTRICTIONS. Surplus as regards policyholders for Guaranty was
$309,342,000 and $243,079,000 at December 31, 2002 and 2001, respectively.
Statutory net income for Guaranty was $21,816,000, $11,195,000 and $5,289,000 in
2002, 2001 and 2000, respectively.
Substantially all of the consolidated retained earnings at each year
end was represented by the retained earnings of 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 20012003 is $39,020,000.$61,868,000. Guaranty paid dividends significantly less than the maximum legal limitsof
$90,000, $1,390,000 and $90,000 in 2002, 2001 and 2000, 1999 and 1998.respectively.
Dividends from Guaranty wereare 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.
F-8
NOTE 54
INVESTMENTS. The amortized costs and market values of investments in debt and equity securities
at December 31 follow:
2000 1999
------------------ -------------------- -----------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------
AMORTIZED MARKET Amortized Market
Amortized MarketCOST VALUE cost value
cost value
--------- -------- --------- --------- -----------------------------------------------------------------------------------------------------------
($000 Omitted)
Debt securities:
Municipal ....................... 132,405 134,894 134,390 133,160
Mortgage-backed ................. 15,657 16,047 8,806 8,509
US Government ................... 22,056 22,661 33,484 32,740Municipal..................................... 152,808 159,453 143,151 145,536
Corporate and utilities ......... 80,096 78,683 68,445 64,902utilities....................... 127,265 132,502 117,950 119,500
U.S. Government............................... 38,741 39,798 38,470 39,818
Foreign....................................... 33,008 34,748 7,767 7,842
Mortgage-backed............................... 1,324 1,360 1,963 1,961
Equity securities ................... 5,273 6,107 5,115 5,317
------- ------- ------- -------
255,487 258,392 250,240 244,628
======= ======= ======= =======securities................................. 8,709 7,900 9,917 10,473
- -----------------------------------------------------------------------------------------------------------
361,855 375,761 319,218 325,130
- -------------------------------------------------------------==============================================
Gross unrealized gains and losses at December 31 were:
2000 1999
------------------ -------------------
Amortized Market Amortized Market
cost value cost value
--------- -------- --------- --------- -------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------
GAINS LOSSES Gains Losses
- -------------------------------------------------------------------------------------------------------------
($000 Omitted)
Debt securities: ................................
Municipal ......................... 2,753 264 1,028 2,258
Mortgage-backed ................... 418 28 42 339
US Government ..................... 607 2 85 829................................... 6,797 152 3,057 672
Corporate and utilities ........... 1,427 2,840 201 3,744..................... 6,472 1,235 2,954 1,404
U.S. Government ............................. 1,057 - 1,366 18
Foreign ..................................... 1,742 2 96 21
Mortgage-backed ............................. 36 - - 2
Equity securities ..................... 1,335 501 641 439
----- ----- ----- -----
6,540 3,635 1,997 7,609
===== ===== ===== =====............................... 295 1,104 1,060 504
- -------------------------------------------------------------------------------------------------------------
16,399 2,493 8,533 2,621
- --------------------------------------------------------------===============================================
F-9
26
Debt securities at December 31, 20002002 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 ........................ 10,078 10,174............................. 28,696 28,999
After one year through five years .......... 66,975 68,253............... 119,370 124,324
After five years through ten years ......... 99,738 101,404.............. 150,897 158,858
After ten years ............................ 57,766 56,407................................. 52,859 54,320
Mortgage-backed securities ................. 15,657 16,047
------- -------
250,214 252,285
======= =======...................... 1,324 1,360
- ----------------------------------------------------------------------------------------------------------
353,146 367,861
- ---------------------------------------------------------------------------------=========================
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 US
Government.U.S. Government
agencies.
F-9
NOTE 65
INVESTMENT INCOME. Income from investments and realized gains and losses from
sales of investments for the
three years follow:
- -----------------------------------------------------------------------------------------------------
2002 2001 2000
1999 1998
------- ------- -------- -----------------------------------------------------------------------------------------------------
($000 Omitted)
Income:
Debt securities ................................................................................ 17,484 15,614 13,770 12,837 12,143
Short-term investments, cash equivalents and other ........................................ 8,044 7,463 6,372
------- ------- -------
21,814 20,300 18,515
======= ======= =======......... 3,210 4,308 5,337
- -----------------------------------------------------------------------------------------------------
20,694 19,922 19,107
- --------------------------------------------------------------------=================================
Realized gains and losses:
Gains .................................................................................................... 7,966 (1) 1,308 823
536 1,923
Losses .................................................................................................. (4,934) (952) (800)
(270) (1,722)
------- ------- -------- -----------------------------------------------------------------------------------------------------
3,032 356 23
266 201
======= ======= =======- --------------------------------------------------------------------=================================
(1) Includes gain on sale of real estate of $2,376,000.
The sales of securities resulted in proceeds of $118,106,000 in 2002,
$41,694,000 in 2001 and $51,066,000 in 2000,
$32,380,000 in 1999 and $54,368,000 in 1998.2000.
Expenses assignable to investment income were insignificant. There were
no significant investments at December 31, 20002002 that did not produce income
during the year.
NOTE 6
INCOME TAXES. Deferred income taxes at December 31, 2002 and 2001 were as
follows:
- -------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------
($000 Omitted)
Deferred tax assets:
Accruals not currently deductible .......................... 1,313 874
Net operating loss carryforwards ........................... 213 483
Allowance for uncollectible amounts ........................ 963 891
Book over tax depreciation ................................. 2,314 3,526
Investments in partnerships ................................ 1,222 905
Foreign tax credit carryforwards ........................... 1,409 1,609
Other ...................................................... 1,711 1,804
- -------------------------------------------------------------------------------------------------
9,145 10,092
Less valuation allowance ................................... (1,292) (608)
- -------------------------------------------------------------------------------------------------
7,853 9,484
Deferred tax liabilities:
Tax over book title loss provisions ........................ (13,051) (2,411)
Unrealized gains on investments ............................ (4,867) (2,069)
Other ...................................................... (1,219) (716)
- -------------------------------------------------------------------------------------------------
(19,137) (5,196)
- -------------------------------------------------------------------------------------------------
Net deferred income taxes ...................................... (11,284) 4,288
- ----------------------------------------------------------------------===========================
The Company has $1,207,000 and $202,000 foreign tax credit
carryforwards that expire in 2006 and 2007, respectively. The valuation
allowance relates to certain foreign tax credit carryforwards, 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 tax assets.
Deferred tax expense was $12,775,000, $2,012,000 and $2,041,000 in
2002, 2001 and 2000, respectively.
F-10
The following reconciles federal income taxes computed at the statutory rate
with income taxes as reported.
- ---------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
($000 Omitted)
Expected income taxes at 35% ............................. 53,851 28,203 401
State income taxes ....................................... 3,268 1,976 223
Foreign taxes - net of tax credits ....................... 1,761 528 -
Tax effect of permanent differences:
Tax-exempt interest ................................... (2,009) (1,966) (1,909)
Meals and entertainment .............................. 1,140 1,079 742
Goodwill ............................................. - 933 457
Net (earnings) losses from equity investees ......... (1,197) (471) 208
Minority interests ................................... 1,201 997 546
Non-taxable income ................................... (1,303) (1,434) (1,044)
Other - net .......................................... 2,668 2,049 916
- --------------------------------------------------------------------------------------------------------
Income taxes ............................................. 59,380 31,894 540
- -----------------------------------------------------------------------=================================
Effective income tax rates (%) ........................... 38.6 39.6 47.1
- -----------------------------------------------------------------------=================================
NOTE 7
GOODWILL. The carrying amounts of goodwill for the title reporting unit were
$56,916,000 and $45,704,000 at December 31, 2002 and 2001, respectively. The
remaining goodwill was attributable to the REI segment's two reportable units.
During the three years ended December 31, 2002, goodwill was increased by
acquisitions. Goodwill was decreased primarily by amortization in 2001 and 2000.
In accordance with SFAS No. 142, amortization of goodwill was stopped effective
January 1, 2002. There were no impairment write-offs of goodwill during the
three-years ended December 31, 2002, except for $675,000 in 2001 in the REI
segment and $28,000 in 2001 in the title segment.
- -------------------------------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------
($000 Omitted except per share)
Net earnings:
As reported ............................................ 94,480 48,686 606
Excluding goodwill amortization ........................ - 51,697 2,413
Basic earnings per share:
As reported ............................................ 5.33 3.01 .04
Excluding goodwill amortization ........................ - 3.19 .16
Diluted earnings per share:
As reported ............................................ 5.30 2.98 .04
Excluding goodwill amortization ........................ - 3.16 .16
- ------------------------------------------------------------------------===============================
F-11
NOTE 8
EQUITY INVESTEES. Certain summarized aggregated financial information for
investees follows:
- --------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
($000 Omitted)
For the year:
Revenues ............................................. 47,723 51,318 37,757
Net earnings ......................................... 7,635 3,617 602
As of December 31:
Total assets ......................................... 18,255 25,475
Notes payable ........................................ 3,566 6,823
Stockholders' equity ................................. 12,423 15,457
- ------------------------------------------------------------------------================================
Title premium revenues earned, less amounts retained by agencies, from
policies issued by equity investees were $9,092,000, $7,705,000 and $4,969,000
in 2002, 2001 and 2000, respectively.
The amount of earnings (losses) from equity investees was $3,420,000,
$1,345,000 and ($596,000) in 2002, 2001 and 2000, respectively. These amounts
are included in title insurance - direct operations in the consolidated
financial statements.
Goodwill related to equity investees was not amortized for the year
ended December 31, 2002 in accordance with SFAS No. 142. Goodwill related to
equity investees was amortized for the two years ended December 31, 2001 on a
basis similar to other goodwill. Equity investments will continue to be reviewed
for impairment. See Note 1B.
NOTE 9
NOTES PAYABLE.
2000 1999
------ ------- ----------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------
($000 Omitted)
Banks Primarily- primarily unsecured 5.9% to 9.5%and at LIBOR (1) plus .75%, varying payments ......... 30,146 16,900payments........ 9,759 7,620
Other than banks ................................................ 2,397 2,154
------ ------
32,543 19,054
====== ======............................................................... 4,436 6,174
- ----------------------------------------------------------------------------------------------------
14,195 13,794
- ----------------------------------------------------------------------------------==================
(1) 1.38% and 1.88% at December 31, 2002 and 2001, respectively.
The above notes are due $17,104,000 in 2001, $4,472,000 in 2002,
$2,409,000$6,841,000 in 2003, $3,170,000$2,124,000 in 2004, $873,000$1,734,000 in
2005, $613,000 in 2006, $2,206,000 in 2007 and $4,515,000$677,000 subsequent to 2005.
F-10
272007.
NOTE 810
ESTIMATED TITLE LOSSES. Provisions accrued, payments made and liability balances
for the three years follow:
- ---------------------------------------------------------------------------------------------------------
2002 2001 2000
1999 1998
-------- -------- --------- ---------------------------------------------------------------------------------------------------------
($000 Omitted)
Balances at January 1 ......................................................... 202,544 190,298 183,787
171,763 156,791
Provisions ....................................................................... 75,920 51,454 38,999
44,187 39,226
Payments ........................................................................... (48,441) (39,721) (32,338) (32,628) (25,041)
Reserve balances acquired ......... -- 550 787
Decrease................................ 35 763 -
Decreases in salvage .................................................... - (250) (150)
(85) --
-------- -------- --------- ---------------------------------------------------------------------------------------------------------
Balances at December 31 ..................................................... 230,058 202,544 190,298
183,787 171,763
======== ======== ========- ------------------------------------------------------------------------=================================
F-12
Provisions include amounts related to the current year of approximately
$75,626,000, $51,085,000 and $38,815,000 $43,869,000for 2002, 2001 and $39,087,000 for 2000, 1999 and 1998, respectively.
Payments related to the current year, including escrow and other loss payments,
were approximately $10,688,000, $11,817,000 and $8,515,000 $8,501,000in 2002, 2001 and
$5,977,000 in 2000, 1999 and 1998, respectively.
NOTE 911
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 whichthat
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, 20002002 and 1999,2001, there were 145,820 shares (cost
$233,000) 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.
On May 21, 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-11F-13
28
NOTE 1012
CHANGES IN COMMON STOCK. Changes in stock and additional paid-in capital for the
three years follow:STOCKHOLDERS' EQUITY.
- --------------------------------------------------------------------------------------------------------------------
COMMON
AND CLASS B ADDITIONAL COMMONOTHER
COMMON PAID-IN STOCKCOMPREHENSIVE TREASURY
STOCK CAPITAL ------- ------- ----------EARNINGS STOCK
- --------------------------------------------------------------------------------------------------------------------
($000 Omitted)
Balances at December 31, 1997 ...................... 6,381 525 52,9221999 ............... 14,696 64,304 (3,530) -
Acquisitions ................................... 41 -- 1,083............................ 430 4,507 - -
Stock bonuses and other ........................ 17 -- 560................. 41 545 - -
Exercise of stock options ...................... 101 -- 1,442............... 1 18 - -
Tax benefit of stock options exercised ......... -- -- 828.. - 1 - -
Unrealized investment gains ............. - - 5,148 -
Realized loss reclassification .......... - - 396 -
Foreign currency translation ................... -- -- 51
------- ------- -------translations ........... - - (16) -
Common stock repurchases ................ - - - (1,512)
- --------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 ...................... 6,540 525 56,8862000 ............... 15,168 69,375 1,998 (1,512)
Stock dividend ................................. 6,648 525 --offering .......................... 2,500 42,009 - -
Acquisitions ................................... 441 -- 6,918............................ 198 3,022 - -
Stock bonuses and other ........................ 14 -- 599................. 25 474 - -
Exercise of stock options ...................... 3 -- 62............... 27 310 - -
Tax benefit of stock options exercised ......... -- -- 30.. - 49 - -
Unrealized investment gains ............. - - 2,135 -
Realized gain reclassification .......... - - (180) -
Foreign currency translation ................... -- -- (65)
------- ------- -------translations ........... - - 196 -
- --------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 ...................... 13,646 1,050 64,430
Acquisitions ................................... 430 -- 4,5072001 ............... 17,918 115,239 4,149 (1,512)
Stock bonuses and other ........................ 41 -- 545................. 44 747 - -
Exercise of stock options ...................... 1 -- 18............... 95 372 - -
Tax benefit of stock options exercised ......... -- -- 1.. - 512 - -
Unrealized investment gains ............. - - 7,205 -
Realized gain reclassification .......... - - (2,009) -
Foreign currency translation ................... -- -- (16)
------- ------- -------
Balances at Decembertranslations ........... - - (1) -
Common stock repurchased ................ - - - (2,220)
Common stock forfeited .................. - - - (173)
- --------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 ...................... 14,118 1,050 69,485
======= ======= =======2002 ............... 18,057 116,870 9,344 (3,905)
- ----------------------------------------------------================================================================
In August 2001 the Company issued 2,500,000 shares of its Common Stock
in an offering at a price of $19 per share.
F-14
NOTE 1113
STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans
for the three years follows:
- ----------------------------------------------------------------------------------------
Exercise
Shares (1) prices (1)(2)
--------- --------------
- ----------------------------------------------------------------------------------------
($)
December 31, 1997 ................... 436,200 7.60
Granted ......................... 90,600 18.84
Exercised ....................... (202,800) 7.61
Forfeited ....................... (10,400) 7.91
-------- -----
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
Granted .......................................... 86,100 19.02
Exercised ........................................ (94,800) 4.98
Forfeited ........................................ (2,800) 20.22
- ----------------------------------------------------------------------------------------
DECEMBER 31, 2002 .................................... 504,700 16.31
- ------------------------------------------------------------------======================
(1) Restated for a two-for-one stock split in May 1999.
(2) Weighted average
F-12
29
At December 31, 2000, 19992002, 2001 and 19982000 there were 470,200, 380,012504,700, 516,200 and
280,700470,200 options, respectively, exercisable. The weighted average fair values of
options granted during the years 2002, 2001 and 2000 1999were $11.01, $11.53 and
1998 were $7.51, $8.50 and
$7.18, respectively. See Note 1S.
The following summarizes information about fixed stock options
outstanding and exercisable at December 31, 2000:2002:
- ------------------------------------------------------------------------------------------------
Range of exercise prices ($)
9.75 to 18.7816.97 to
4.59
13.00 20.22 Total
---------- ---------- ---------- ----------- ------------------------------------------------------------------------------------------------
Shares .................... 90,000 211,400 168,800 470,200............................................... 180,100 324,600 504,700
Remaining contractual life - years (1) ........ 1.0 5.0 6.3 4.7............... 3.3 7.3 5.9
Exercise price ($) (1) .... 4.59 11.22 19.29 12.83
---------- ---------- ---------- ----------............................... 11.06 19.22 16.31
- -----------------------------------------------------------=====================================
(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 is 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 39.9% and a
risk-free interest rate of 5.8% for 2000.
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:
2000 1999 1998
--------- --------- ---------
($000 Omitted)
Net earnings:
As reported .......................... 606 28,422 47,038
Pro forma ............................ 186 27,943 46,615
Earnings per share: (1)
Net earnings - basic .................. .04 1.96 3.37
Net earnings - diluted ................ .04 1.95 3.32
Pro forma - assuming dilution ......... .01 1.91 3.30
--------- --------- ---------
(1) Restated for a two-for-one stock split in May 1999.
NOTE 1214
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 90,000 in 2002, 153,000 in 2001 and 106,000
in 2000, 125,000 in 1999 and 182,000
in 1998.
F-13
30
NOTE 13
LEASES. The Company's expense for leased office space was $32,667,000 in 2000,
$28,194,000 in 1999 and $23,131,000 in 1998. These are noncancelable, operating
leases expiring over the next nine years. The future minimum lease payments are
as follows (stated in thousands of dollars):
2001 ............................. 30,182
2002 ............................. 23,405
2003 ............................. 19,119
2004 ............................. 12,054
2005 ............................. 4,135
2006 and after ................... 4,884
------
93,779
======
NOTE 14
CONTINGENT LIABILITIES AND COMMITMENTS. The Company is contingently liable for
disbursements of escrow funds held by agents in certain cases where specific
insured closing guarantees have been issued.
Various takeout commitments approximated $3,801,000 at December 31,
2000. Management believes adequate provisions have been made for any losses
resulting from these commitments.
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 riskrisks from other
underwriters. Payments and recoveries on reinsured losses were insignificant
during the three years ended December 31, 2000.2002. 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.
F-15
NOTE 16
EQUITY IN INVESTEES. CertainLEASES. The Company's expense for leased office space was $40,663,000 in 2002,
$37,181,000 in 2001 and $32,667,000 in 2000. These are noncancelable, operating
leases expiring over the next 14 years. The future minimum lease payments are
summarized aggregate financial information for
investees follows:as follows (stated in thousands of dollars):
2000 1999 1998
------ ------ ------
($000 Omitted)
For the year:
Revenues ..................... 37,757 29,164 85,706
Net earnings ................. 602 3,278 5,360
As of December 31:
Total assets ................. 19,183 13,234
Stockholders' equity ......... 10,026 5,230
------ ------ ------2003 ................................................. 34,350
2004 ................................................. 26,628
2005 ................................................. 19,228
2006 ................................................. 15,289
2007 ................................................. 11,851
2008 and after ....................................... 65,907
- ------------------------------------------------------------------------
173,253
- -----------------------------------------------------------------=======
NOTE 17
CONTINGENT LIABILITIES AND COMMITMENTS. The excessCompany is contingently liable for
disbursements of escrow funds held by agencies 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 $1,053,614,000 at December 31, 2002.
The Company is a qualified intermediary in tax-deferred property
exchanges for customers pursuant to Section 1031 of the purchase price overInternal Revenue Code.
The Company holds the Company's shareproceeds from transactions until a qualifying exchange can
occur. This resulted in a contingent liability to the Company of approximately
$340,714,000 at December 31, 2002.
On December 31, 2002 the Company was contingently liable for guarantees
of indebtedness owed primarily to banks and others by unconsolidated equity
acquired ininvestees and other third parties. The guarantees relate primarily to business
expansion and generally expire no later than December 15, 2006. The maximum
potential future payments on the guarantees amount to $2,679,000 for equity
investees and $7,216,000 for other third parties. Management believes that the
collateral available, primarily title plants and the guarantees of corporate
stock, would enable the Company to recover the amounts paid under the
guarantees. The Company believes no provision for losses is needed because no
loss is expected on these guarantees.
In the ordinary course of business the Company guarantees the third
party indebtedness of its investeesconsolidated subsidiaries. On December 31, 2002 the
maximum potential future payments on the guarantees is amortizednot more than the notes
payable recorded on a basis similarthe consolidated balance sheets.
In the normal conduct of its business, the Company is subject to
goodwill.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 1718
SEGMENT INFORMATION. The Company's two reportable segments are title and real
estate information (REI). TheBoth segments significantly influence business toserve 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 insuresproperty and insuring 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, creditproperty reports
and tax services. This segment also provides post-closing services to lenders,
including document retrievals, assignments, lien releases, recordation,
collateral reviews and loan pool certifications.
F-14
31lenders.
In addition, thisthe 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.
F-16
Under the Company's internal reporting and accountability systems,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)
Revenues:
2000 ............................... 883,022 52,463 935,485
1999 ............................... 1,012,215 59,039 1,071,254
1998 ............................... 918,389 50,372 968,7612002:
Revenues ........................................ 1,708,597 71,119 1,779,716
Intersegment revenues ........................... 2,063 1,398 3,461
Depreciation and amortization:
2000 ............................... 16,283 4,668amortization ................... 18,545 2,838 21,383
Pretax earnings ................................. 145,059 8,801 153,860
Identifiable assets ............................. 797,854 44,419 842,273
2001:
Revenues ......................................... 1,207,764 63,821 1,271,585
Intersegment revenues ............................ 2,023 3,787 5,810
Depreciation and amortization .................... 18,389 4,259 22,648
Pretax earnings .................................. 75,294 5,286 80,580
Identifiable assets .............................. 639,282 38,581 677,863
2000:
Revenues ......................................... 884,736 50,749 935,485
Intersegment revenues ............................ 226 3,379 3,605
Depreciation and amortization .................... 16,710 4,241 20,951
1999 ............................... 13,911 4,157 18,068
1998 ............................... 11,480 3,104 14,584
Pretax earnings:
2000 ............................... 5,591 (4,445)earnings (losses) ......................... 5,863 (4,717) 1,146
1999 ............................... 43,615 2,950(1) 46,565
1998 ............................... 73,198 3,129 76,327
Identifiable assets:
2000 ............................... 525,045 38,403 563,448
1999 ............................... 496,191 39,550 535,741
--------- --------- ---------- -------------------------------------------------------------------============================================
(1) Includes a pretax charge of $1,319,000 resulting from the settlement of a
lawsuit.
NOTE 1819
QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
- ------------------------------------------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------- ------------------------------------------------------------------------------------------------------------
($000 Omitted, except per share)
Revenues:
2000 .................................. 208,203 224,670 239,004 263,608
1999 .................................. 247,878 296,093 266,381 260,9022002 ............................................. 347,974 407,128 473,345 551,269
2001 ............................................. 245,714 315,660 340,154 370,057
Net earnings:
2000 .................................. (3,354) 1,874 1,758 328
1999 .................................. 9,600 11,726 6,098 9982002 ............................................. 11,344 17,711 21,597 43,828
2001 ............................................. 3,073 15,438 13,003 17,172
Earnings per share - diluted:
(1)
2000 .................................. (.23) .13 .12 .02
1999 .................................. .67 .80 .41 .07
-------- -------- -------- --------2002 ............................................. .63 .99 1.22 2.46
2001 ............................................. .20 1.00 .78 .96
- --------------------------------------------------------------==============================================
(1) RestatedComputations 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 two-for-one stock split in May 1999.
F-15whole.
F-17
32
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
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
Stewart Title Stewart Title
December 31, 20002002 Guaranty Company Insurance Company
- ----------------- ---------------- ---------------------------------------------------------------------------------------------------------------------------------
($000 Omitted)
Admitted assets
Bonds ........................................................ 222,807 24,339............................................ 299,045 34,320
Stocks - investments in affiliates ........................... 130,098 1,847............... 240,833 -
Stocks - other ............................................... 7,145 --................................... 7,821 -
Cash and bank deposits ....................................... 35,041 2,386
Short-termshort-term investments ....................................... 2,297 999.................. 57,169 2,942
Title plants ................................................. 4,221 166..................................... 3,734 100
Title insurance premiums and fees and other receivables ......... 10,557 896receivable ..... 26,495 1,115
Other ........................................................ 17,392 1,369
------- -------
429,558 32,002
======= =======............................................ 16,521 1,557
- -----------------------------------------------------------------------------------------------------------
651,618 40,034
- -----------------------------------------------------------------------====================================
Liabilities, surplus and other funds
Reserve for title losses ..................................... 33,902 6,526......................... 42,812 9,072
Statutory premium reserve .................................... 182,509 9,569........................ 266,184 12,784
Other ........................................................ 18,046 1,634
------- -------
234,457 17,729............................................ 33,280 2,717
- -----------------------------------------------------------------------------------------------------------
342,276 24,573
Surplus as regards policyholders (Note) .......................... 195,101 14,273
------- -------
429,558 32,002
======= =======.............. 309,342 15,461
- -----------------------------------------------------------------------------------------------------------
651,618 40,034
- -----------------------------------------------------------------------====================================
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, 2000 ($0002002
(000 omitted)............... 249,730
======= ............................................................... $ 444,890
==========
Note: The amount shown above for stockholder's equity exceeds policyholderpolicyholders
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-16Unaudited - see accompanying independent auditors' report.
F-18
33
SCHEDULE I
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
INCOMEEARNINGS AND RETAINED EARNINGS INFORMATION
Year================================================================================================================
Years Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
1999 1998
--------- --------- ------------- ---- ----
(In thousands)
================================================================================================================
RevenuesREVENUES
Investment income ............................................ $ 374532 $ 442471 $ 583374
Other income ................................................. 418 80 11 1 --
--------- --------- ---------
950 551 385
443 583
ExpensesEXPENSES
Employee costs ............................................... 284 220 189 123 229
Other operating expenses ..................................... 3,531 2,913 2,084 2,840 3,006
Depreciation and amortization ................................ 70 39 33 106 92
--------- --------- ---------
3,885 3,172 2,306
3,069 3,327
LossLosses before taxes and equity in earnings of investees .................... (2,935) (2,621) (1,921)
(2,626) (2,744)
Income taxes (benefit) .......................................... (419) (811) (566)
Equity in earnings oftax benefit .............................................. 772 678 419
Earnings from equity investees ................................................................... 96,643 50,629 2,108 30,237 49,216
--------- --------- ---------
Net income ......................................................NET EARNINGS .................................................... 94,480 48,686 606 28,422 47,038
Retained earnings at beginning of year .......................... 258,746 210,060 209,454 190,363 145,140
Cash dividends on Common Stock ($.00, $.16 and $.14 per
share) ...................................................... -- (2,158) (1,815)
Stock dividend .................................................. -- (7,173) --
--------- --------- ---------
Retained earnings at end of year ................................ $ 210,060353,226 $ 209,454258,746 $ 190,363210,060
========= ========= =========
See accompanying note to financial statements.statement information.
(Schedule continued on following page.)
S-1
34
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
BALANCE SHEET INFORMATION
=================================================================================================================
December 31,
----------------------
2000 1999
--------- -------------------------
2002 2001
---- ----
(In thousands)
=================================================================================================================
AssetsASSETS
Cash and cash equivalents ......................................................................................................................... $ 376933 $ --
--------- ---------167
Short-term investments ................................................................. 4,408 6,762
--------- ---------.............................................................. 200 3,003
Investments in debt securities, at market ........................................... 9,756 14,975
Receivables:
Notes, including $4,300$23,399 and $6,618$32,859 from affiliates ................................... 4,869 7,168.............................. 23,595 33,032
Other, including $2,500$554 and $11,846$556 from affiliates .................................. 2,650 12,079.................................... 631 848
Less allowance for uncollectible amounts ....................................................................................... (20) (20)
--------- ---------
7,499 19,22724,206 33,860
Furniture and equipment, at cost ........................................................ 251 246.................................................... 4,461 257
Less accumulated depreciation .......................................................... (145) (115)....................................................... (205) (149)
--------- ---------
106 1314,256 108
Title plants, at cost ................................................................................................................................. 48 48
Investments in investees ............................................................... 280,544 259,328............................................................ 451,380 340,029
Other assets ........................................................................... 4,693 4,556........................................................................ 4,577 4,883
--------- ---------
$ 297,674495,356 $ 290,052397,073
========= =========
LiabilitiesLIABILITIES
Notes payable including..................................................................... $ - and265 $ - from affiliates ................................. $ 417 $ 1,097329
Accounts payable and accrued liabilities ............................................. 2,168 4,031.......................................... 1,499 2,204
Contingent liabilities and commitments
Stockholders' equitySTOCKHOLDERS' EQUITY
Common - $1 par, authorized 30,000,000, issued and outstanding 14,001,64516,681,212 and
13,645,527........................................................................... 14,118 13,64616,751,240 ....................................................................... 17,007 16,868
Class B Common - $1 par, authorized 1,500,000 issued and outstanding 1,050,012 ...................... 1,050 1,050
Additional paid-in capital ............................................................. 69,485 64,430.......................................................... 116,870 115,239
Retained earnings (1) .................................................................. 210,060 209,454............................................................... 353,226 258,746
Accumulated other comprehensive earnings (loss) ........................................ 1,888 (3,656)earnings:
Unrealized investment gains ..................................................... 9,039 3,843
Foreign currency translations ................................................... 305 306
Treasury stock - 325,669 and 116,900 Common shares, at cost ................................................................. (3,905) (1,512) --
--------- ---------
Total stockholders' equity ($19.6127.84 and $19.39$22.16 per share) ........................ 295,089 284,924..................... 493,592 394,540
--------- ---------
$ 297,674495,356 $ 290,052397,073
========= =========
(1) Includes undistributed earnings of subsidiaries of $213,805$361,077 in 20002002 and
$212,249$264,434 in 1999.2001.
See accompanying note to financial statements.
Schedulestatement information.
(Schedule continued on following page.)
S-2
35
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
CASH FLOWSFLOW INFORMATION
Year=================================================================================================================
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000
1999 1998
-------- -------- ------------ ---- ----
(In thousands)
=================================================================================================================
Cash used by operating activities (Note) .....................CASH USED BY OPERATING ACTIVITIES (NOTE) ......................... $ (1,685) $ (279) $ (5,701)
$ (2,978) $ (2,805)
Cash flow from investingInvesting activities:
Purchases of property and equipment - net ..................... (4,209) (70) -
Proceeds from investments matured and sold .................................... 19,799 3,484 2,354 4,677 --
Purchases of investments excluding mortgage loans ........ -- -- (2,438)...................................... (11,686) (16,902) -
Dividends received from unconsolidated subsidiaries .................. 90 1,390 8,090 5,090 7,633
Increases in mortgagesnotes and other notes receivable .........receivables ...................... (93) (29,603) (75) (542) (300)
Collections on mortgagesnotes and other notes receivable .......receivables .................... 9,529 1,440 56 303 265
Cash paid for the acquisitionacquisitions of subsidiaries .............- net .............. (11,382) (4,067) (2,175) (4,470) (2,500)
-------- -------- --------
Cash provided by investing activities ........................CASH PROVIDED (USED) BY INVESTING ACTIVITIES ..................... 2,048 (44,328) 8,250 5,058 2,660
-------- -------- --------
Cash flow from financingFinancing activities:
Dividends paid ............................................ -- (2,158) (1,815)
Proceeds of notes payable ................................. -- -- 417
Payments on notes payable ...................................................................... (64) (448) (680) -- --
Proceeds from issuanceexercise of stock ...........................options ....................... 467 337 19
65 1,543Proceeds from stock offering - net ............................ - 44,509 -
Purchases of treasury stock .................................................................. - - (1,512) -- --
-------- -------- --------
Cash (used) provided by financing activities .................CASH PROVIDED (USED) BY FINANCING ACTIVITIES ..................... 403 44,398 (2,173) (2,093) 145
-------- -------- --------
(Decrease) increase in cash and cash equivalents .............INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. $ 376766 $ (13)(209) $ --376
======== ======== ========
Note: Reconciliation of net incomeearnings to the above amounts
Net income ................................................earnings .................................................. $ 60694,480 $ 28,42248,686 $ 47,038606
Add (deduct):
Depreciation and amortization ........................................................ 70 39 33
106 92
IncreaseDecrease (increase) in accounts receivablereceivables - net ..................................... 2 1,606 (1,714) (727) (1,060)
(Decrease) increase in accounts payablepayables and accrued
liabilities - net .......................................................................... (705) 36 (1,863)
905 508
Equity in net earnings ofEarnings from equity investees ................................................. (96,643) (50,629) (2,108) (30,237) (49,216)
Stock bonuses paid ..................................... 586 613 577
Other - net ............................................ (1,241) (2,060) (744)................................................ 1,111 (17) (655)
-------- -------- --------
Cash used by operating activities ...................................................... $ (5,701)(1,685) $ (2,978)(279) $ (2,805)(5,701)
======== ======== ========
Supplemental information:
Income taxes paid ....................................... -- -- --........................................... - - -
Interest paid ........................................... -- -- --............................................... - - -
Noncash transactions:
Forgiveness of debt from affiliate .................................................. - - 4,913 -- --
See accompanying note to financial statements.statement information.
(Schedule continued on following page.)
S-3
36
SCHEDULE I
(CONTINUED)
STEWART INFORMATION SERVICES CORPORATION
(PARENT COMPANY)
NOTE TO FINANCIAL STATEMENT INFORMATION
The Registrant operatesWe operate as a holding company transacting substantially all business
through itsour subsidiaries. TheOur consolidated financial statements for
the Registrant and its subsidiaries 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 19992001 and 19982000 Parent Company financial
statements have been reclassified for comparative purposes. Net earnings, as
previously reported, were not affected.
Total dividendsDividends received from subsidiaries for 2000, 19992002, 2001 and 19982000 were
$90,000, $13,090,000$1,390,000 and $90,000, respectively.
S-4
37
SCHEDULE II
STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 20002002
======================================================================================================================
Col. C
Col. A Col. B Additions Col. D Col. E
---------------- -------------- ------------------------------- -------------- --------------======================================================================================================================
Balance Charged Charged to
at to other Balance
beginning cost and accounts -Deductions-Deductions at end
Description of period expenses (describe) described(described) (described) of period
---------------- -------------- -------------- -------------- -------------- --------------======================================================================================================================
Stewart Information Services
Corporation and subsidiaries:
Year ended December 31, 1998:2000:
Estimated title losses .............................. $183,787,003 $ 156,791,38238,999,295 - $ 39,226,182 $ 787,000(C) $ 25,041,558(A) $ 171,763,00632,488,157 (A) $190,298,141
Allowance for uncollectible
amounts .... 5,551,849 2,110,000 -- 2,859,144(B) 4,802,705......................... 4,379,473 2,130,000 - 1,382,655 (B) 5,126,818
Year ended December 31, 1999:2001:
Estimated title losses ................. 171,763,006 44,186,778 550,000(C) 32,712,781(A) 183,787,003............. 190,298,141 51,453,895 $ 763,000(C) 39,970,656 (A) 202,544,380
Allowance for uncollectible
amounts .... 4,802,705 792,000 -- 1,215,232(B) 4,379,473......................... 5,126,818 1,600,000 - 2,062,348 (B) 4,664,470
Year ended December 31, 2000:2002:
Estimated title losses ................. 183,787,003 38,999,295 -- 32,488,157(A) 190,298,141............. 202,544,380 75,920,324 35,000(C) 48,442,030 (A) 230,057,674
Allowance for uncollectible
amounts .... 4,379,473 2,130,000 -- 1,382,655(B) 5,126,818......................... 4,664,470 2,223,000 1,579,908 (B) 5,307,562
Stewart Information Services
Corporation - Parent:
Year ended December 31, 1998:2000:
Allowance for uncollectible amounts ..... $ 20,000 -- -- --- - - $ 20,000
Year ended December 31, 1999:2001:
Allowance for uncollectible amounts ..... 20,000 -- -- --- - - 20,000
Year ended December 31, 2000:2002:
Allowance for uncollectible amounts ..... 20,000 -- -- -- 20,000- - $ 294 (B) 19,706
(A) Represents primarily payments of policy and escrow losses and loss
adjustment expenses during the year, less salvage collections.year.
(B) Represents uncollectible accounts written off.
(C) Represents estimated title loss reserve acquired.
S-5
38
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
3.1 - Certificate of Incorporation of the Registrant, as amended March
19, 2001
3.2 - By-Laws of the Registrant, as amended March 13, 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 herein
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 hereinExhibit
3.1 - Certificate of Incorporation of the Registrant, as amended March
19, 2001 (incorporated by reference in this report from Exhibit
3.1 of the 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
the 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 the 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
the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)
10.4 - Stewart Information Services Corporation 2002 Stock Option Plan
for Region Managers (incorporated by reference in this report
from Exhibit 10.4 of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002)
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
99.1 - Certificate of Co-Chief Executive Officer pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002
99.2 - Certificate of Co-Chief Executive Officer pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002
99.3 - Certificate of Chief Financial Officer pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002