-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TdDBqZU2MinjXn3Vcc24SXmraBMegwErQvOM75q4Biyq/lEu2Y0Lmmp5fIy3C6pS aD8JawQoeLtzP2tZc3hkXA== 0000950129-00-001373.txt : 20000327 0000950129-00-001373.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950129-00-001373 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART INFORMATION SERVICES CORP CENTRAL INDEX KEY: 0000094344 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 741677330 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02658 FILM NUMBER: 578450 BUSINESS ADDRESS: STREET 1: 1980 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136258100 MAIL ADDRESS: STREET 1: 1980 POST OAK BLVD STREET 2: STE 830 CITY: HOUSTON STATE: TX ZIP: 77056 10-K405 1 STEWART INFORMATION SERVICES CORP. - 12/31/1999 1 - -------------------------------------------------------------------------------- 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, 1999 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 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, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 3, 2000, 13,679,806 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, as reported by the NYSE on March 3, 2000 of Stewart Information Services Corporation) held by non-affiliates of the Registrant was approximately $184,677,381. 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 May 1, 2000, are incorporated by reference in Parts III and IV of this document. - -------------------------------------------------------------------------------- 2 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PART I ITEM NO. PAGE ---- ---- 1. Business ................................................................................. 1 2. Properties ............................................................................... 4 3. Legal Proceedings ........................................................................ 5 4. Submission of Matters to a Vote of Security Holders ...................................... 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters .................... 6 6. Selected Financial Data .................................................................. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 7 7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 10 8. Financial Statements and Supplementary Data .............................................. 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 11 PART III 10. Directors and Executive Officers of the Registrant ....................................... 12 11. Executive Compensation ................................................................... 12 12. Security Ownership of Certain Beneficial Owners and Management ........................... 12 13. Certain Relationships and Related Transactions ........................................... 12 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 13 Signatures ............................................................................... 14
3 P A R T I ITEM 1. BUSINESS Stewart's primary business is title insurance. Stewart issues policies through more than 4,700 issuing locations on homes and other real property located in all 50 states, the District of Columbia and several foreign countries. Stewart also sells computer-related services and information, as well as mapping products and geographic information systems, to domestic and foreign governments and private entities. The Company's two segments of business are title and real estate information ("REI"). The segments significantly influence business to each other because of the nature of their operations and their common customers. The segments provide services through a network of offices, including both direct operations and agents, throughout the United States. The operations in the several international markets in which the Company does business are generally insignificant to consolidated results. The financial information related to these segments is discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference. TITLE The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property. Examination and closing. The purpose of a title examination is to ascertain the ownership of the property being transferred, what debts are owed on it and what the title policy coverage will be. This involves searching for and examining documents such as deeds, mortgages, wills, divorce decrees, court judgments, liens, paving assessments and tax records. At the closing or "settlement", the seller executes a deed to the new owner. The buyer signs new mortgage documents. Closing funds are then disbursed to the seller, the prior mortgage company, real estate brokers, the title company and others. The documents are then recorded in the public records. A title policy is generally issued to both the lender and new owner. Title policies. Lenders in the USA generally require title insurance as a condition to making a loan on real estate, including securitized lending. This is to assure lenders of the priority of their lien position. The purchasers of the property want the assurance given in their policy against claims that may arise against their ownership. The face amount of the policy is normally the purchase price or the amount of the related loan. Title insurance is substantially different from other types of insurance. Fire, auto, health and life insurance protect against losses and events in the future. In contrast, title insurance seeks to eliminate most risks through the examination and settlement process. Investments. The Company has established policies and procedures to manage its exposure to changes in the fair value of its investments. These policies include an emphasis on credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending on market conditions. The Company has classified all of its investments as available-for-sale. Losses. Losses on policies occur because of a title defect not discovered during the examination and settlement process. Other reasons for losses include forgeries, misrepresentations, unrecorded construction liens, the failure to pay off existing liens, mishandling of settlement funds, issuance by agents of unauthorized coverages and other legal issues. Some claimants seek damages in excess of policy limits. Such claims are based on various legal theories usually alleging misrepresentation by an issuing office. Although the Company vigorously defends against spurious claims, it has 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. -1- 4 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. For losses under $750,000 each, the Company estimates the aggregate amount that will be paid in future years on title policies issued in the current year. The estimated amount is charged to earnings currently (when the related revenues are recognized). In making the estimates, the Company uses, among other things, moving average ratios of recent actual policy loss payment experience, net of recoveries, to premium revenues. Policy losses in excess of $750,000 each are individually evaluated. A reserve for incurred but not reported major losses is also maintained. Escrow and other losses incurred in office operations are accounted for separately. Amounts shown as the Company's estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. In accordance with industry practice, the amounts have not been discounted to their present values. Factors affecting revenues. Title revenues are closely related to the level of activity in the real estate market and the prices at which real estate sales are made. Real estate sales are directly affected by the availability and cost of money to finance purchases. Other factors include demand by buyers, consumer confidence and family incomes. These factors may override the seasonal nature of the title business. Generally, the third quarter is the most active in terms of real estate sales and the first quarter is the least active. Selected information for the national real estate industry follows (1999 amounts are preliminary):
1999 1998 1997 ------ ------ ------ Housing starts - millions .................. 1.67 1.62 1.48 Housing resales - millions ................. 5.18 4.96 4.38 Housing resales - median sales price in $ thousands .............................. 133.0 128.0 121.4
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's title revenues in any of the last three years. Titles insured included residential and commercial properties, undeveloped acreage, farms and ranches. Service, location, financial strength, size and related factors affect customer acceptance. Increasing market share is accomplished primarily by providing superior service. The parties to a closing are concerned with personal schedules and the interest and other costs associated with the 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 is an important factor in maintaining and increasing the Company's agency network. Out of the nation's top five title insurers, Stewart earned the highest ratings awarded by the industry's leading rating companies. Stewart received an A" from Demotech, Inc., an A2 from Moodys and an A+ from Lace Financial and Duff & Phelps. Market share. Estimating a title insurer's market share is difficult. Based on unconsolidated statutory net premiums written for 1998 (1999 amounts are not available), Stewart Title Guaranty Company ("Guaranty") is one of the leading individual title insurers in America. Competitors include (names are abbreviated) Chicago Title, Fidelity, First American, Land America and Old Republic. As do most title insurers, Stewart also competes with abstractors, attorneys who issue title opinions and attorney-owned title insurance bar funds. A number of home builders, financial institutions, real estate brokers and others own or control title insurance agents, some of which issue policies underwritten by Guaranty. This "controlled" business also provides competition for Stewart's agents. Offices. The number of locations issuing Stewart policies was 4,789 at December 31, 1999, compared to 4,249 a year earlier and 3,798 two years earlier. Of these totals 4,425, 3,933 and 3,517 were independent agents at December 31, 1999, 1998, and 1997, respectively. -2- 5 Regulations. Title insurance companies are subject to extensive state regulations covering rates, agent licensing, policy forms, trade practices, reserve requirements, investments and the flow of funds between an insurer and its parent or its subsidiaries and any similar related party transaction. Kickbacks and similar practices are prohibited by certain state and federal laws. REAL ESTATE INFORMATION The real estate information segment provides services to the real estate and mortgage industries primarily through the electronic delivery of services needed for settlement. These services include title reports, flood determinations, property appraisals, document preparation, credit reports and other real estate information. In addition, this segment includes services related to tax-deferred exchanges, surveys, the accounting and operating systems of title agents and government authorities and the construction of title plants. Factors affecting revenues. As in the title segment, REI revenues are also closely related to the level of activity in the real estate market. Customers. The REI segment includes both mortgage services ancillary to the settlement process as well as providing technology to facilitate the electronic preparation and delivery of real estate information. The primary sources of REI business are lenders. Other customers include title offices, real estate brokers, attorneys, municipalities and courthouses. No one customer was responsible for as much as ten percent of Stewart's REI revenues in any of the last three years. The most 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 companies in this segment are a part of the closing process which is driven by personal schedules and the interest and other costs associated with the delays in the settlement. GENERAL Technology. Stewart's automation products and services are increasing productivity in the title office and speeding the real estate closing process for lenders, real estate professionals and consumers. In the past, an order typically required several individuals to search the title, retrieve and review documents and finally create the actual commitment. Today, one person can receive the order electronically and, on the same screen, view the prior file, examine the index of documents, retrieve and review electronically stored documents, prepare the commitment and deliver the product on a normal subdivision file. Trademarks. Stewart has developed numerous automation products and processes which are crucial to both its title and REI segments. These systems automate most facets of the real estate transaction. Among these trademarked products and processes are AIM(R), Landata Title Plant(R), LANDSCAN(R), RESource(R), single seat technology(TM), StarNet(R) and Virtual Underwriter(R). Employees. Stewart and its subsidiaries employed approximately 5,751 people at December 31, 1999. -3- 6 ITEM 2. PROPERTIES The Registrant and its wholly-owned subsidiary, Stewart Title Guaranty Company and its subsidiaries ("Guaranty"), own or lease the following properties: The following table sets forth information about the Registrant's other principal properties:
Location Type Use Size Acquired In - -------------------------- ---------------------- ------------------- -------------- ----------- Houston, Texas Leased office building Executive office of 248,427 sq. ft. (1) the Registrant and Guaranty Los Angeles, California Leased office building Office of Guaranty 37,406 sq. ft. (1) Houston, Texas Leased office building Office of Guaranty 26,420 sq. ft. (2) Dallas, Texas Leased office building Office of Guaranty 25,921 sq. ft (3) Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (4) San Antonio, Texas Leased office building Office of Guaranty 20,864 sq. ft. (5) San Diego, California Leased office building Office of Guaranty 20,020 sq. ft. (6) Concord, California Leased office building Office of Guaranty 18,916 sq. ft. (1) Colorado Springs, Colorado Leased office building Office of Guaranty 16,000 sq. ft. (2) Denver, Colorado Leased office building Office of Guaranty 15,935 sq. ft. (2) Oklahoma City, Oklahoma Leased office building Office of Guaranty 14,795 sq. ft. (4) Austin, Texas Leased office building Office of Guaranty 14,278 sq. ft. (2) Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905 San Antonio, Texas Owned office building Office of Guaranty 26,769 sq. ft. 1980 & 1982 Phoenix, Arizona Owned office building Office of Guaranty 24,459 sq. ft. 1981 Tucson, Arizona Owned office building Office of Guaranty 24,000 sq. ft. 1974 Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 1985
- -------------------- (1) These leases terminate in 2004. (2) These leases terminate in 2001. (3) This lease terminates in 2009. (4) These leases terminate in 2003. (5) This lease terminates in 2005. (6) This lease terminates in 2000. The Registrant leases offices at approximately 395 locations. The average term for all such leases is approximately four years. The leases expire from 2000 to 2009. The Registrant believes it will not have any difficulty obtaining renewals of leases as they expire or, alternatively, leasing comparable property. The aggregate annual rental expense under all leases was approximately $28,194,000. All buildings and equipment owned or leased by the Registrant are considered by the Registrant to be well maintained, adequately insured and generally sufficient for the Registrant's purposes. Substantially all of the Registrant's owned real property above is subject to mortgages. -4- 7 ITEM 3. LEGAL PROCEEDINGS The Registrant is a party to routine lawsuits incidental to its business, most of which involve disputed policy claims. In many of these suits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agent of the Registrant. The Registrant does not expect that any of these proceedings will have a material adverse effect on its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -5- 8 P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's 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 the Common Stock for each fiscal period indicated, as reported by NYSE, and the amount of cash dividends paid per share. Amounts are restated for a two-for-one stock split in May 1999.
HIGH LOW DIVIDENDS ---- --- --------- 1999: First quarter ........................... 31.38 15.25 .04 Second quarter .......................... 21.94 15.50 .04 Third quarter ........................... 23.00 15.50 .04 Fourth quarter .......................... 18.25 10.25 .04 1998: First quarter ........................... 16.13 14.25 .035 Second quarter .......................... 26.94 15.16 .035 Third quarter .......................... 33.88 21.50 .035 Fourth quarter .......................... 29.38 22.50 .035
The Company has paid regular quarterly cash dividends on its Common Stock since 1972. The Company's Certificate of Incorporation provides that no cash dividends may be paid on the Class B Common Stock. The Board of Directors has approved a plan to repurchase up to 5 percent (680,000 shares) of the Company's currently issued and outstanding Common Stock. The Board also determined that the Company's regular quarterly dividend should be discontinued in favor of returning those and additional funds to stockholders through the stock purchase plan. The number of shareholders of record as of December 31, 1999 was 2,513. As of March 3, 2000, the price of one share of the Company's Common Stock was $13.50. -6- 9 ITEM 6. SELECTED FINANCIAL DATA (Ten year summary)
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ In millions of dollars Total revenues ........................ 1,071.3 968.8 708.9 656.0 534.6 611.1 683.6 540.7 385.5 374.0 Title segment: Operating revenues ............... 991.6 899.7 657.3 609.4 496.0 599.5 672.9 530.3 372.3 363.0 Investment income ................ 20.3 18.5 15.9 14.5 13.6 12.4 10.3 10.3 11.1 11.0 Investment gains (losses) ........ 0.3 0.2 0.4 0.1 1.0 (0.8) 0.4 0.1 2.1 -- Total revenues ................... 1,012.2 918.4 673.6 624.0 510.6 611.1 683.6 540.7 385.5 374.0 Pretax earnings .................. 43.6 73.2 29.2 22.5 10.8 13.8 37.6 21.2 1.1 0.9 REI segment: (1) Revenues ......................... 59.0 50.4 35.3 32.0 24.0 Pretax earnings .................. 3.0 3.1 (5.5) 0.4 (0.1) Title Loss provisions ................. 44.2 39.2 29.8 33.8 29.6 40.2 58.6 54.1 40.7 38.2 % to title operating revenues .... 4.5 4.4 4.5 5.6 6.0 6.7 8.7 10.2 10.9 10.5 Net earnings (2) ...................... 28.4 47.0 15.3 14.4 7.0 9.7 23.7 14.6 1.7 0.2 Cash flow from operations ............. 57.9 86.5 36.0 38.3 20.6 27.7 54.3 36.3 18.6 11.0 Total assets .......................... 535.7 498.5 417.7 383.4 351.4 325.2 313.9 251.9 219.1 201.3 Long-term debt ........................ 6.0 8.9 11.4 7.9 7.3 2.5 3.0 4.2 6.8 6.6 Stockholders' equity (3) .............. 284.9 260.4 209.5 191.0 174.9 156.4 156.2 128.6 114.8 113.9 Per share data (4) Average shares-diluted (in millions) ......................... 14.6 14.2 13.8 13.5 12.7 12.5 12.4 12.2 12.2 12.2 Net earnings-basic (2) ................ 1.96 3.37 1.12 1.08 0.56 0.78 1.93 1.20 0.14 0.01 Net earnings-diluted (2) .............. 1.95 3.32 1.11 1.07 0.55 0.77 1.90 1.20 0.14 0.01 Cash dividends ........................ 0.16 0.14 0.13 0.12 0.11 0.10 0.09 0.08 0.07 0.12 Stockholders' equity (3) .............. 19.39 18.43 15.17 14.17 13.68 12.59 12.69 10.55 9.42 9.35 Market price High ............................. 31.38 33.88 14.63 11.32 11.25 10.71 10.17 7.25 4.84 6.17 Low .............................. 10.25 14.25 9.38 9.82 7.57 7.19 6.25 4.34 2.59 2.25 Year end ......................... 13.31 29.00 14.50 10.38 10.75 7.69 10.00 6.84 4.59 2.63
(1) Prior to 1995, segment operations for real estate information services were not reported separately from title operations and were less significant. (2) Includes the following items, after providing for income taxes: 1997 - a writedown of goodwill of $1.2 million, or $.09 per share. 1992 - a reserve established for title losses over ten years old of $2.2 million, or $.18 per share. 1991 - a fresh start tax credit of $1.3 million, or $.11 per share. (3) Includes unrealized gains and losses upon adoption of FAS 115 in 1993. (4) Restated for two-for-one stock split in May 1999 and a three-for-two stock split in April 1994, effected as stock dividends. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A comparison of the results of operations of the Company for 1999 with 1998 and 1998 with 1997 follows. GENERAL. The Company's two segments of operations are title and real estate information. In general, the principal factors that contribute to increases in the Company's operating revenues include declining mortgage interest rates (which usually increase home sales and refinancing transactions), rising home prices, higher premium rates, increased market share, additional revenues from new offices and increased revenues from commercial transactions. Although relatively few in number, large commercial transactions typically yield higher premiums. Mortgage interest rates, in the early months of 1997, rose but then began a fairly steady decline in May 1997 and fell each month that followed. In 1998 rates rose slightly above 7% during the first half of the year, but stayed just below 7% for the rest of the year. In 1999 rates rose gradually to just over 8% by the end of the year. -7- 10 Operating in these mortgage interest rate environments and a strong general economy, real estate activity began to increase in late 1997. Existing home sales moved to record levels in the last quarter of 1997. Strong activity in home sales continued throughout 1998. Refinancing transactions rose in the last month of 1997 and in the first quarter of 1998 to record levels, decreased in the second and third quarters and then increased significantly to still another record level in the fourth quarter of 1998. In 1999 existing home sales remained strong, while refinancing transactions dropped significantly during the second half of the year. TITLE REVENUES. The Company's revenues from premiums, fees and other revenues increased 10.2% in 1999 over 1998 and 36.9% in 1998 over 1997. The number of title orders opened and closed by the Company and the average revenue per order closed follow (agent operations and certain other income have been excluded).
1999 1998 1997 ------ ------ ------ Number of orders opened (000s) ....... 430 510 331 Number of orders closed (000s) ....... 331 368 247 Average revenue per order closed ..... $1,082 $ 960 $ 979
Total closings decreased 10.1% in 1999 and increased 49.0% in 1998. The average revenue per closing increased 12.7% in 1999 and decreased 1.9% in 1998. The average rate was increased by higher home prices, offset in 1998 by a large number of refinancings with their lower premiums. A 3% reduction in Texas title premium rates became effective August 1, 1998. However, the Company is experiencing new home equity business in Texas that did not exist before 1998. There were no other major revenue rate changes in 1999 or 1998. TITLE REVENUES BY STATE. The approximate amounts and percentages of consolidated title revenues for the last three years were:
Amounts ($ millions) Percentages 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Texas .......................... 167 162 116 17 18 18 California ..................... 158 156 123 16 17 19 New York ....................... 73 67 51 7 7 8 Florida ........................ 72 67 47 7 8 7 All Others ..................... 522 448 320 53 50 48 --- --- --- -- -- -- 992 900 657 100 100 100 === === === === === ===
REI REVENUES. Real estate information revenues were $59.0 million in 1999, $50.4 million in 1998 and $35.3 million in 1997. The increases in 1999 and 1998 were primarily due to a significant number of new businesses started and additional income earned from existing operations. These increases were partially offset by a decrease in business volume due to increases in mortgage interest rates. Real estate information profits were reduced by a $1.3 million pretax charge resulting from the settlement of a lawsuit during 1999. INVESTMENTS. Investment income increased 9.6% in 1999 and 16.2% in 1998 primarily because of increases in average balances invested. Investment gains in 1999, 1998 and 1997 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance. AGENT RETENTION. Premiums earned from agents were $629.5 million in 1999, $545.1 million in 1998 and $413.0 million in 1997. The amounts retained by agents, as a percentage of premiums, were 80.1%, 80.4% and 81.0% in the years 1999, 1998 and 1997, respectively. Amounts retained by title agents are based on contracts between agents and the title underwriters of the Company. The percentage that amounts retained by agents bears to agent revenues may vary from year to year because of the geographical mix of agent operations and the volume of title revenues. EMPLOYEE COSTS. Employee costs for the combined business segments increased 12.8% in 1999 and 33.2% in 1998. Employee costs for the title segment as a percentage of title operating revenues were 25.1%, 24.6% and 25.3% in 1999, 1998 and 1997, respectively. Employee costs for the REI segment as a percentage of REI revenues were 57.9%, 58.7% and 63.2% in 1999, 1998 and 1997, respectively. -8- 11 The number of persons employed by the Company at December 31, 1999, 1998 and 1997 was 5,751, 5,638 and 4,569, respectively. The increase in staff in 1999 and 1998 was primarily the result of acquisitions, increased REI volume and the expansion of the Company's automation and national marketing operations. Through automating operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. The Company has taken steps and will continue to align staff levels in response to lower order counts. OTHER OPERATING EXPENSES. Other operating expenses for the combined business segments increased 18.3% in 1999 and 24.8% in 1998. Other operating expenses for the title segment as a percentage of title operating revenues were 15.4%, 14.4% and 15.4% in 1999, 1998 and 1997, respectively. Other operating expenses for the REI segment as a percentage of REI revenues were 28.4%, 26.3% and 37.6% in 1999, 1998 and 1997, respectively. The overall increase in other operating expenses for the combined business segments in 1999 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. Expenses that increased in 1998, primarily due to changes in transaction volume, were premium taxes, cost of resale services and products, business promotion, rent and supplies. Other operating expenses also include delivery costs, policy forms, title plant expenses, telephone and travel. Most of these expenses follow, to varying degrees, the changes in transaction volume and revenues. The Company's labor and certain other operating costs are sensitive to inflation. To the extent inflation causes increases in the prices of homes and other real estate, premium revenues are also increased. Premiums are determined in part by the insured values of the transactions handled by the Company. TITLE LOSSES. Provisions for title losses, as a percentage of title premiums, fees and other revenues, were 4.5%, 4.4% and 4.5% in 1999, 1998 and 1997, respectively. The continued improvement in industry trends in claims and the Company's improved experience in claims have led to lower loss ratios in recent years. An increase in refinancing transactions, which results in lower loss exposure, also reduced loss ratios. Such transactions were at record levels in 1998. NONRECURRING CHARGE. A subsidiary in the REI segment was sold in early 1998. A pretax writeoff of $1.9 million of goodwill in the subsidiary was recorded in the fourth quarter of 1997. The subsidiary incurred after-tax operating losses of $1.0 million in 1997. INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 39.0%, 38.4% and 35.4% in 1999, 1998 and 1997, respectively. The 1999 and 1998 effective tax rates were higher primarily because nontaxable income from municipal bonds was significantly less in relation to pretax profits. THE YEAR 2000 ISSUE. Information technology is a crucial part of the Company's business. Accordingly, the Company has completed a comprehensive Year 2000 ("Y2K") readiness program that addressed challenges associated with the Y2K issue. As a result of this program, the Company encountered no major automation or business disruption due to Y2K issues. The Company continues to operate normally across all business units and geographies and will continue to monitor operations throughout 2000. The total costs incurred for the Y2K readiness program were $3.6 million. LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $57.9 million, $86.5 million and $36.0 million in 1999, 1998 and 1997, respectively. Internally generated cash flow has been the primary source of funds for additions to property and equipment, expanding operations, dividends to stockholders and other requirements. This source may be supplemented by bank borrowings. 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 4 and 5 to the consolidated financial statements. -9- 12 The liquidity of the Company itself, excluding Guaranty and its subsidiaries, is comprised of cash and investments aggregating $6.8 million and short-term liabilities of $1.6 million at December 31, 1999. The Company knows of no commitments or uncertainties which are likely to materially affect the ability of the Company and its subsidiaries to fund cash needs. The Company's capital resources, represented primarily by long-term debt of $6.0 million and stockholders' equity of $284.9 million at December 31, 1999, are considered adequate. During 1999 the Company financed a portion of various acquisitions through the issuance of Common Stock totaling $7.4 million. Acquisitions during 1999 have resulted in an increase in goodwill of $9.7 million. FORWARD LOOKING STATEMENTS. All statements included in this report which address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties including, among other things, changes in mortgage interest rates, employment levels, actions of competitors, changes in real estate markets, general economic conditions and legislation, primarily legislation related to insurance, and other risks and uncertainties discussed in the Company's filings with the Securities and Exchange Commission. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The discussion below about the Company's risk management strategies includes forward-looking statements that are subject to risk and uncertainties. Management's projections of hypothetical net losses in fair value of the Company's market rate sensitive instruments should certain potential changes in market rates occur is presented below. While the Company believes that the potential market rate changes are reasonably possible, actual results may differ. The Company's only material market risk in investments in financial instruments is in its debt securities portfolio. The Company invests primarily in marketable municipal, US government, corporate and mortgage-backed debt securities. The Company does not invest in financial instruments of a hedging or derivative nature. The Company has established policies and procedures to manage its exposure to changes in the fair value of its investments. These policies include 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 has classified all of its investments as available-for-sale. The fair value of the Company's investments in debt securities at December 31, 1999 was $237.4 million. Debt securities at December 31, 1999 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
Amortized Fair costs values --------- ------ ($000 Omitted) In one year or less .................... 1,650 1,697 After one year through five years ...... 67,499 67,483 After five years through ten years ..... 119,392 117,220 After ten years ........................ 45,918 42,530 Mortgage-backed securities ............. 8,806 8,509 ------- ------- 243,265 237,439 ======= =======
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. Based on the Company's debt securities portfolio and interest rates at December 31, 1999, a 100 basis point increase in interest rates would result in a decrease of approximately $12.4 million or 5.1% in the fair value of the 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. -10- 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required to be provided in this item is included in the Consolidated Financial Statements of the Company, including the Notes thereto, attached hereto as pages F-2 to F-17, and such information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -11- 14 P A R T III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the directors of the Company will be included in the proxy statement for the 2000 Annual Meeting of Stockholders (the "Proxy Statement") to be filed within 120 days after December 31, 1999, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will be included in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information, if any, regarding beneficial ownership of the Common Stock will be included in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions will be included in the Proxy Statement and is incorporated herein by reference. -12- 15 P A R T IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules The financial statements and financial statement schedules filed as part of this report are listed in the "Index to Consolidated Financial Statements" on Page F-1 hereof. All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1999. (c) Exhibits 3.1 - Certificate of Incorporation of the Registrant, as amended April 30, 1999 3.2 - By-Laws of the Registrant, as amended September 1, 1998 (incorporated by reference herein from Exhibit 3.2 of Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 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 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 27. - Financial Data Schedule * Indicates a management contract or compensation plan. -13- 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STEWART INFORMATION SERVICES CORPORATION (Registrant) By: /s/ Malcolm S. Morris ------------------------------------- Malcolm S. Morris, Co-Chief Executive Officer and Chairman of the Board of Directors By: /s/ Stewart Morris, Jr. ------------------------------------- Stewart Morris, Jr., Co-Chief Executive Officer, President and Director By: /s/ Max Crisp ------------------------------------- Max Crisp, Vice President-Finance, Secretary, Treasurer, Director and Principal Financial and Accounting Officer Dated: March 16, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ Max Crisp Director March 16, 2000 - ------------------------ -------------- (Max Crisp) /s/ E. Douglas Hodo Director March 16, 2000 - ------------------------ -------------- (E. Douglas Hodo) /s/ C. M. Hudspeth Director March 16, 2000 - ------------------------ -------------- (C. M. Hudspeth) /s/ Malcolm S. Morris Director March 16, 2000 - ------------------------ -------------- (Malcolm S. Morris) /s/ Stewart Morris, Jr. Director March 16, 2000 - ------------------------ -------------- (Stewart Morris, Jr.) -14- 17 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, 1999, 1998 and 1997 F-3 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 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 of Stewart Information Services Corporation We have audited the accompanying consolidated balance sheets of Stewart Information Services Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, retained earnings and comprehensive earnings and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of Stewart Information Services Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Houston, Texas February 14, 2000 except for Note 20, which is as of March 13, 2000 F-2 19 CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE EARNINGS
Years ended December 31 1999 1998 1997 ---------- ---------- ---------- ($000 Omitted) REVENUES Title premiums, fees and other revenues ........... 991,649 899,673 657,298 Real estate information services .................. 59,039 50,372 35,320 Investment income ................................. 20,300 18,515 15,929 Investment gains - net ............................ 266 201 363 ---------- ---------- ---------- 1,071,254 968,761 708,910 EXPENSES Amounts retained by agents ........................ 504,201 438,338 334,653 Employee costs .................................... 283,073 250,966 188,385 Other operating expenses .......................... 168,975 142,826 114,422 Title losses and related claims ................... 44,187 39,226 29,794 Depreciation and amortization ..................... 18,068 14,584 12,115 Interest .......................................... 1,298 1,424 1,343 Minority interests ................................ 4,887 5,070 2,614 Nonrecurring charge ............................... -- -- 1,905 ---------- ---------- ---------- 1,024,689 892,434 685,231 Earnings before taxes ................................ 46,565 76,327 23,679 Income taxes ......................................... 18,143 29,289 8,391 ---------- ---------- ---------- NET EARNINGS ......................................... 28,422 47,038 15,288 Retained earnings at beginning of year ............... 190,363 145,140 131,496 Cash dividends on Common Stock ($.16, $.14 and $.13 per share) ............................... (2,158) (1,815) (1,644) Stock dividend ....................................... (7,173) -- -- ---------- ---------- ---------- Retained earnings at end of year ..................... 209,454 190,363 145,140 ========== ========== ========== Average number of shares outstanding - assuming dilution (000 omitted) ................... 14,606 14,154 13,794 Earnings per share - basic ........................... 1.96 3.37 1.12 EARNINGS PER SHARE - DILUTED ......................... 1.95 3.32 1.11 ========== ========== ========== Comprehensive earnings: Net earnings ......................................... 28,422 47,038 15,288 Changes in unrealized investment (losses) gains, net of taxes of ($5,269), $858 and $1,409 ......... (9,785) 1,593 2,616 ---------- ---------- ---------- COMPREHENSIVE EARNINGS ............................... 18,637 48,631 17,904 ========== ========== ==========
See notes to consolidated financial statements F-3 20 CONSOLIDATED BALANCE SHEETS
December 31 1999 1998 -------- -------- ($000 Omitted) ASSETS Cash and cash equivalents ........................................ 36,803 44,883 Short-term investments ........................................... 67,455 59,446 Investments in debt and equity securities, at market: Statutory reserve funds ...................................... 185,087 164,554 Other ........................................................ 57,669 62,758 -------- -------- 242,756 227,312 Receivables: Notes ........................................................ 8,429 8,137 Premiums from agents ......................................... 17,478 16,051 Other ........................................................ 27,052 27,347 Less allowance for uncollectible amounts ..................... (4,379) (4,803) -------- -------- 48,580 46,732 Property and equipment, at cost: Land ......................................................... 2,062 2,335 Buildings .................................................... 6,531 6,476 Furniture and equipment ...................................... 118,978 97,111 Less accumulated depreciation and amortization ............... (81,671) (69,530) -------- -------- 45,900 36,392 Title plants, at cost ............................................ 26,258 23,608 Real estate, at lower of cost or net realizable value ............ 2,073 2,202 Investments in investees, on an equity basis ..................... 3,761 7,368 Goodwill, less accumulated amortization of $8,661 and $6,995 ..... 31,641 23,615 Deferred income taxes ............................................ 12,378 10,633 Other assets ..................................................... 18,136 16,290 -------- -------- 535,741 498,481 ======== ======== LIABILITIES Notes payable, including $5,971 and $ 8,894 long-term portion ..................................................... 19,054 16,194 Accounts payable and accrued liabilities ......................... 40,851 42,615 Estimated title losses ........................................... 183,787 171,763 Income taxes ..................................................... 452 1,963 Minority interests ............................................... 6,673 5,503 Contingent liabilities and commitments STOCKHOLDERS' EQUITY Common - $1 par, authorized 30,000,000, issued and outstanding 13,645,527 and 13,079,930 ........................ 13,646 6,540 Class B Common - $1 par, authorized 1,500,000, issued and outstanding 1,050,012 ......................................... 1,050 525 Additional paid-in capital ....................................... 64,430 56,886 Retained earnings ................................................ 209,454 190,363 Accumulated other comprehensive earnings ......................... (3,656) 6,129 -------- -------- Total stockholders' equity ($19.39 and $18.43 per share) ..... 284,924 260,443 -------- -------- 535,741 498,481 ======== ========
See notes to consolidated financial statements. F-4 21 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1999 1998 1997 -------- -------- -------- ($000 Omitted) Cash provided by operating activities (Note) ................... 57,875 86,467 35,959 Investing activities: Purchases of property and equipment and title plants-net ............................................... (25,307) (20,473) (13,209) Proceeds from investments matured and sold .................. 46,536 65,770 40,133 Purchases of investments .................................... (82,338) (104,017) (48,554) Increases in notes receivable ............................... (6,118) (2,316) (2,644) Collections on notes receivable ............................. 5,826 2,141 1,006 Proceeds from sale of equity investment-net ................. 6,009 -- -- Cash paid for the acquisition of subsidiaries-net ........... (7,026) (5,886) (3,592) -------- -------- -------- Cash used by investing activities .............................. (62,418) (64,781) (26,860) Financing activities: Dividends paid .............................................. (2,158) (1,815) (1,644) Distribution to minority interests .......................... (4,071) (4,031) (2,131) Proceeds from issuance of stock ............................. 65 1,543 135 Proceeds of notes payable ................................... 10,056 9,150 10,688 Payments on notes payable ................................... (7,429) (12,041) (4,240) -------- -------- -------- Cash (used) provided by financing activities ................... (3,537) (7,194) 2,808 -------- -------- -------- (Decrease) increase in cash and cash equivalents ............... (8,080) 14,492 11,907 ======== ======== ======== Note: Reconciliation of net earnings to the above amounts Net earnings ................................................ 28,422 47,038 15,288 Add (deduct): Depreciation and amortization ............................ 18,068 14,584 12,115 Provisions for title losses in excess of payments ........ 11,474 14,185 6,460 Provision for uncollectible amounts-net .................. (424) (749) (1,118) (Increase) decrease in accounts receivable-net ........... (867) (12,473) 2,660 (Decrease) increase in accounts payable and accrued liabilities-net ............................... (1,527) 16,577 1,419 Provision (benefit) for deferred income taxes ............ 3,524 4,142 (1,886) (Decrease) increase in income taxes payable .............. (1,512) 599 945 Minority interest expense ................................ 4,887 5,070 2,614 Equity in net earnings of investees ...................... (1,072) (1,477) (1,964) Realized investment gains-net ............................ (266) (201) (363) Stock bonuses ............................................ 613 577 409 Increase in other assets ................................. (2,070) (1,952) (2,963) Nonrecurring charge ...................................... -- -- 1,905 Other-net ................................................ (1,375) 547 438 -------- -------- -------- Cash provided by operating activities .......................... 57,875 86,467 35,959 ======== ======== ======== Supplemental information: Income taxes paid ........................................... 16,018 26,511 7,636 Interest paid ............................................... 1,187 1,478 1,222
See notes to consolidated financial statements. F-5 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Three years ended December 31, 1999) NOTE 1 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The accompanying financial statements were prepared by management which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles, including management's best judgments and estimates, with due consideration given to materiality. Actual results could differ from estimates. B. RECLASSIFICATION. Certain prior year amounts in the consolidated financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. C. 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 is made for minority interests. D. 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, in accordance with practices required or permitted by regulatory authorities. The statutory accounts are restated in consolidation to conform to generally accepted accounting principles. In restating to generally accepted accounting principles, the amounts for statutory premium reserve and reserve for reported title losses are eliminated and, in substitution, amounts are established for estimated title losses (see below). The net effect, after providing for 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. REVENUE RECOGNITION. Revenues from services rendered in closing and insuring titles are considered earned at the time of the closing of the related real estate transactions. Revenues from services rendered in providing real estate information are considered earned at the time the service is performed or the work product is delivered to the customer. F. TITLE LOSSES AND RELATED CLAIMS. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. For losses under $750,000 each, the Company estimates the aggregate amount that will be paid in future years on title policies issued in the current year. The estimated amount is charged to earnings currently (when the related revenues are recognized). In making the estimates, the Company uses, among other things, moving average ratios of recent actual policy loss payment experience, net of recoveries, to premium revenues. Policy losses in excess of $750,000 each are individually evaluated. A reserve for incurred but not reported major losses is also maintained. Escrow and other losses incurred in office operations are accounted for separately. Amounts shown as the Company's estimated liability for future loss payments are continually reviewed for reasonableness and adjusted as appropriate. 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. I. INVESTMENTS. The Company has classified all of its investments as available-for-sale. Realized gains and losses on sales of investments are determined primarily 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. F-6 23 J. 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. K. 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 which 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. L. GOODWILL. Goodwill is the excess of the purchase price over the fair value of net assets of subsidiaries acquired and is amortized using the straight-line method by charges to earnings over 10 to 40 years. M. LONG-LIVED ASSETS. The Company continuously reviews the carrying values of its title plants, goodwill and other long-lived assets for possible impairment. In reviewing for impairment of goodwill, the Company considers adverse market or other conditions. The Company determines the fair value of goodwill by calculating the discounted value of projected cash flow from operations and premium income. Where appropriate, the book amounts are reduced to fair market values. N. FAIR VALUES. The fair values of financial instruments, including cash, cash equivalents, notes receivable, notes payable, accounts payable and commitments, 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. O. 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. P. COMPREHENSIVE INCOME. As of January 1, 1998, the Company adopted FAS 130 "Reporting Comprehensive Income". The Company's comprehensive income includes net earnings and all non-owner related changes to stockholders' equity, which is primarily unrealized gains and losses on investments. Q. DERIVATIVES AND HEDGING. The Company does not invest in hedging or derivative instruments nor does it intend to do so in the future. Accordingly, FAS 133 "Accounting for Derivative Instruments and Hedging Activities", which became becomes effective January 1, 2001, will have no impact on the consolidated financial statements. NOTE 2 NONRECURRING CHARGE. During the fourth quarter of 1997, the Company recorded a pretax charge of $1,905,000 representing the writeoff of goodwill in a subsidiary located in England that was later sold in early 1998. This subsidiary was included in the REI segment of the Company's operations until its sale. NOTE 3 INCOME TAXES. The following reconciles federal income taxes computed at the statutory rate with income taxes as reported.
1999 1998 1997 ------- ------- ------- ($000 Omitted) Expected income taxes at 35% ............. 16,298 26,714 8,288 State income taxes ....................... 1,900 2,932 537 Tax effect of permanent differences: Tax-exempt interest .................. (1,951) (1,779) (1,640) Nondeductible items .................. 616 661 558 Equity income ........................ (375) (517) (687) Minority interests ................... 1,710 1,775 915 Other - net .......................... (55) (497) 420 ------- ------- ------- Income taxes ............................. 18,143 29,289 8,391 ======= ======= ======= Effective income tax rate (%) ............ 39.0 38.4 35.4 ======= ======= =======
F-7 24 Deferred tax assets and liabilities at December 31, 1999 and 1998 were as follows:
1999 1998 ------- ------- ($000 Omitted) Deferred tax assets: Book over tax title loss provisions ...... 5,942 10,389 Unrealized losses on investments ......... 1,968 -- Accruals not currently deductible ........ 964 1,035 Net operating losses ..................... 892 972 Allowance for uncollectible amounts ...... 655 777 Book over tax depreciation ............... 1,499 898 Investments in partnerships .............. 68 -- Other .................................... 2,064 2,103 ------- ------- 14,052 16,174 Less valuation allowance ................. (1,008) (1,008) ------- ------- 13,044 15,166 Deferred tax liabilities: Unrealized gains on investments .......... -- (3,301) Investments in partnerships .............. -- (835) Other .................................... (666) (397) ------- ------- (666) (4,533) ------- ------- Net deferred tax assets ..................... 12,378 10,633 ======= =======
The Company's valuation allowance relates to portions of certain subsidiary operating loss carryforwards and other deferred tax assets. Management believes future earnings will be sufficient to permit the Company to realize net deferred tax assets. There were deferred tax expenses of $3,524,000 in 1999 and $4,142,000 in 1998. There was a deferred tax benefit of $1,886,000 in 1997. NOTE 4 RESTRICTIONS ON CASH AND INVESTMENTS. The statutory reserve funds included in the accompanying financial statements are maintained to comply with legal requirements for statutory premium reserves and state deposits. These funds are not available for any other purpose. A substantial majority of investments and cash at each year end was held by the Company's title insurer subsidiaries. Generally, the types of investments a title insurer can make are subject to legal restrictions. Furthermore, the transfer of funds by a title insurer to its parent or subsidiary operations, as well as other related party transactions, are restricted by law and generally require the approval of state insurance authorities. NOTE 5 DIVIDEND RESTRICTIONS. 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 2000 is $38,765,000. Guaranty paid dividends significantly less than the maximum legal limits in 1999, 1998 and 1997. Dividends from Guaranty were also voluntarily restricted primarily to maintain statutory surplus and liquidity at competitive levels. The ability of a title insurer to pay claims can significantly affect the decision of lenders and other customers when buying a policy from a particular insurer. F-8 25 NOTE 6 INVESTMENTS. The amortized costs and market values of investments in debt and equity securities at December 31 follow:
1999 1998 --------------------- --------------------- Amortized Market Amortized Market costs values costs values --------- ------ --------- ------ ($000 Omitted) Debt securities: Municipal ................... 134,298 133,068 128,745 133,533 Mortgage-backed ............. 8,806 8,509 4,131 4,233 US Government ............... 31,716 30,960 23,325 24,086 Corporate and utilities ..... 68,445 64,902 56,710 59,796 Equity securities .............. 5,115 5,317 4,971 5,664 ------- ------- ------- ------- 248,380 242,756 217,882 227,312 ======= ======= ======= =======
Gross unrealized gains and losses at December 31 were:
1999 1998 --------------------- --------------------- Gains Losses Gains Losses ------- ------- ------- ------- ($000 Omitted) Debt securities: Municipal ................... 1,028 2,258 5,006 218 Mortgage-backed ............. 42 339 103 1 US Government ............... 73 829 789 28 Corporate and utilities ..... 201 3,744 3,182 96 Equity securities .............. 641 439 749 56 ------- ------- ------- ------- 1,985 7,609 9,829 399 ======= ======= ======= =======
Debt securities at December 31, 1999 mature, according to their contractual terms, as follows (actual maturities may differ because of call or prepayment rights):
Amortized Market costs values --------- ------- ($000 Omitted) In one year or less .................... 1,650 1,697 After one year through five years ...... 67,499 67,483 After five years through ten years ..... 119,392 117,220 After ten years ........................ 45,918 42,530 Mortgage-backed securities ............. 8,806 8,509 ------- ------- 243,265 237,439 ======= =======
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. F-9 26 NOTE 7 INVESTMENT INCOME. Income from investments and realized gains and losses from sales of investments for the three years follow:
1999 1998 1997 ------- ------- ------- ($000 Omitted) Income: Debt securities ............................. 12,837 12,143 11,938 Short-term investments, cash equivalents and other ................................. 7,463 6,372 3,991 ------- ------- ------- 20,300 18,515 15,929 ======= ======= ======= Realized gains and losses: Gains ........................................ 536 1,923 571 Losses ....................................... (270) (1,722) (208) ------- ------- ------- 266 201 363 ======= ======= =======
The sales of securities resulted in proceeds of $32,380,000 in 1999, $54,368,000 in 1998 and $30,870,000 in 1997. Expenses assignable to investment income were insignificant. There were no significant investments at December 31, 1999 that did not produce income during the year. NOTE 8 NOTES PAYABLE.
1999 1998 ------ ------ ($000 Omitted) Banks Primarily unsecured, 6.6% to 8.5%, varying payments .... 16,900 13,174 Other than banks .......................................... 2,154 3,020 ------ ------ 19,054 16,194 ====== ======
The above notes are due $13,083,000 in 2000, $4,237,000 in 2001, $651,000 in 2002, $796,000 in 2003, $85,000 in 2004 and $202,000 subsequent to 2004. F-10 27 NOTE 9 ESTIMATED TITLE LOSSES. Provisions accrued, payments made and liability balances for the three years follow:
1999 1998 1997 -------- -------- -------- ($000 Omitted) Balances at January 1 ........... 171,763 156,791 150,331 Provisions ................... 44,187 39,226 29,794 Payments ..................... (32,628) (25,041) (23,334) Reserve balance acquired ..... 550 787 -- Decrease in salvage .......... (85) -- -- -------- -------- -------- Balances at December 31 ......... 183,787 171,763 156,791 ======== ======== ========
Provisions include amounts related to the current year of approximately $43,869,000, $39,087,000 and $29,681,000 for 1999, 1998 and 1997, respectively. Payments related to the current year, including escrow and other loss payments, were approximately $8,501,000, $5,977,000 and $5,991,000 for 1999, 1998 and 1997, respectively. The above current year provision totals include provisions made for claims which are based on historical ratios of losses-to-premium revenues. See Note 1(F) for the principles followed in accounting for title losses and related claims. NOTE 10 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 which 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, 1999 and 1998, 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-11 28 NOTE 11 CHANGES IN COMMON STOCK. Changes in stock and additional paid-in capital for the three years follow:
Class B Additional Common Common paid-in Stock Stock capital ------- ------- ---------- ($000 Omitted) Balances at December 31, 1996 ................. 6,216 525 50,833 Acquisitions ............................... 137 -- 1,634 Stock bonuses and other .................... 19 -- 390 Exercise of stock options .................. 9 -- 126 Foreign currency translation ............... -- -- (61) ------- ------- ------- Balances at December 31, 1997 ................. 6,381 525 52,922 Acquisitions ............................... 41 -- 1,659 Stock bonuses and other .................... 17 -- 560 Exercise of stock options .................. 101 -- 1,442 Tax benefit of stock options exercised ..... -- -- 828 Foreign currency translation ............... -- -- 51 Treasury stock ............................. -- -- (576) ------- ------- ------- Balances at December 31, 1998 ................. 6,540 525 56,886 Stock dividend ............................. 6,648 525 -- Acquisitions ............................... 441 -- 6,918 Stock bonuses and other .................... 14 -- 599 Exercise of stock options .................. 3 -- 62 Tax benefit on stock options exercised ..... -- -- 30 Foreign currency translation ............... -- -- (65) ------- ------- ------- Balances at December 31, 1999 ................. 13,646 1,050 64,430 ======= ======= =======
NOTE 12 STOCK OPTIONS. A summary of the status of the Company's fixed stock option plans for the three years follows:
- ---------------------------------------------------------- Exercise Shares (1) Prices(1)(2) - ---------------------------------------------------------- ($) December 31, 1996 ......... 390,200 7.13 Granted ................ 76,800 9.93 Exercised .............. (17,000) 7.89 Forfeited .............. (13,800) 6.79 - ------------------------------------------------------ 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 - ------------------------------------------------------
(1) Restated for a two-for-one stock split in May 1999. (2) Weighted average F-12 29 At December 31, 1999, 1998 and 1997 there were 380,012, 280,700 and 373,676 options, respectively, exercisable. The weighted average fair values of options granted during the years 1999, 1998 and 1997 were $8.50, $7.18 and $3.40, respectively. The following summarizes information about fixed stock options outstanding at December 31, 1999:
- ------------------------------------------------------------------------------------------------ Range of exercise prices ($) Total 4.59 to 9.75 to 18.78 to 4.59 to 7.69 10.75 20.22 20.22 ---------- ---------- ---------- ---------- Options outstanding: Shares ................................... 92,800 128,200 171,400 392,400 Remaining contractual life-years(1) ...... 2.0 6.0 7.0 5.5 Exercise price ($) (1) ................... 4.68 10.06 19.31 12.81 Options exercisable: Shares ................................... 92,800 115,812 171,400 380,012 Exercise price ($) (1) ................... 4.68 10.10 19.31 12.93 - ------------------------------------------------------------------------------------------------
(1) Weighted average The Company applies APB 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Under FAS 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model. The Company assumed a dividend yield of 0.8%, an expected life of five to ten years for each option, expected volatility of 34.1% and risk-free interest rates between 4.7% and 5.7% for the years 1999, 1998 and 1997. 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:
1999 1998 1997 ------ ------ ------ ($000 Omitted) Net earnings: As reported ..................... 28,422 47,038 15,288 Pro forma ....................... 27,943 46,615 15,119 Earnings per share: (1) Net earnings-basic .............. 1.96 3.37 1.12 Net earnings-diluted ............ 1.95 3.32 1.11 Pro forma-assuming dilution ..... 1.91 3.30 1.10
(1) Restated for a two-for-one stock split in May 1999. NOTE 13 EARNINGS PER SHARE. The Company's basic earnings per share figures were 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 related to its stock option plans. In calculating the effect of the options and determining a figure for diluted earnings per share, the average number of shares used in calculating basic earnings per share was increased by 125,000 in 1999, 182,000 in 1998 and 136,000 in 1997. F-13 30 NOTE 14 LEASES. The Company's expense for leased office space was $28,194,000 in 1999, $23,131,000 in 1998 and $20,520,000 in 1997. These are noncancelable, operating leases expiring over the next seven years. The future minimum lease payments are as follows (stated in thousands of dollars): 2000................. 25,657 2001................. 21,357 2002................. 16,334 2003................. 13,067 2004................. 6,625 2005 and after....... 4,220 ------ 87,260 ======
NOTE 15 CONTINGENT LIABILITIES AND COMMITMENTS. The Company makes separate provisions for individual title losses over $750,000 and reviews claims in excess of this amount asserted against Guaranty when evaluating the adequacy of recorded reserves. Claims have been made at December 31, 1999 against Guaranty for amounts in excess of $750,000 for which no provision was made. Management believes, with the advice of counsel, the loss on these claims (1) will be resolved for less than $750,000 each or (2) cannot be reasonably estimated. Management believes any loss on these claims which cannot be estimated at December 31, 1999 will not be material in relation to the consolidated financial condition of the Company. 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 $2,236,000 at December 31, 1999. Management believes adequate provisions have been made for any losses resulting from these commitments. NOTE 16 REINSURANCE. As is the industry practice, the Company cedes risk to other underwriters in excess of certain underwriting limits. However, the Company remains liable if the reinsurer should fail to satisfy its obligations. The Company also assumes risk from other underwriters. A payment on an assumed risk or a recovery on a ceded risk is rare in the experience of the Company and the industry. The Company has not paid or recovered any reinsured losses during the three years ended December 31, 1999. The total amount of premiums for assumed and ceded risks was less than one percent of title premiums, fees and other revenues in each of the last three years. NOTE 17 EQUITY IN INVESTEES. Certain summarized aggregate financial information for investees follows:
1999 1998 1997 ------ ------ ------ ($000 Omitted) For the year: Revenues .................. 29,164 85,706 66,760 Net earnings .............. 3,278 5,360 4,808 As of December 31: Total assets ............. 13,234 47,331 Stockholders' equity ..... 5,230 19,760
F-14 31 NOTE 18 SEGMENT INFORMATION. The Company's two reportable segments are title and real estate information. The segments significantly influence business to each other because of the nature of their operations and their common customers. The title segment includes the functions of searching, examining, closing and insuring the condition of the title to real property. The real estate information segment provides services to the real estate and mortgage industries primarily through the electronic delivery of services needed for settlement. These services include title reports, flood determinations, property appraisals, document preparation, credit reports and other real estate information. In addition, this segment includes services related to tax-deferred exchanges, surveys, the accounting and operating systems of title agents and government authorities and the construction of title plants. The segments provide services through a network of offices, including both direct operations and agents, throughout the United States. The operations in the several international markets in which the Company does business are generally insignificant to consolidated results. Under the Company's internal reporting and accountability systems, 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 relating to the real estate information segment. These expenditures are charged to that segment. All investment income is included in the title segment as it is generated primarily from the investments of the title underwriting operations.
Real estate Title information Total --------- ----------- --------- ($000 omitted) Revenues: 1999.................... 1,012,215 59,039 1,071,254 1998.................... 918,389 50,372 968,761 1997.................... 673,590 35,320 708,910 Depreciation: 1999.................... 13,911 4,157 18,068 1998.................... 11,480 3,104 14,584 1997.................... 7,858 4,257 (1) 12,115 Pretax earnings (loss): 1999.................... 43,615 2,950 (2) 46,565 1998.................... 73,198 3,129 76,327 1997.................... 29,145 (5,466)(1) 23,679 Identifiable assets: 1999.................... 496,191 39,550 535,741 1998.................... 463,030 35,451 498,481
(1) Includes a nonrecurring pretax charge of $1,905,000 for a writeoff of goodwill in a subsidiary that was sold in 1998. (2) Includes a pretax charge of $1,319,000 resulting from the settlement of a lawsuit. F-15 32 NOTE 19 Quarterly financial information (unaudited).
Mar 31 June 30 Sept 30 Dec 31 ------- ------- ------- ------- ($000 Omitted, except per share) Revenues: 1999 ............................. 247,878 296,093 266,381 260,902 1998 ............................. 197,042 235,439 250,425 285,855 Net earnings: 1999 ............................. 9,600 11,726 6,098 998 1998 ............................. 8,625 11,258 14,048 13,107 Earnings per share-diluted: (1) 1999 ............................. .67 .80 .41 .07 1998 ............................. .61 .80 .99 .92
(1) Restated for a two-for-one stock split in May 1999. NOTE 20 SUBSEQUENT EVENT. On March 13, 2000, the Company's Board of Directors approved a plan to repurchase up to 5 percent (680,000 shares) of the Company's currently issued and outstanding Common Stock. The Company's regular quarterly cash dividend will be discontinued. The amount and timing of any share repurchases will depend on, among other factors, the market performance of the shares, the availability and alternative uses of the Company's funds and Securities and Exchange Commission regulations. Purchases under the Plan are currently authorized through December 31, 2001. F-16 33 STEWART TITLE GUARANTY COMPANY STEWART TITLE INSURANCE COMPANY Principal Underwriters of Stewart Information Services Corporation UNCONSOLIDATED STATUTORY BALANCE SHEETS From statutory Annual Statements as filed (unaudited)
Stewart Title Stewart Title December 31, 1999 Guaranty Company Insurance Company - ----------------- ---------------- ----------------- ($000 Omitted) Admitted assets Bonds ..................................................... 218,569 22,100 Stocks - investments in affiliates ........................ 128,015 1,384 Stocks - other ............................................ 6,277 -- Cash and bank deposits .................................... 40,264 3,402 Short-term investments .................................... 2,994 498 Title plants .............................................. 4,282 199 Title insurance premiums, fees and other receivables ...... 12,534 256 Other ..................................................... 9,030 1,495 ------- -------- 421,965 29,334 ======= ======== Liabilities, surplus and other funds Reserve for title losses .................................. 30,653 5,636 Statutory premium reserve ................................. 169,674 8,384 Other ..................................................... 27,811 1,192 ------- -------- 228,138 15,212 Surplus as regards policyholders (Note) ..................... 193,827 14,122 ------- -------- 421,965 29,334 ======= ======== - ---------------------------------------------------------------------------------------------- Consolidated stockholder's equity (unaudited), based on generally accepted accounting principles (GAAP), for Stewart Title Guaranty Company at December 31, 1999 was ($000 omitted).......................................... $243,955 ========
Note: The amount shown above for stockholder's equity exceeds policyholder surplus primarily because under GAAP the statutory premium reserve and reserve for reported title losses are eliminated and estimated title loss reserves are substituted, net of applicable income taxes. F-17 34 SCHEDULE I STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) INCOME AND RETAINED EARNINGS INFORMATION
Year Ended December 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Revenues Investment income ........................................ $ 442 $ 583 $ 701 Other income ............................................. 1 -- 3 --------- --------- --------- 443 583 704 Expenses Employee costs ........................................... 123 229 201 Other operating expenses ................................. 2,840 3,006 2,098 Depreciation and amortization ............................ 106 92 90 --------- --------- --------- 3,069 3,327 2,389 Loss before taxes and equity in earnings of investees ....... (2,626) (2,744) (1,685) Income taxes (benefit) ...................................... (811) (566) (502) Equity in earnings of investees ............................. 30,237 49,216 16,471 --------- --------- --------- Net income .................................................. 28,422 47,038 15,288 Retained earnings at beginning of year ...................... 190,363 145,140 131,496 Cash dividends on Common Stock ($.16, $.14 and $.13 per share) .................................................. (2,158) (1,815) (1,644) Stock dividend .............................................. (7,173) -- -- --------- --------- --------- Retained earnings at end of year ............................ $ 209,454 $ 190,363 $ 145,140 ========= ========= =========
See accompanying note to financial statements. (Schedule continued on following page.) S-1 35 SCHEDULE I (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) BALANCE SHEET INFORMATION
December 31, ---------------------- 1999 1998 --------- --------- (In thousands) Assets Cash and cash equivalents ........................................................ $ -- $ 13 --------- --------- Short-term investments ........................................................... 6,762 11,439 --------- --------- Receivables: Notes, including $6,618 and $6,918 from affiliates ............................. 7,168 7,471 Other, including $11,846 and $3,275 from affiliates ............................ 12,079 4,038 Less allowance for uncollectible amounts ....................................... (20) (20) --------- --------- 19,227 11,489 Furniture and equipment at cost .................................................. 246 202 Less accumulated depreciation .................................................... (115) (104) --------- --------- 131 98 Title plants, at cost ............................................................ 48 48 Investments in investees ......................................................... 259,328 238,095 Other assets ..................................................................... 4,556 4,313 --------- --------- $ 290,052 $ 265,495 ========= ========= Liabilities Notes payable, including $ - and $ - from affiliates ........................... $ 1,097 $ 1,097 Accounts payable and accrued liabilities ....................................... 4,031 3,955 Contingent liabilities and commitments Stockholders' equity Common - $1 par, authorized 30,000,000 issued and outstanding 13,645,527 and 13,079,930 ..................................................................... 13,646 6,540 Class B Common - $1 par, authorized 1,500,000 and outstanding 1,050,012 .......... 1,050 525 Additional paid-in-capital ....................................................... 64,430 56,886 Retained earnings (1) ............................................................ 209,454 190,363 Accumulated other comprehensive earnings ......................................... (3,656) 6,129 --------- --------- Total stockholders' equity ($19.39 and $18.43 per share) .................. 284,924 260,443 --------- --------- $ 290,052 $ 265,495 ========= =========
(1) Includes undistributed earnings of subsidiaries of $212,249 in 1999 and $184,179 in 1998. See accompanying note to financial statements. (Schedule continued on following page.) S-2 36 SCHEDULE I (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) CASH FLOWS INFORMATION
Year Ended December 31, ------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Cash flow from operating activities (Note) .................... $ (2,978) $ (2,805) $ (3,645) Cash flow from investing activities: Proceeds from investments sold ............................. 4,677 -- 1,619 Purchases of investments, excluding mortgage loans ......... -- (2,438) -- Dividends received from unconsolidated subsidiaries ........ 5,090 7,633 4,583 Increases in mortgages and other notes receivable .......... (542) (300) (364) Collections on mortgages and other notes receivable ........ 303 265 23 Cash paid for the acquisition of subsidiaries .............. (4,470) (2,500) (900) -------- -------- -------- Cash provided by investing activities ......................... 5,058 2,660 4,961 -------- -------- -------- Cash flow from financing activities: Dividends paid ............................................. (2,158) (1,815) (1,644) Proceeds of notes payable .................................. -- 417 106 Proceeds from issuance of stock ............................ 65 1,543 135 -------- -------- -------- Cash (used) provided by financing activities .................. (2,093) 145 (1,403) -------- -------- -------- Decrease in cash and cash equivalents ......................... $ (13) $ -- $ (87) ======== ======== ======== Note: Reconciliation of net income to the above amounts: Net income ................................................. $ 28,422 $ 47,038 $ 15,288 Add (deduct): Depreciation and amortization ........................... 106 92 90 Increase in accounts receivable - net ................... (727) (1,060) (3,267) Increase (decrease) in accounts payable and accrued liabilities - net .................................... 905 508 671 Equity in net earnings of investees ..................... (30,237) (49,216) (16,471) Stock bonuses paid ...................................... 613 577 409 Treasury stock acquired ................................. -- (576) -- Other - net ............................................. (2,060) (152) (365) -------- -------- -------- Cash used by operating activities ............................. $ (2,978) $ (2,805) $ (3,645) ======== ======== ======== Supplemental information: Income taxes paid ........................................ -- -- -- Interest paid ............................................ -- -- --
See accompanying note to financial statements. (Schedule continued on following page.) S-3 37 SCHEDULE I (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) NOTE TO FINANCIAL STATEMENT INFORMATION The Registrant operates as a holding company transacting substantially all business through its subsidiaries. The 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 1998 and 1997 Parent Company financial statements have been reclassified for comparative purposes. Net earnings, as previously reported, were not affected. Total dividends received from unconsolidated subsidiaries for 1999, 1998 and 1997 were $13,090,000, $90,000 and $9,633,000, respectively. S-4 38 SCHEDULE II STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS December 31, 1999
Col. A Col. B Col. C Col. D Col. E - ------------------------------------------ ------------ -------------------------- --------------- ------------ Additions -------------------------- Balance Charged Charged to at to other Balance beginning cost and accounts -Deductions- at end Description of period expenses describe described of period - ------------------------------------------ ------------ ------------ ------------ --------------- ------------ Stewart Information Services Corporation and subsidiaries: Year ended December 31, 1997: Estimated title losses .................. $150,331,563 $ 29,794,444 -- $ 23,334,625 (A) $156,791,382 Allowance for uncollectible amounts ..... 6,669,591 1,596,000 -- 2,713,742 (B) 5,551,849 Year ended December 31, 1998: Estimated title losses .................. 156,791,382 39,226,182 787,000 (C) 25,041,558 (A) 171,763,006 Allowance for uncollectible amounts ..... 5,551,849 2,110,000 -- 2,859,144 (B) 4,802,705 Year ended December 31, 1999: Estimated title losses .................. 171,763,006 44,186,778 550,000 (C) 32,712,781 (A) 183,787,003 Allowance for uncollectible amounts ..... 4,802,705 792,000 -- 1,215,232 (B) 4,379,473 Stewart Information Services Corporation - Parent: Year ended December 31, 1997: Allowance for uncollectible amounts ...... $ 20,000 -- -- -- $ 20,000 Year ended December 31, 1998: Allowance for uncollectible amounts ...... 20,000 -- -- -- 20,000 Year ended December 31, 1999: Allowance for uncollectible amounts ...... 20,000 -- -- -- 20,000
(A) Represents payments of policy losses and loss adjustment expenses during the year, less salvage collections. (B) Represents uncollectible accounts written off. (C) Represents estimated title loss reserve acquired. S-5 39 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 3.1 - Certificate of Incorporation of the Registrant, as amended April 30, 1999 3.2 - By-Laws of the Registrant, as amended September 1, 1998 (incorporated by reference herein from Exhibit 3.2 of Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 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 21 - Subsidiaries of the Registrant 23 - Consent of Independent Certified Public Accountant, including consent of incorporation by reference of their reports to previously filed Securities Act registration statements 27 - Financial Data Schedule
EX-3.1 2 CERTIFICATED OF INCORPORATION - APRIL 30, 1999 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION STEWART INFORMATION SERVICES CORPORATION, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is STEWART INFORMATION SERVICES CORPORATION. The date of filing its original Certificate of Incorporation with the Secretary of State was March 25, 1970. 2. This Restated Certificate of Incorporation restates and integrates and also amends the Certificate of Incorporation to read as herein set forth in full: CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION FIRST: The name of the corporation is Stewart Information Services Corporation. SECOND: The registered office of the corporation in the State of Delaware is located at 100 West Tenth Street in the City of Wilmington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, 100 West Tenth Street, Wilmington, Delaware. 2 THIRD: The nature of the business, objects and purposes to be transacted, promoted or carried on by the corporation are: The business of accumulating and dealing in information of all types, the guaranteeing of such information, the providing of services related to real estate and other services by use of such information or otherwise, either directly or through subsidiaries or affiliates; and To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. Fourth: The total number of shares of stock which the corporation shall have authority to issue is 6,500,000, of which 5,000,000 shares of the par value of $1 each, amounting in the aggregate to $5,000,000, shall be designated Common Stock, and of which 1,500,000 shares of the par value of $1 each, amounting in the aggregate to $1,500,000, shall be designated Class B Common Stock. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof are as follows: (1) Voting. The Common Stock and the Class B Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock and each holder of the Class B Common Stock being -2- 3 entitled to one vote for each share held. For so long as there are issued and outstanding 175,000 or more shares of Class B Common Stock (adjusted proportionately for stock dividends and stock splits or combinations), at each election for directors the Common Stock and the Class B Common Stock shall be voted as separate classes, and the holders of the Common Stock shall be entitled to elect five of the nine directors (each holder of Common Stock having the right to vote, in person or by proxy, the number of shares owned by him for the five directors to be elected by the holders of the Common Stock and for whose election he has a right to vote, or to cumulate his votes by giving one candidate as many votes as five times the number of his shares shall equal, or by distributing such votes on the same principle among any number of such five candidates). The holders of the Class B Common Stock shall be entitled to elect the remaining four of the nine directors, and no holder of Class B Common Stock shall have the right of cumulative voting at any election of directors. In the event that issued and outstanding shares of Class B Common Stock are less than 175,000 shares but more than 100,000 shares (adjusted proportionately for stock dividends and stock splits or combinations), the number of directors to be so elected by the holders of the Common Stock shall be six and the number of directors to be so elected by the holders of the Class B Common Stock shall be three. Except as -3- 4 otherwise provided hereinafter in this paragraph and as otherwise required by law, all shares of Common Stock and Class B Common Stock shall, upon all matters other than the election of directors, be voted as a single class (and, in the event that the number of issued and outstanding shares of Class B Common Stock is ever less than 100,000 (adjusted proportionately for stock dividends and stock splits or combinations), the Common Stock and the Class B Common Stock shall be voted as a single class upon all matters, with the right to cumulate votes for the election of directors); provided, however, that no change in the Certificate of Incorporation which would affect the Common Stock and the Class B Common Stock unequally shall be made without the affirmative vote of at least a majority of the outstanding shares of each class, voting as a class. (2) Dividends. The holders of the Common Stock and the Class B Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise, subject to the following preferences and restrictions: (a) No cash dividends shall be declared or paid upon the Class B Common Stock; (b) Dividends payable in property (other than cash or stock) of the corporation shall be payable upon the shares of Common Stock and Class B Common Stock without distinction between the two classes; -4- 5 (c) If a dividend payable in stock of the corporation shall be declared at any time upon either the Common Stock or the Class B Common Stock, a like dividend shall be declared upon the other class of common stock. All dividends payable in stock of the corporation shall be paid in shares of Common Stock with respect to dividends upon shares of the Common Stock and in shares of Class B Common Stock with respect to dividends upon shares of the Class B Common Stock. (3) Preemptive Rights. No stockholder shall have any preemptive right to subscribe to an additional issue of capital stock of the corporation or to any security convertible into such stock. Any preferential rights to purchase stock or securities of the corporation which are granted to the stockholders shall be granted to the holders of the Common Stock and Class B Common Stock without distinction between the two classes. (4) Conversion. Each share of Class B Common Stock of the corporation shall, at any time at the option of the holder thereof, be convertible into one share of Common Stock of the corporation. In the event of any transfer, upon death or otherwise, of any share of Class B Common Stock to any person or entity other than a lineal descendant of William H. Stewart (who died in 1903 in Galveston County, Texas), a spouse of any such descendant or a personal representative, trustee or custodian for -5- 6 the benefit of any such spouse or descendant, such share shall thereupon become a share of Common Stock. (5) Liquidation. Upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the remaining net assets of the corporation shall be distributed pro rata to the holders of the Common Stock and the Class B Common Stock in accordance with their respective rights and interests. ****** Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, the meeting and vote of stockholders may be dispensed with and such action may be taken with the written consent of stockholders having not less than the minimum percentage of the vote required by statue for the proposed corporate action, provided that prompt notice shall be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous consent. Fifth: The name and mailing address of the incorporator is:
Name Mailing Address ---- --------------- William M. Ryan 800 Bank of Southwest Building Houston, Texas 77002
-6- 7 Sixth: The corporation is to have perpetual existence. Seventh: The Board of Directors of the corporation shall consist of nine members. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (1) To make, alter or repeal the by-laws of the corporation. (2) To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. (3) To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. (4) By a majority of the whole Board of Directors, to designate one or more committees, each committee to consist of two or more of the Directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution or in the by-laws of the corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, the by-laws may provide that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. -7- 8 (5) When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called upon such notice as is required by statute, or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all or substantially all the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including securities of any other corporation or corporations, as the Board of Directors shall deem expedient and for the best interests of the corporation. Eighth: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number -8- 9 representing three-fourths in value of the creditors or class of creditors, and/or of the stockholder or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. Ninth: Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the corporation. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide. Tenth: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -9- 10 3. This Restated Certificate of Incorporation was duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, by written consent of the sole stockholder in accordance with Section 228 thereof. 4. The capital of the corporation will not be reduced under or by reason of any amendment in this Restated Certificate of Incorporation. IN WITNESS WHEREOF, the corporation has caused its corporate seal to be affixed hereto and this Certificate to be signed by its President and attested by its Secretary, this 20 day of October, 1970. STEWART INFORMATION SERVICES CORPORATION BY James W. Davis ------------------------------------------- Executive Vice President [SEAL] /s/ [ILLEGIBLE] - ------------------------------ Secretary -10- 11 STATE OF TEXAS: ) ) SS. COUNTY OF HARRIS: ) BE IT REMEMBERED that on this 20 day of October, 1970, personally came before me a notary public in and for the State and County aforesaid, James V. Davis, Executive Vice President of Stewart Information Services Corporation, a Delaware corporation, known to me personally to be such, and acknowledged that he signed the foregoing Restated Certificate of Incorporation, that the Restated Certificate of Incorporation is the act and deed of the corporation and that the facts stated therein are true. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ B. Weaver --------------------------------------- Notary Public NOTARY PUBLIC COUNTY OF HARRIS, TEXAS -11- 12 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION Stewart Information Services Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Stewart Information Services Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by deleting the Article thereof numbered "Fourth (1)" so that, as amended, said Article shall be and read as follows: (1) Voting. The Common Stock and the Class B Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock and each holder of the Class B Common Stock being entitled to one vote for each share held. For so long as there are issued and outstanding 175,000 or more shares of Class B Common Stock (adjusted proportionately for stock dividends and stock splits or combinations), at each election for directors the Common Stock and the Class B Common Stock shall be voted as separate classes, and the holders of the Common Stock shall be entitled to elect five of the nine directors (each holder of Common Stock having the right to vote, in person or by proxy, the number of shares owned by him for the five directors to be elected by the holders of the Common Stock and for whose election he has a right to vote, or to cumulate his votes by giving one candidate as many votes as five times the number of his shares shall equal, or by distributing such votes on the same principle among any number of such five candidates). The holders of the Class B Common Stock shall be entitled to elect the remaining four of the nine directors, and no holder of Class B Common Stock shall have the right of cumulative voting at and election of directors. In the event that issued and outstanding shares of Class B Common Stock are less than 175,000 shares but more than 100,000 shares (adjusted proportionately for stock dividends and stock splits or combinations), the number of directors to be so elected by the holders of the Common Stock shall be six and the number of directors to be so elected by the holders of the Class B Common Stock shall be three. Any amendment to, or rescission of, Section 3.7 of the Company's by-laws must be approved by a majority of the Company's outstanding Common Stock and a majority of the Company's outstanding Class B Common Stock, voting as separate classes. Except as otherwise provided hereinafter in this paragraph and as otherwise required by law, all shares of Common Stock and Class B Common Stock shall, upon all matters other than the election of directors, be voted as a single class (and, in the event that the number of issued and outstanding shares of Class B Common Stock is ever less than 100,000 (adjusted proportionately for stock dividends and stock splits or combinations), the Common Stock and the Class B Common Stock shall be voted as a single class, upon all matters, with the right to cumulate votes for the election of directors); provided, however, that no change in the Certificate of Incorporation which would affect the Common Stock 13 and the Class B Common Stock unequally shall be made without the affirmative vote of at least a majority of the outstanding shares of each class, voting as a class. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation will not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said Stewart Information Services Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Stewart Morris, its President, and attested by Max Crisp, its Secretary, this 27th day of April, 1979. STEWART INFORMATION SERVICES CORPORATION By /s/ STEWART MORRIS MM ------------------------------------- President (Corporate Seal) ATTEST: /s/ MAX CRISP - ---------------------------------- Secretary THE STATE OF TEXAS ) COUNTY OF HARRIS ) BE IT REMEMBERED that on this 27th day of April, 1979, personally came before me, a Notary Public in and for the County and State aforesaid, Stewart Morris, President of Stewart Information Services Corporation, a corporation of the State of Delaware, and he duly executed said certificate before me and acknowledged the said certificate to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said certificate and attested by the Secretary of said corporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office this the day and year aforesaid. /s/ SUE M. NOLZ ------------------------------ Notary Public in and for Harris County, Texas [NOTARIAL SEAL] 14 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION Stewart Information Services Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Stewart Information Services Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that said amendment be considered at the next annual meeting of the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the restated Certificate of Incorporation of the Company be amended by deleting therefrom paragraph (4) of Article Fourth and adding a new paragraph (4) as follows: (4) Conversion. Each share of Class B Common Stock of the corporation shall, at any time at the option of the holder thereof, be convertible into one share of Common Stock of the corporation. In the event of any transfer, upon death or otherwise, of any share of Class B Common Stock to any person or entity other than a "qualified holder" (as hereinafter defined), such share shall thereupon become a share of Common Stock. As used in the preceding sentence, the term "qualified holder" means (i) a lineal descendant of William H. Stewart (who died in 1903 in Galveston County, Texas), (ii) a spouse of any such descendant and (iii) a personal representative, trustee or custodian for the benefit of any such spouse or descendant. A partnership shall be deemed to be a qualified holder if each of its partners is a qualified holder, a corporation shall be deemed to be a qualified holder if each holder of its capital stock is a qualified holder, and a trust shall be deemed to be a qualified holder if each beneficiary is a qualified holder. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation will not be reduced under or by reason of said amendment. 15 IN WITNESS WHEREOF, said Stewart Information Services Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Stewart Morris, its President, and attested by Max Crisp, its Secretary, this 2nd day of June, 1980. STEWART INFORMATION SERVICES CORPORATION By /s/ STEWART MORRIS MM ------------------------------------- President (Corporate Seal) ATTEST: /s/ MAX CRISP - ---------------------------------- Secretary THE STATE OF TEXAS ) COUNTY OF HARRIS ) BE IT REMEMBERED that on this 2nd day of June, 1980, personally came before me, a Notary Public in and for the County and State aforesaid, Stewart Morris, President of Stewart Information Services Corporation, a corporation of the State of Delaware, and he duly executed said certificate before me and acknowledged the said certificate to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said certificate and attested by the Secretary of said corporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office this the day and year aforesaid. /s/ SUE M. NOLZ ------------------------------ Notary Public in and for Harris County, Texas [NOTARIAL SEAL] 16 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION Stewart Information Services Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Stewart Information Services Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by adding thereto Article Eleventh, which Article shall read as follows: Eleventh: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this paragraph by the stockholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such repeal or modification. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation will not be reduced under or by reason of said amendment. 17 IN WITNESS WHEREOF, said Stewart Information Services Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Stewart Morris, its President, and attested by Max Crisp, its Secretary, this 18th day of May, 1987. STEWART INFORMATION SERVICES CORPORATION By /s/ STEWART MORRIS ------------------------------------- President (Corporate Seal) ATTEST: /s/ MAX CRISP - ---------------------------------- Secretary THE STATE OF TEXAS ) COUNTY OF HARRIS ) BE IT REMEMBERED that on this 18th day of May, 1987, personally came before me, a Notary Public in and for the County and State aforesaid, Stewart Morris, President of Stewart Information Services Corporation, a corporation of the State of Delaware, and he duly executed said certificate before me and acknowledged the said certificate to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said certificate and attested by the Secretary of said corporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office this the day and year aforesaid. /s/ SANDI M. BRYANT ---------------------------------- SANDI M. BRYANT Notary Public in and for the State of Texas 18 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION Stewart Information Services Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Stewart Information Services Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by deleting the first full paragraph of Article thereof numbered "Fourth" and adding a new first paragraph of such Article as follows: "Fourth: The total number of shares of stock which the corporation shall have authority to issue is 16,500,000, of which 15,000,000 shares of the par value of $1 each, amounting in the aggregate to $15,000,000, shall be designated Common Stock, and of which 1,500,000 shares of the par value of $1 each, amounting in the aggregate to $1,500,000, shall be designated Class B Common Stock." SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation will not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said Stewart Information Services Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Stewart Morris, its President, and attested by Max Crisp, its Secretary, this 30th day of April, 1993. STEWART INFORMATION SERVICES CORPORATION By /s/ STEWART MORRIS ------------------------------------- Stewart Morris, President (Corporate Seal) ATTEST: /s/ MAX CRISP - ---------------------------------- Max Crisp, Secretary 19 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STEWART INFORMATION SERVICES CORPORATION Stewart Information Services Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Stewart Information Services Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by deleting the first full paragraph of Article thereof numbered "Fourth" and adding a new first paragraph of such Article as follows: "Fourth: The total number of shares of stock which the corporation shall have authority to issue is 31,500,000, of which 30,000,000 shares of the par value of $1 each, amounting in the aggregate to $30,000,000, shall be designated Common Stock, and of which 1,500,000 shares of the par value of $1 each, amounting in the aggregate to $1,500,000, shall be designated Class B Common Stock." SECOND: That thereafter, pursuant to a resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation will not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said Stewart Information Services Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Stewart Morris, its President, and attested by Max Crisp, its Secretary, this 30th day of April, 1999. STEWART INFORMATION SERVICES CORPORATION By: /s/ STEWART MORRIS ------------------------------------- Stewart Morris, President ATTEST: By: /s/ MAX CRISP ---------------------------------- Max Crisp, Secretary EX-10.1 3 SUMMARY OF AGREEMENTS AS TO PAYMENT OF BONUSES 1 EXHIBIT 10.1 STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES EXECUTIVE OFFICER BONUS PLANS DECEMBER 31, 1999 The following summarizes the terms of the bonus arrangements approved by the Company's Compensation Committee with respect to the Company's executive officers: STEWART MORRIS, JR., as Chairman of the Board, shall receive in addition to his salary, 1% on the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders, and .75% of the profits from $20,000,000 to $40,000,000, .50% of the profits from $40,000,001 to $60,000,000 and .25% of the profits exceeding $60,000,000. For the calendar year 1999, Mr. Morris shall receive no less that $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1999, Mr. Morris received $370,000 in bonus compensation. Total compensation shall exclude payments made by the company for insurance premiums, board fees or stock options granted. MALCOLM S. MORRIS, as President and Chief Executive Officer, shall receive in addition to his salary, 1% on the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits from $20,000,000 to $40,000,000, .50% of the profits from $40,000,001 to $60,000,000 and .25% of the profits exceeding $60,000,000. For the calendar year 1999, Mr. Morris shall receive no less that $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1999, Mr. Morris received $370,000 in bonus compensation. Total compensation shall exclude payments made by the company for insurance premiums, board fees or stock options granted. CARLOSS MORRIS, as Chairman of the Executive Committee, shall receive in addition to his salary, 1% of the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits from $20,000,000 to $40,000,000, .50% of the profits from $40,000,001 to $60,000,000 and .25% of the profits exceeding $60,000,000. For the calendar year 1999, Mr. Morris shall receive no less than $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1999 Mr. Morris received $365,000 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. STEWART MORRIS, as Vice Chairman of the Executive Committee, shall receive in addition to his salary, 1% of the first $20,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders and .75% of the profits from $20,000,000 to $40,000,000, .50% of the profits from $40,000,001 to $60,000,000 and .25% of the profits exceeding $60,000,000. For the calendar year 1999, Mr. Morris shall receive no less than $125,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $500,000. For the calendar year 1999 Mr. Morris received $365,000 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. MAX CRISP, as Senior Vice President - Finance, shall receive in addition to his salary, .5% of the first $50,000,000 of the consolidated income before taxes of Stewart Title Guaranty Company as reported to its stockholders, .40% of the profits from $50,000,001 to $75,000,000, .30% of the profits from $75,000,001 to $100,000,000 and .20% of the profits exceeding $100,000,000. For the calendar year 1999, Mr. Crisp shall receive no less than $100,000 in bonus compensation and his total compensation from base salaries and bonuses shall not exceed $400,000. For the calendar year 1999 Mr. Crisp received $242,755 in bonus compensation. Total compensation shall exclude any insurance premiums, board fees or stock options granted. EX-10.3 4 1999 STOCK OPTION PLAN 1 EXHIBIT 10.3 STEWART INFORMATION SERVICES CORPORATION 1999 STOCK OPTION PLAN 1. Purpose. The purpose of the Stewart Information Services Corporation 1999 Stock Option Plan (the "Plan") is to provide compensation in the form of ownership of the common stock, $1.00 par value ("Common Stock"), of Stewart Information Services Corporation, a Delaware corporation (the "Company"), to executive officers of the Company and its subsidiaries, and is intended to advance the best interest of the Company by providing certain persons having substantial responsibility for its management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to remain in its employ. 2. Eligibility. The individuals who shall be eligible to participate in the Plan ("Eligible Participants") shall be the executive officers of the Company other than Carloss Morris and Stewart Morris. No individual shall be eligible to receive an Option under the Plan while that individual is a member of the Committee. No person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company shall be eligible to receive an Option that is an incentive stock option unless, at the time that the Option is granted, (i) the option price is at least 110% of the fair market value of the Common Stock at such time and (ii) the Option by its own terms is not exercisable after the expiration of five years from the date the Option is granted. A person will be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust will be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. 3. Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). No member of the Committee shall be liable for any act or omission of any other member of the Committee or for any act or omission on his own part, including but not limited to the exercise of any power or discretion given to him under the Plan, except those resulting from his own gross negligence or willful misconduct. All questions of interpretation and application of the Plan, or as to options granted under it, shall be subject to the determination of a majority of the Committee. The Committee in exercising any power or authority granted under this Plan or in making any determination under this Plan shall perform or refrain from performing those acts using its sole discretion and judgment. Any decision made by the Committee or any refraining to act or any act taken by the Committee in good faith shall be final and binding on all parties. The Committee's decision shall never be subject to de novo review. When appropriate the Plan shall be administered to qualify certain of the Options granted under it as "incentive stock options" described in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. Stock Reserved for the Plan. The shares subject to the Plan shall consist of unissued shares of the Common Stock or previously issued shares reacquired and held by the Company or its subsidiaries. The total amount of the Common Stock with respect to which options may be granted under the Plan ("Options") shall not exceed 300,000 shares in aggregate. The class and aggregate number of shares that may be subject to Options shall be subject to adjustment under Section 16. This number of shares shall be and is hereby reserved for issuance pursuant to this Plan. Any of such shares that may remain unsold and that are not subject to outstanding Options at the termination of the Plan shall cease to be reserved for the purpose of the Plan. Should any Option expire or be canceled before its exercise in full, the shares theretofore subject to such option may again be made subject to an Option. 5. Grant of Options. The Committee may grant the following options any time during the term of this Plan to any Eligible Participant that it chooses: (a) "Incentive" Stock Options. The Committee may grant to an Eligible Participant an Option, or Options, to buy a stated number of shares of Common Stock under the terms and 1 2 conditions of the Plan, which Option or Options would be an "incentive stock option" within the meaning of Section 422 of the Code. (b) "Non-incentive" Stock Options. The Committee may grant to an Eligible Participant an Option, or Options, to buy a stated number of shares of Common Stock under the terms and conditions of the Plan, which Option or Options would not constitute an "incentive stock option" within the meaning of Section 422 of the Code. Each option granted shall be approved by the Committee. Subject only to any applicable limitations set forth in this Plan, the number of shares of Common Stock to be covered by an Option shall be as determined by the Committee. 6. Stock Appreciation Rights. Stock appreciation rights ("Stock Appreciation Rights") may be included in each Option granted under the Plan to allow the holder of an Option (an "Optionee") to surrender that Option (or a portion of the part that is then exercisable) and receive in exchange, upon a written request from the Optionee describing the special circumstances that exist which create the need to use such Stock Appreciation Rights and subject to any other conditions and limitations set by the Committee, an amount equal to the excess of the fair market value of the Common Stock covered by the Option (or the portion of it surrendered), determined as of the date of surrender, over the aggregate option price of the Common Stock. The payment will be made in shares of Common Stock valued at fair market value. Stock Appreciation Rights may be exercised only when the fair market value of the Common Stock covered by the Option surrendered exceeds the option price of the Common Stock. Upon the surrender of an Option, or a portion of it, for Stock Appreciation Rights, the shares represented by the Option (or that part of it surrendered) shall not be available for reissuance under the Plan. Each of the Stock Appreciation Rights (a) will expire not later than the expiration of the underlying Option, (b) may be for no more than 100% of the difference between the exercise price of the underlying Option and the fair market value of a share of the Common Stock at the time the Stock Appreciation Right is exercised, and (c) may be exercised only when the underlying Option is eligible to be exercised. 7. Option Price. The price at which shares of Common Stock may be purchased pursuant to an Option that is an incentive stock option shall be not less than the fair market value of the shares of Common Stock on the date the Option is granted. The Committee in its discretion may provide that the price at which shares may be purchased shall be more than the minimum price required. If an individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price at which shares may be purchased under an Option that is an incentive stock option shall be not less than 110% of the fair market value of the Common Stock on the date the Option is granted. 8. Duration of Options. No Option that is an incentive stock option shall be exercisable after the expiration of 10 years from the date the Option is granted. The Committee in its discretion may provide that the Option shall be exercisable throughout the 10-year period or during any lesser period commencing on or after the date of grant of the Option and ending upon or before the expiration of the 10-year period. If an individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, no Option that is an incentive stock option shall be exercisable after the expiration of five years from the date the Option is granted. No Option that is a non-incentive stock option shall be exercisable after the expiration of 10 years from the date the Option is granted. The Committee in its discretion may provide that the Option shall be exercisable throughout the 10-year period or during any lesser period commencing on or after the date of grant of the Option and ending upon or before the expiration of the 10-year period. 9. Maximum Value of Stock Subject to Options That are Incentive Stock Options. To the extent that the aggregate fair market value (determined as of the date the Option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by the Optionee in any calendar year (under this Plan and any other incentive stock option plan(s) of the Company and any parent and subsidiary corporation) exceeds $100,000, the Options shall be treated as non-incentive stock options. In making this determination, Options shall be taken into account in the order in which they were granted. 2 3 10. Exercise of Options. An Optionee may exercise such Optionee's Option by delivering to the Company a written notice stating (i) that such Optionee wishes to exercise such Option on the date such notice is so delivered, (ii) the number of shares of Common Stock with respect to which the Option is to be exercised and (iii) the address to which the certificate representing such shares of Common Stock should be mailed. To be effective, such written notice shall be accompanied by (i) payment of the Option Price of such shares of Common Stock and (ii) payment of an amount of money necessary to satisfy any withholding tax liability that may result from the exercise of such Option. Each such payment shall be made by cashier's check drawn on a national banking association and payable to the order of the Company in United States dollars. 11. Transferability of Options. Options and Stock Appreciation Rights shall not be transferable by the Optionee except by will or under the laws of descent and distribution, and shall be exercisable, during his lifetime, only by him. 12. Termination of Employment or Death of Optionee. Except as maybe otherwise expressly provided herein, all Options (whether incentive or non-incentive) shall terminate on the earlier of the date of the expiration of the Option or one day less than three months after the date of severance, upon severance of the employment relationship between the Company and the Optionee, whether with or without cause, for any reason other than the death of the Optionee, including retirement or disability, during which period the Optionee shall be entitled to exercise the Option in respect of the number of shares that the Optionee would have been entitled to purchase had the Optionee exercised the Option on the date of such severance of employment. Whether authorized leave of absence, or absence on military or government service, shall constitute severance of the employment relationship between the Company and the Optionee shall be determined by the Committee at the time thereof. In the event of the death of the holder of any Option (whether incentive or non-incentive) while in the employ of the Company and before the date of expiration of such Option, such Option shall continue in effect until the date of expiration of the Option. After the death of the Optionee, his executors, administrators or any person or person to whom his Option may be transferred by will or by the laws of descent and distribution, shall have the right, any time before the termination of an Option, to exercise the Option in respect to the number of shares that the Optionee would have been entitled to exercise if he had exercised the Option on the date of his death while in employment. Notwithstanding the foregoing provisions of this Section 12, in the case of an Option that is a non-incentive stock option, the Committee may provide for a different option termination date in the option agreement with respect to such Option. For purposes of incentive stock options issued under this Plan, an employment relationship between the Company and the Optionee shall be deemed to exist during any period in which the Optionee is employed by the Company, by any parent or subsidiary corporation, by a corporation issuing or assuming an option in a transaction to which Section 424(a) of the Code, as amended, applies, or by a parent or subsidiary corporation of such corporation issuing or assuming an option. For purposes of non-incentive stock options issued under this Plan, an employment relationship between the Company and the Optionee will exist under the circumstances described above for incentive stock options and will also exist if the Optionee is transferred to an affiliate corporation approved by the Committee. 13. Requirements of Law. The Company shall not be required to sell or issue any shares under any Option if issuing the shares shall constitute a violation by the Optionee or the Company of any provisions of any law or regulation of any governmental authority. Each Option granted under this Plan shall be subject to the requirements that, if at any time the Board of Directors of the Company or the Committee shall determine that the listing, registration or qualification of the shares upon any securities exchange or under any state or federal law of the United states or of any other country or governmental subdivision, or the consent or approval of any governmental regulatory body, or investment or other representations, are necessary or desirable in connection with the issue or purchase of shares subject to an Option, that Option shall not be exercised in whole or in part unless the listing, registration, qualification, consent, approval or representations shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. Any determination in this connection by the Committee shall be final. In the event the shares issuable on exercise of an Option are not registered under the Securities Act of 1933, the Company may imprint on the certificate for those shares the following legend or any other legend which counsel for the Company considers necessary or advisable to comply with the Securities Act of 1933: 3 4 "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon registration or upon receipt by the Corporation of an opinion of counsel satisfactory to the Corporation, in form and substance satisfactory to the Corporation, that registration is not required for a sale or transfer." The Company may, but shall in no event be obligated to, register any securities covered by this Plan under the Securities Act of 1933 (as now in effect or as later amended) and, in the event any shares are registered, the Company may remove any legend on certificates representing those shares. The Company shall not be obligated to take any other affirmative action to cause the exercise of an Option or the issuance of shares under the Option to comply with any law or regulation or any governmental authority. 14. No Rights as Stockholder. No Optionee shall have rights as a stockholder with respect to shares covered by his Option until the date a stock certificate is issued for the shares. Except as provided in Section 15, no adjustment for dividends, or other matters shall be made if the record date is before the date the certificate is issued. 15. Employment Obligation. The granting of any Option shall not impose upon the Company any obligation to employ or continue to employ any Optionee. The right of the Company to terminate the employment of any officer or other employee shall not be diminished or affected because an Option has been granted to him. 16. Adjustments. The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. If the Company shall effect a subdivision or consolidation of shares or other capital adjustment of, or the payment of a dividend in capital stock or other equity securities of the Company on, its Common Stock, or other increase or reduction of the number of shares of the Common Stock outstanding without receiving consideration therefor in money, services, or property, or the reclassification of its Common Stock, in whole or in part, into other equity securities of the Company, then (a) the number, class and per share price of shares of stock subject to outstanding Options hereunder shall be appropriately adjusted (or in the case of the issuance of other equity securities as a dividend on, or in a reclassification of, the Common Stock, the Options shall extend to such other securities) in a way that entitles an Optionee to receive, upon exercise of an Option, for the same aggregate cash compensation, the same total number and class or classes of shares (or in the case of a dividend of, or reclassification into, other equity securities, such other securities) he would have held after such adjustment if he had exercised his Option in full immediately before the event requiring the adjustment, or, if applicable, the record date for determining shareholders to be affected by such adjustment; and (b) the number and class of shares then reserved for issuance under the Plan (or in the case of a dividend of, or reclassification into, other equity securities, such other securities) shall be adjusted by substituting for the total number and class of shares of stock then received, the number and class or classes of shares of stock (or. in the case of a dividend on, or reclassification into, other equity securities, such other securities) that would have been received by the owner of an equal number of outstanding shares of Common Stock as the result of the event requiring the adjustment. Comparable rights shall accrue to each Optionee upon successive subdivisions, consolidations, capital adjustment, dividends or reclassifications of the character described above. If the Company shall make a tender offer for, or grant to all of its holders of its shares of Common Stock the right to require the Company or any subsidiary of the Company to acquire from such stockholders shares of, Common Stock, at a price in excess of the Current Market Price (a "Put Right") or the Company shall grant to all of its holders for its shares of Common Stock the right to acquire shares of Common Stock for less than the Current Market Price (a "Purchase Right") then, in the case of a Put Right, the Option Price shall be adjusted by multiplying the Option Price in effect immediately before the record date for the determination of stockholders entitled to receive such Put Right by a fraction, the numerator of which shall be the number of shares of Common Stock then outstanding minus the number of shares of Common Stock that could be purchased at the Current Market Price for the aggregate amount that would be paid if all Put Rights are exercised and the denominator of which is the number of shares of Common Stock 4 5 that would be outstanding if all Put Rights are exercised; and, in the case of a Purchase Right, the Option Price shall be adjusted by multiplying the Option Price in effect immediately before the record date for the determination of the stockholders entitled to receive such Purchase Right by a fraction, the numerator of which shall be the number of shares of Common Stock then outstanding plus the number of shares of Common Stock that could be purchased at the Current Market Price for the aggregate amount that would be paid if all Purchase Rights are exercised and the denominator of which is the number of shares of Common Stock that would be outstanding if all Purchase Rights are exercised. In addition, the number of shares subject to the option shall be increased by multiplying the number of shares then subject to the Option by a fraction that is the inverse of the fraction used to adjust the Option Price. Notwithstanding the foregoing, if any such Put Rights or Purchase Rights shall terminate without being exercised, the Option Price and number of shares subject to Option shall be appropriately readjusted to reflect the Option Price and number of shares subject to the Option that would have been in effect if such unexercised Rights had never existed. Comparable adjustments shall be made upon successive transactions of the character described above. After the merger of one or more corporations into the Company, after any consolidation of the Company and one or more corporations, or after any other corporate transaction described in Section 424(a) of the Code in which the Company shall be the surviving corporation, each Optionee, at no additional cost, shall be entitled to receive, upon any exercise of his Option, in lieu of the number of shares as to which the Option shall then be so exercised, the number and class of shares of stock or other equity securities to which the Optionee would have been entitled pursuant to the terms of the agreement of merger or consolidation if at the time of such merger or consolidation such Optionee had been a holder of a number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised and, if as a result of such merger, consolidation or other transaction, the holders of Common Stock are not entitled to receive any shares of Common Stock pursuant to the terms thereof, each Optionee, at no additional cost shall be entitled to receive, upon exercise of his Option, such other assets and property, including cash to which he would have been entitled if at the time of such merger, consolidation or other transaction he had been the holder of the number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised. Comparable rights shall accrue to each Optionee upon successive mergers or consolidations of the character described above. After a merger of the Company into one or more corporations, after a consolidation of the Company and one or more corporations, or after any other corporate transaction described in Section 424(a) of the Code in which the Company is not the surviving corporation, each Optionee shall, at no additional cost, be entitled at the option of the surviving corporation (i) to have his then existing Option assumed or have a new option substituted for the existing Option by the surviving corporation to the transaction that is then employing him, or a parent or subsidiary of such corporation, on a basis where the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such option is equal to the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, provided that the shares subject to the new option must be traded on the New York or American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotation System, or (ii) to receive, upon any exercise of his Option, in lieu of the number of shares as to which the Option shall then be so exercised, the securities, property and other assets, including cash, to which the Optionee would have been entitled pursuant to the terms of the agreement of merger or consolidation or the agreement giving rise to the other corporate transaction if at the time of such merger, consolidation or other transaction such Optionee had been the holder of the number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised. If a corporate transaction described in Section 424(a) of the Code that involves the Company is to take place and there is to be no surviving corporation while an Option remains in whole or in part unexercised, it shall be canceled by the Board of Directors as of the effective date of any such corporate transaction but before that date each Optionee shall be provided with a notice of such cancellation and each Optionee shall have the right to exercise such Option in full to the extent it is then still unexercised during a 30-day period preceding the effective date of such corporate transaction. For purposes of this Section 16, Current Market Price per share of Common Stock shall mean the last reported price for the Common Stock in the New York Stock Exchange--Composite Transaction listing on the trading day immediately preceding the first trading day on which, as a result of the establishment of a record date or otherwise, 5 6 the trading price reflects that an acquiror of Common Stock in the public market will not participate in or receive the payment of any applicable dividend or distribution. Except as hereinbefore expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. 17. Amendment or Termination of Plan. The Board of Directors may amend, alter or discontinue the Plan, but no amendment or alteration shall be made which would impair the rights of any Optionee under any Option theretofore granted without his consent. The Board shall have the power to make all changes in the Plan and in the regulations and administrative provisions under the Plan or in any outstanding Option as in the opinion of counsel for the Company may be necessary or appropriate from time to time to enable any Option granted pursuant to the Plan to qualify as an incentive stock option under Section 422 of the Code and the regulations that may be issued under that Section as in existence from time to time. 18. Written Agreement. Each Option granted under this Plan shall be embodied in a written option agreement, which shall be subject to the terms and conditions prescribed above, and shall be signed by the Optionee and by the appropriate officer of the Company for and in the name and on behalf of the Company. Each option agreement shall contain any other provisions that the Committee in its discretion shall deem advisable. 19. Indemnification of the Committee. The Company shall indemnify each present and future member of the Committee against, and each member of the Committee shall be entitled without further act on his part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved because of his being or having been a member of the Committee, whether he continues to be such member of the Committee at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee (a) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee, or (b) in respect of any matter in which any settlement is effected, to an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further, that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee unless, within sixty (60) days after institution of any such action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend the same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and shall be in addition to all other rights to which such member of the Committee may be entitled to as a matter of law, contract or otherwise. Nothing in this Section 19 shall be construed to limit or otherwise affect any right to indemnification or payment of expense, or any provisions limiting the liability of any officer or director of the Company or any member of the Committee, provided by law, the Certificate of Incorporation of the Company or otherwise. 20. Effectiveness and Expiration of the Plan. The Plan shall be effective January 1, 1999. The Plan shall expire five years and one day after the effective date of the Plan, and thereafter no option shall be granted pursuant to the Plan. 6 7 Name of Optionee: ------------------------------------ (the "Optionee") STEWART INFORMATION SERVICES CORPORATION AMENDED AND RESTATED STOCK OPTION AGREEMENT (Includes all options granted through the date hereof to the Optionee under all stock option plans of the Company) Stewart Information Services Corporation (the "Company") has granted to the Optionee options to purchase the number of shares of common stock, $1.00 par value, of the Company set forth on Annex A hereto. Annex A also sets forth the stock option plan of the Company under which such options were granted, the dates of grant, the prices at which such options are exercisable, the dates on which such options first became or will become exercisable, the expiration date of such options and whether such options are intended to be incentive stock options governed by Section 422 of the Internal Revenue Code of 1986, as amended. Each option reflected on Annex A is subject to all the terms and conditions of the stock option plan under which it was granted. By accepting the options reflected on Annex A, the Optionee agrees to be bound by all of the terms and conditions of the stock option plans of the Company under which such options were granted. The options reflected in Annex A are cumulative of and restate, and are not in addition to, any options heretofore reflected in any stock option agreement between the Company and the Optionee. Annex A reflects all options granted by the Company to the Optionee through the date hereof. Dated the ______ day of __________________, 199____. STEWART INFORMATION SERVICES CORPORATION By: ---------------------------------- Name: --------------------------------- Title: -------------------------------- ACCEPTED: - -------------------------------------- Optionee - -------------------------------------- Date 7 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ -------------- Stewart Title of Mobile, Inc. ............................. Alabama Stewart Title of Anchorage ................................ Alaska Citizens Title & Trust .................................... Arizona Stewart Title & Trust of Phoenix, Inc. .................... Arizona Stewart Title & Trust of Tucson ........................... Arizona Arkansas Title Insurance Company .......................... Arkansas First Arkansas Title Company .............................. Arkansas Garland County Title Company .............................. Arkansas Landata of Arkansas ....................................... Arkansas McDonald Abstract Company ................................. Arkansas Stewart Title of Arkansas ................................. Arkansas Tucker Abstract ........................................... Arkansas Landata Airborne Systems, Inc. ............................ California API Properties Corp. ...................................... California Asset Preservation, Inc. .................................. California GPMD, Inc. ................................................ California Granite Bay Holding Corp. ................................. California Granite Properties, Inc. .................................. California Landata, Inc. of Los Angeles .............................. California Landata, Inc. of the West Coast ........................... California Online Documents, Inc. .................................... California Stewart Title of California, Inc. ......................... California WTI Properties, Inc. ...................................... California Stewart Title Company of Colorado Springs ................. Colorado Stewart Title of Aspen, Inc. .............................. Colorado Stewart Title of Denver, Inc. ............................. Colorado Stewart Title of Eagle County, Inc. ....................... Colorado Stewart Title of Glenwood Springs, Inc. ................... Colorado Stewart Title of Larimer County, Inc. ..................... Colorado Stewart Title of Pueblo ................................... Colorado Stewart Title of Steamboat Springs ........................ Colorado Stewart Water, L.L.C. ..................................... Colorado The Title Specialists, L.L.C. ............................. Delaware Advance Homestead Title, Inc. ............................. Florida Bay Title Services, Inc. .................................. Florida Landata Foresight ......................................... Florida Landata, Inc. of Florida .................................. Florida New Century Title of Orlando .............................. Florida New Century Title of Sarasota ............................. Florida New Century Title of Tampa ................................ Florida Stewart Approved Title, Inc. .............................. Florida Stewart Insurance Services, Inc. .......................... Florida Stewart River City Title .................................. Florida Stewart Title Company of Sarasota, Inc. ................... Florida Stewart Title of Clearwater, Inc. ......................... Florida Stewart Title of Jacksonville, Inc. ....................... Florida Stewart Title of Martin County ............................ Florida Stewart Title of Northwest Florida ........................ Florida Stewart Title of Orange County, Inc. ...................... Florida Stewart Title of Pensacola ................................ Florida Stewart Title of Pinellas, Inc. ........................... Florida Stewart Title of Polk County, Inc. ........................ Florida Stewart Title of Tallahassee, Inc. ........................ Florida Stewart Title of Tampa .................................... Florida
(continued) 2 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ -------------- Stewart Properties of Tampa ............................... Florida Blaine County Title, Inc. ................................. Idaho Stewart Title Company of Idaho, Inc. ...................... Idaho Stewart Title of Canyon County ............................ Idaho Stewart Title of North Idaho, Inc. ........................ Idaho Stewart Title of Pocatello ................................ Idaho Information Services of Illinois .......................... Illinois Landata, Inc. of Illinois ................................. Illinois Stewart Title Company of Illinois ......................... Illinois Cripe Title ............................................... Indiana Mortgage Services of Indiana .............................. Indiana Stewart Title Services of Central Indiana ................. Indiana Stewart Title Services of Indiana, Inc. ................... Indiana O'Rourke Title Company .................................... Kansas Stewart Title of Louisiana, Inc. .......................... Louisiana Cambridge Landata, Incorporated ........................... Maryland Stewart Title Company of Maryland ......................... Maryland Stewart Title of Detroit, Inc. ............................ Michigan Stewart Title Company of Minnesota ........................ Minnesota Stewart Title of Mississippi .............................. Mississippi Stewart Title, Inc. (Kansas City) ......................... Missouri Stewart Title of Carson City .............................. Nevada Stewart Title of Churchill County ......................... Nevada Stewart Title of Douglas County ........................... Nevada Stewart Title of Nevada ................................... Nevada Stewart Title of Northeastern Nevada ...................... Nevada Stewart Title of Northern Nevada .......................... Nevada Professional Title Agency ................................. New Hampshire Stewart Title of Northern New England ..................... New Hampshire Stewart Title of Bergen County ............................ New Jersey Stewart Title of Central Jersey, Inc. ..................... New Jersey Stewart Title Services of North Jersey, L.L.C. ............ New Jersey Stewart-Princeton Abstract ................................ New Jersey Santa Fe Abstract Limited ................................. New Mexico Stewart Title Limited ..................................... New Mexico River City Abstract, L.L.C. ............................... New York Stewart Title Insurance Company ........................... New York Stewart Title of North Carolina, Inc. ..................... North Carolina Stewart Title of the Piedmont ............................. North Carolina Excelsior Title Agency .................................... Ohio National Land Title Insurance Company ..................... Ohio Stewart Title Agency of Columbus, Ltd. .................... Ohio Stewart Title Agency of Ohio, Inc. ........................ Ohio Landata Research .......................................... Oklahoma Stewart Abstract & Title Co. of Oklahoma .................. Oklahoma Stewart Escrow & Title Services of Lawton ................. Oklahoma Stewart Title Insurance Company of Oregon ................. Oregon Stewart Title of Oregon ................................... Oregon Stewart Title - Newport, LLC .............................. Rhode Island Stewart Title of Rhode Island, Inc. ....................... Rhode Island Advance Title Company ..................................... Texas Allecon Title, LLC ........................................ Texas Brazoria County Abstract .................................. Texas
(continued) 3 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Cameron County Title ...................................... Texas Dominion Title ............................................ Texas East-West, Inc. ........................................... Texas Electronic Closing Services, Inc. ......................... Texas Fulghum, Inc. ............................................. Texas GC Acquisition, Inc. ...................................... Texas Gracy Title Co., L.C. ..................................... Texas Highland Solutions ........................................ Texas Landata Field Services .................................... Texas Landata Geo Services, Inc. ................................ Texas Landata Group, Inc. ....................................... Texas Landata Site Services ..................................... Texas Landata Systems, Inc. ..................................... Texas Landata Technologies ...................................... Texas Medina County Title ....................................... Texas MHI Title Company of Houston, L.C. ........................ Texas Nacogdoches Abstract & Title .............................. Texas Ortem Investments, Inc. ................................... Texas Pacific Title, L.C. ....................................... Texas Premier Title, L.C. ....................................... Texas Primero, Inc. ............................................. Texas Priority Resources, Inc. .................................. Texas Priority Title - Dallas ................................... Texas Priority Title - Houston .................................. Texas RealEC, Inc. .............................................. Texas Southland Information, Inc. ............................... Texas Stewart - U.A.M., Inc. .................................... Texas Stewart Information International, Inc. ................... Texas Stewart Investment Services Corporation ................... Texas Stewart Management Information, Inc. ...................... Texas Stewart Mortgage Information Company ...................... Texas Stewart Mortgage Processing ............................... Texas Stewart National Order Center ............................. Texas Stewart Title Austin, Inc. ................................ Texas Stewart Title Company ..................................... Texas Stewart Title Company of Rockport, Inc. ................... Texas Stewart Title Guaranty Company ............................ Texas Stewart Title of Corpus Christi ........................... Texas Stewart Title of Eagle Pass ............................... Texas Stewart Title of Lubbock, Inc. ............................ Texas Stewart Title of Montgomery County ........................ Texas Stewart Title of North Texas .............................. Texas Stewart Trust Company ..................................... Texas Texarkana Title and Abstract, Inc. ........................ Texas Landata Inc. of Utah ...................................... Utah Cedar Run Title & Abstract ................................ Virginia Greenbrier Title, LLC ..................................... Virginia Howell Title, LLC ......................................... Virginia Land Title Research, Inc. ................................. Virginia Potomac Title & Escrow .................................... Virginia Resource Title, LLC ....................................... Virginia
(continued) 4 EXHIBIT 21 (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES
STATE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ------------- Signature & Stewart Settlements, L.C. ..................... Virginia Stewart Services of Greater Virginia ...................... Virginia Stewart Title - Shenandoah Valley, L.C. ................... Virginia Stewart Title & Settlement Services, Inc. ................. Virginia Stewart Title and Escrow, Inc. ............................ Virginia Stewart Title Services of Virginia, L.C. .................. Virginia Stewart Title of Kittitas County .......................... Washington Stewart Title of Washington ............................... Washington Accurate Title ............................................ Wisconsin Sheboygan Title Services, Inc. ............................ Wisconsin Stewart Title of Gillette, Inc. ........................... Wyoming INTERNATIONAL Landata Inc. of Belize .................................... Belize Stewart Costa Rica ........................................ Costa Rica Stewart Information Hungary ............................... Hungary Stewart Title Guaranty de Mexico, ABC ..................... Mexico Stewart Data Slovakia ..................................... Slovakia Stewart Title Great Britain ............................... United Kingdom Stewart Title Insurance Company Limited ................... United Kingdom
EX-23 6 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCT. 1 EXHIBIT 23 The Board of Directors Stewart Information Services Corporation: We consent to incorporation by reference in the registration statements (No. 33-48519, No. 33-48520, No. 33-58156, No. 33-59747, No. 33-62535, No. 333-03981, No. 333-24075, No. 333-65971 and No. 333-77579) on Form S-8 of Stewart Information Services Corporation of our report dated February 14, 2000, except as to note 20, which is as of March 13, 2000, relating to the consolidated balance sheets of Stewart Information Services Corporation and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of earnings, retained earnings and comprehensive earnings and cash flows for each of the years in the three-year period ended December 31, 1999, and all related schedules, which report appears in the December 31, 1999 annual report on Form 10-K of Stewart Information Services Corporation. /s/ KPMG LLP Houston, Texas March 23, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 36,803 310,211 52,959 4,379 0 0 127,571 81,671 535,741 0 19,054 0 0 14,696 270,228 535,741 0 1,071,254 0 504,201 519,190 0 1,298 46,565 18,143 28,422 0 0 0 28,422 1.96 1.95
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