The Registrant and its wholly-owned subsidiary, Stewart Title Guaranty Company and its subsidiaries ("Guaranty"), own or lease the following properties:
- -------------------- (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.
(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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.