The following table sets forth information about the Registrant's other principal properties:
(2) Includes the following items, after providing for income taxes: 1997 - a writeoff of goodwill of $1.2 million, or $.18 per share. 1992 - a reserve established for title losses over ten years old of $2.2 million, or $.36 per share. 1991 - a fresh start tax credit of $1.3 million, or $.21 per share.
TITLE REVENUES. The Company's revenues from premiums, fees and other revenues increased 36.9% in 1998 over 1997 and 7.9% in 1997 over 1996. 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).
REI REVENUES. Real estate information revenues were $50.4 million in 1998, $35.3 million in 1997 and $32.0 million in 1996. The increases in 1998 and 1997 were primarily due to a significant number of new businesses started and additional income earned from existing operations. The Company terminated an unprofitable REI business in late 1996 which reduced the revenue increase in 1997 over 1996.
INVESTMENTS. Investment income increased 16.2% in 1998 and 10.2% in 1997 primarily because of increases in average balances invested and higher market yields. Investment gains in 1998, 1997 and 1996 were realized as part of the ongoing management of the investment portfolio for the purpose of improving performance.
EMPLOYEE AND OTHER EXPENSES. Employee costs for the combined segments of businesses increased 33.2% in 1998 and 10.2% in 1997. The number of persons employed by the Company at December 31, 1998, 1997 and 1996 was 5,638, 4,569, and 4,111, respectively. The increase in staff in 1998 and 1997 was primarily the result of increased title and 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.
Other operating expenses increased 24.8% in 1998 and 11.3% in 1997. The overall increase for each year was caused primarily by changes in transaction volume. Expenses that increased in 1998 were premium taxes, REI expenses, business promotion, rent and supplies. Expenses that increased in 1997 were rent, premium taxes, business promotion and delivery costs. Other operating expenses also include 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.
INCOME TAXES. The provision for federal and state income taxes represented effective tax rates of 38.4%, 35.4% and 36.9% in 1998, 1997 and 1996, respectively. The 1998 and 1996 effective tax rates were higher primarily because nontaxable income from municipal bonds was significantly less in relation to pretax profits.
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 financial statements.
The liquidity of the Company itself, excluding Guaranty and its subsidiaries, is comprised of cash and investments aggregating $11.5 million and short-term liabilities of $1.2 million at December 31, 1998. 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 $8.9 million and stockholders' equity of $260.4 million at December 31, 1998, are considered adequate.
THE YEAR 2000 ISSUE. Information technology is a crucial part of the Company's business. The Company recognizes the technological challenges associated with the Year 2000 ("Y2K") Issue. It has established a formal compliance plan to address these challenges and a Y2K Team to carry out this plan. The plan includes several distinct phases: (1) assessment, (2) remediation, (3) testing and (4) implementation. The progress of the work of the Y2K Team is monitored by the Company's senior management and the audit committee of the Company's board of directors.
Computer software is used in the title and real estate information segments of the Company's business. The uses of software in the title segment include searching and examining titles, closing transactions, accounting for agent policies and claims. In the real estate information segment, software is used in providing mortgage services, such as flood determinations, appraisals and assignments.
Certain subsidiaries that have been acquired by the Company and still operate with different systems from the Company's have been given high priority under the Company's Y2K plan. The Company expects to complete all phases of Y2K compliance for these subsidiaries during the second quarter of 1999.
In addition to addressing the Company's own systems, as described above, the Y2K Team must assess the state of readiness of the systems of other entities with which it does business. These include independent title insurance agents and other business partners, such as county courthouses and lenders, whose condition or operational capability is important to the Company. Failure by these third parties to resolve adequately their Y2K problems could have a material adverse effect on the Company's operations.
The Company currently estimates that the total cost of its Y2K compliance program will not exceed $4.0 million. A significant portion of the remaining costs are expected to be incurred during the first and second quarters of 1999.