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 [FEE REQUIRED] For the fiscal year ended December 31, 1996 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 1, 1997, 6,256,801 shares of Common Stock, $1 par value, and 525,006 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 February 28, 1997) of Stewart Information Services Corporation held by non-affiliates of the Registrant was approximately $125,918,120. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Stewart Information Services Corporation Annual Report to Stockholders for the year ended December 31, 1996 are incorporated by reference in Parts I and II of this document. Portions of the definitive proxy statement (the "Proxy Statement"), relating to the annual meeting of the Registrant's stockholders to be held April 25, 1997, are incorporated by reference in Parts III and IV of this document. ================================================================================
2 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS PART I <TABLE> <CAPTION> ITEM NO. PAGE --- ---- <S> <C> <C> 1. Business . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . 3 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 4 4. Submission of Matters to a Vote of Security Holders . 4 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . 5 6. Selected Financial Data . . . . . . . . . . . . . . . . 6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 6 8. Financial Statements and Supplementary Data . . . . . 6 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 6 PART III 10. Directors and Executive Officers of the Registrant . . 7 11. Executive Compensation . . . . . . . . . . . . . . . . . 7 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . 7 13. Certain Relationships and Related Transactions . . . . . 7 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 8 Signatures . . . . . . . . . . . . . . . . . . . . . . . 10 </TABLE> i
3 P A R T I ITEM 1. BUSINESS Stewart's primary business is title insurance. Stewart issues policies through more than 3,700 issuing locations on homes and other real property located in all 50 states, the District of Columbia, Canada, Mexico, Belize (reinsurance), the Bahamas, Guam, England and the Commonwealth of the Northern Marianas. Stewart sells computer-related services and information, as well as mapping products and geographic information systems to government and private entities, both domestic and foreign. 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. 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. 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. -1-
4 Selected information for the national real estate industry follows (1996 amounts are preliminary): <TABLE> <CAPTION> 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Housing starts - millions........................... 1.47 1.35 1.46 Housing resales - millions.......................... 4.09 3.80 3.95 Housing resales - median sales price in $ thousands......................................... 118.1 112.9 109.8 </TABLE> 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 five 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. Market share. Estimating a title insurer's market share is difficult. Stewart believes it is the leading title insurer in Texas and in a number of cities across the USA. Based on unconsolidated statutory revenues for 1995 (1996 amounts are not available), Stewart Title Guaranty Company ("Guaranty") is the fourth largest title insurer in America. Competitors include (names are abbreviated) Chicago Title, Commonwealth, Fidelity, First American, Lawyers Title 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 3,763 at December 31, 1996, compared to 3,549 a year earlier and 3,312 two years earlier. Of these totals, 3,488, 3,302 and 3,018 were independent agents at December 31, 1996, 1995 and 1994, respectively. Affiliated offices produced 77% to 80% of consolidated revenues from title premiums and fees during each of the three years ended December 31, 1996. Title revenues by state. The approximate amounts and percentages of Stewart's consolidated title revenues (excluding other revenues) by state for the last three years were: AMOUNTS ($MILLIONS) PERCENTAGES ======== ======= ======= ======= ======== ======== 1996 1995 1994 1996 1995 1994 ======== ======= ======= ======= ======== ======== Texas................. 73 61 73 24 25 27 California............ 65 59 68 22 24 25 Florida............... 26 21 22 9 9 8 Nevada................ 15 13 14 5 5 5 Colorado.............. 15 12 12 5 5 4 Arizona............... 14 12 14 5 5 5 New York ............. 13 9 7 4 4 3 All others............ 77 56 62 26 23 23 --- --- --- --- --- --- 298 243 272 100 100 100 === === === === === === -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. Employees. Stewart and its subsidiaries employed approximately 4,111 persons at December 31, 1996. 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: <TABLE> <CAPTION> Location Type Use Size Acquired In - ----------------------- ---------------------- ------------------- --------------- ----------- <S> <C> <C> <C> <C> Houston, Texas Leased office building Executive office of 206,796 sq. ft. (1) the Registrant and Guaranty Dallas, Texas Leased office building Office of Guaranty 25,117 sq. ft (2) Austin, Texas Leased office building Office of Guaranty 14,278 sq. ft. (3) Los Angeles, California Leased office building Office of Guaranty 22,466 sq. ft. (4) San Diego, California Leased office building Office of Guaranty 20,020 sq. ft. (5) Riverside, California Leased office building Office of Guaranty 20,968 sq. ft. (4) San Antonio, Texas Owned office building Office of Guaranty 26,769 sq. ft. 1980 & 1982 Galveston, Texas Owned office building Office of Guaranty 50,000 sq. ft. 1905 Phoenix, Arizona Owned office building Office of Guaranty 24,459 sq. ft. 1981 Phoenix, Arizona Owned office building Office of Guaranty 17,500 sq. ft. 1985 Tucson, Arizona Owned office building Office of Guaranty 24,000 sq. ft. 1974 </TABLE> (1) The lease terminates in 2004. (2) This lease terminates in 1999. (3) This lease terminates in 2001. (4) These leases terminate in 1998. (5) This lease terminates in 2000. The Registrant leases offices at approximately 304 locations. The average term for all such leases is approximately six years. The leases expire from 1997 to 2006. 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 $18,586,000. 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. -3-
6 ITEM 3. LEGAL PROCEEDINGS Guaranty and 18 other title insurers are defendants in a consolidated class action proceeding originating from complaints first filed in April 1990. The suit is currently pending in the United States District Court for the District of Arizona. The plaintiffs allege that the defendants violated federal antitrust law by participating in title insurance rating bureaus in Arizona and Wisconsin in the early 1980s through which they allegedly agreed upon the prices and other terms and conditions of sale for title search and examination services. The plaintiffs request treble damages in an unspecified amount, costs and attorneys' fees. The Court has certified the proceeding as a class action and approved a settlement pursuant to which members of the class would receive cash (not to exceed approximately $4.1 million from all defendants) and additional coverage under, and discounts on, title insurance policies. In addition, the Court has awarded counsel for certain plaintiffs the negotiated sum of $1.3 million in fees and expenses. The Court has awarded counsel for the remaining plaintiffs fees and expenses totaling $0.5 million. The Court has under advisement the motions of such plaintiff's counsel to amend and to reconsider that award. James C. O'Brien and Ingrid K. O'Brien vs. Stewart Title Guaranty Company, filed September 25, 1996, in the United States District Court, Southern District of Florida. This purported class action is one of eight similar suits filed against various underwriters in Florida, including Guaranty. The alleged class would include all purchasers of title insurance or evidence of title in Florida since 1990. Plaintiffs allege that Guaranty's premium and cost sharing agreements with its Florida agents, which are governed by and set in accordance with rates promulgated by the Florida Department of Insurance, constitute violations of the Real Estate Settlement Procedures Act and Florida law, including fraudulent and negligent misrepresentation. Plaintiffs seek injunctive relief and treble damages of at least $60 million based upon the title insurance premiums paid by the purported class. Guaranty has filed a motion to dismiss the complaint on various grounds, including the filed rate doctrine. The Court has deferred any action on the plaintiff's motion to certify the proceedings as a class action pending disposition of Guaranty's motion to dismiss. Guaranty believes that the plaintiff's allegations are without merit and intends to vigorously defend this suit. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -4-
7 P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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. <TABLE> <CAPTION> HIGH LOW DIVIDENDS ----- ----- --------- <S> <C> <C> <C> 1996: First quarter . . . . . . . . . 21.38 19.63 .06 Second quarter. . . . . . . . . 21.25 19.63 .06 Third quarter . . . . . . . . . 21.00 20.00 .06 Fourth quarter. . . . . . . . . 22.63 20.25 .06 1995: First quarter . . . . . . . . . 17.63 15.13 .05 Second quarter. . . . . . . . . 20.00 17.13 .05 Third quarter . . . . . . . . . 20.25 18.63 .05 Fourth quarter . . . . . . . . 22.50 18.63 .06 </TABLE> 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. While it is the current intention of the Board of Directors to continue to pay quarterly cash dividends on its Common Stock, the payment of future dividends necessarily will depend on the earnings and financial needs of the Company, as well as applicable legal restrictions. -5-
8 ITEM 6. SELECTED FINANCIAL DATA Selected financial data have been included on Page 18 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, and such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth on Pages 18 through 21 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, and such information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA <TABLE> <CAPTION> 1996 Annual Report to Stockholders Page No. <S> <C> Independent Auditors' Report ....................................... 21 Consolidated Statements of Earnings and Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 ....................... 22 Consolidated Balance Sheets as of December 31, 1996 and 1995 ....... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 ................................... 24 Notes to Consolidated Financial Statements ......................... 25 </TABLE> ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -6-
9 P A R T III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders to be held April 25, 1997, under the captions "Election of Directors" and "Executive Compensation", and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders to be held April 25, 1997, under the caption "Executive Compensation", and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders to be held April 25, 1997, under the caption "Security Ownership of Certain Beneficial Owners and Management", and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders to be held April 25, 1997, under the caption "Executive Compensation", and such information is incorporated herein by reference. -7-
10 P A R T IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. and 2. Financial Statements and Financial Statement Schedules Item 8 of this Report on Form 10-K lists certain consolidated financial statements of the Registrant and its subsidiaries incorporated by reference to the Annual Report to Stockholders for the year ended December 31, 1996, which includes a reference to appropriate page numbers in such Annual Report. <TABLE> <CAPTION> Form 10-K Page No. --------- <S> <C> Independent Auditors' Report ................................................ 11 Reports of Independent Auditors ............................................. 12 Schedule II - Financial information of the Registrant (Parent Company) ..... 36 - Short-term borrowings ........................................ 40 Schedule V - Valuation and qualifying accounts ............................ 41 </TABLE> 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, 1996. (c) Exhibits 3.1 - Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) 3.2 - By-Laws of the Registrant 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 between the Registrant and certain executive officers (incorporated by reference to Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) -8-
11 13. - Annual Report to Stockholders for 1996 (the financial text of the annual report incorporated herein by reference in Item 6 of Part II of this report) 21. - Subsidiaries of the Registrant 23. - Consents of Independent Certified Public Accountants, including consents to incorporation by reference of their reports into previously filed Securities Act registration statements 27. - Financial Data Schedule -9-
12 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: Carloss Morris --------------------------------------------- Carloss Morris, Co-Chief Executive Officer and Chairman of the Board of Directors By: Stewart Morris --------------------------------------------- Stewart Morris, Co-Chief Executive Officer, President and Director By: Max Crisp --------------------------------------------- Max Crisp, Vice President-Finance, Secretary, Treasurer, Director and Principal Financial and Accounting Officer Dated: March 25, 1997 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: Max Crisp Director March 25, 1997 ------------------------ (Max Crisp) E. Douglas Hodo Director March 25, 1997 - ------------------------- (E. Douglas Hodo) C. M. Hudspeth Director March 25, 1997 - ------------------------- (C. M. Hudspeth) Carloss Morris Director March 25, 1997 - ------------------------- (Carloss Morris) Stewart Morris Director March 25, 1997 - ------------------------- (Stewart Morris) -10-
13 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Stewart Information Services Corporation: Under date of February 7, 1997, we reported on the consolidated balance sheets of Stewart Information Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings and retained earnings and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK L.L.P. - --------------------------------------- Houston. Texas February 7, 1997 -11-
14 REPORT OF INDEPENDENT ACCOUNTANT Stewart Title Company El Paso, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at 500 N. Mesa, Suite 300, El Paso, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company, El Paso, Texas, as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ M. TIMOTHY O'ROARK -------------------------- M. TIMOTHY O'ROARK, C.P.A. El Paso, Texas February 18, 1997 -12-
15 REPORT OF INDEPENDENT AUDITORS The Board of Directors Stewart Title We have audited the statements of operations, retained earnings, and cash flows for the year ended December 31, 1994 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and its cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG L.L.P. ------------------------------- ERNST & YOUNG LLP Century City Los Angeles, California January 20, 1995 -13-
16 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Stewart Title & Trust of Phoenix, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and retained earnings and of cash flows as of and for each of the two years in the period ended December 31, 1994 present fairly, in all material respects, the financial position, results of operations and cash flows of Stewart Title & Trust of Phoenix, Inc. and its subsidiary and affiliate as of and for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Stewart Title & Trust of Phoenix, Inc. and its subsidiary and affiliate for any period subsequent to December 31, 1994. /s/ PRICE WATERHOUSE LLP - ---------------------------------------- PRICE WATERHOUSE LLP Phoenix, Arizona January 20, 1995 -14-
17 To the Board of Directors Stewart Title of California San Jose, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Stewart Title of California at December 31, 1996 and 1995 and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of California as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS ------------------------------ GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 16, 1997 -15-
18 To the Board of Directors Stewart Title of Monterey County Monterey, California INDEPENDENT AUDITORS REPORT We have audited the accompanying balance sheet of Stewart Title of Monterey County at December 31, 1996 and 1995 and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Monterey County as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS ------------------------------ GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 7, 1997 -16-
19 To the Board of Directors Stewart Title of Modesto Modesto, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheets of Stewart Title of Modesto at December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Modesto as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS ----------------------------- GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 7, 1997 -17-
20 To the Board of Directors Stewart Title of Fresno County Fresno, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Stewart Title of Fresno County at December 31, 1996 and 1995 and the related statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Stewart Title of Fresno County as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT BENNETT ACCOUNTANTS ----------------------------- GRANT BENNETT ACCOUNTANTS A PROFESSIONAL CORPORATION Certified Public Accountants January 9, 1997 -18-
21 EXHIBIT A INDEPENDENT AUDITORS' REPORT The Board of Directors Stewart Title Dallas, Inc. dba: Stewart Title North Texas, Inc. We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996, prepared from the accounts maintained at your office at 5728 LBJ Freeway, Dallas, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Dallas, Inc. dba: Stewart Title North Texas, Inc. as of December 31, 1996 in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and are not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ WILKERSON & ARTHUR - ---------------------- Wilkerson & Arthur, P.C. January 16, 1997 -19-
22 EXHIBIT A INDEPENDENT AUDITORS' REPORT The Board of Directors Priority Title Company of Dallas, L.L.C. We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996, prepared from the accounts maintained at your office at 5728 LBJ Freeway, Dallas, Texas. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Priority Title Company of Dallas, L.L.C. as of December 31, 1996 in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and are not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ WILKERSON & ARTHUR, P.C. - --------------------------------------- Wilkerson & Arthur, P.C. January 16, 1997 -20-
23 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title Austin, Inc. Austin, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Austin, Inc. as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at Austin, Texas. This financial statement is the responsibility Of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Austin, Inc., as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 16, 1997 /s/ AARONSON, WHITE & COMPANY - ------------------------------------------ Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 -21-
24 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title Company - Galveston Galveston, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Company - Galveston as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at Galveston, Texas. This financial statement is the responsibility Of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Galveston, as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 10, 1997 /s/ AARONSON, WHITE & COMPANY - ------------------------------------ Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 -22-
25 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title of Montgomery County, Inc. The Woodlands, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title of Montgomery County, Inc. as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at The Woodlands, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Montgomery County, Inc., as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 23, 1997 /s/ AARONSON, WHITE & COMPANY - ------------------------------------- Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 -23-
26 REPORT OF INDEPENDENT ACCOUNTANTS To: Stewart Title Company - Fort Bend Sugarland, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Stewart Title Company - Fort Bend as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at Sugarland, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Fort Bend, as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report is presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities taken as a whole. January 14, 1997 /s/ AARONSON, WHITE & COMPANY - -------------------------------------- Aaronson, White & Company 16010 Barker's Point Lane Suite 175 Houston, Texas 77079 -24-
27 INDEPENDENT AUDITORS' REPORT The Board of Directors Stewart Title - Houston Division I have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of the National Title Services Division of Stewart Title Guaranty Company as of December 31, 1996 and 1995, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statement is the responsibility of the company's management. My responsibility is to express an opinion on this financial statement based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by the National Title Services Division of Stewart Title Guaranty Company as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. My audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ GINNY SANDERS MAY, CPA - ------------------------------------ Ginny Sanders May, CPA January 21, 1997 -25-
28 INDEPENDENT AUDITORS' REPORT The Board of Directors Stewart Title - Houston Division I have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of the Houston Division of Stewart Title as of December 31, 1996 and 1995, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statement is the responsibility of the company's management. My responsibility is to express an opinion on this financial statement based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by the Houston Division of Stewart Title as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. My audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ GINNY SANDERS MAY, CPA - ------------------------------------- Ginny Sanders May, CPA January 21, 1997 -26-
29 INDEPENDENT AUDITORS' REPORT The Board of Directors Priority Title Company of Houston, L.L.C. I have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts of Priority Title Company of Houston, L. L. C. as of December 31, 1996 and 1995, prepared from the accounts maintained in your office at 1980 Post Oak Boulevard, Houston, Texas. The financial statement is the responsibility of the company's management. My responsibility is to express an opinion on this financial statement based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Priority Title Company of Houston, L.L.C. as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. My audit has been made of or the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ GINNY SANDERS MAY, CPA - ----------------------------------------- Ginny Sanders May, CPA January 21, 1997 -27-
30 EXHIBIT A Independent Auditors' Report Board of Directors Stewart Title Company--Beaumont Division Beaumont, Texas 77706 We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996, prepared from the accounts maintained at your office at 2390 N. Dowlen Road, Beaumont, Texas. This financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company - Beaumont Division. as of December 31, 1996, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities. taken as a whole. Very truly yours, /s/ EDGAR, KIKER, & CROSS ---------------------------- EDGAR, KIKER & CROSS, L.L.P. Certified Public Accountants -28-
31 INDEPENDENT AUDITOR'S REPORT Board of Directors Stewart Title Company Houston, Texas I have examined the statements of assets and liabilities of trust (escrow) fund accounts as of December 31, 1996 and 1995, prepared from the accounts maintained at your office in San Antonio, Texas. My examination, which was limited to such accounts, was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as I considered necessary in the circumstances. In my opinion, the aforementioned statements of assets and liabilities of trust (escrow) fund accounts (not separately presented herein) present fairly the assets and liabilities of such accounts handled by the San Antonio Division of Stewart Title Company, as of December 31, 1996 and 1995, in accordance with generally accepted accounting principles, applied on a consistent basis. /s/ JIM S. WALKER ----------------------------- Jim S. Walker Certified Public Accountant Beaumont, Texas January 15, 1997 -29-
32 INDEPENDENT AUDITORS' REPORT Board of Directors Stewart Title Company Amarillo, Texas District Office We have audited the accompanying Statement of Assets and Liabilities of Trust Fund Accounts as of December 31, 1996, prepared from the accounts maintained at your office at Amarillo, Texas. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audits 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 accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. we believe that our audits of the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts provide a reasonable basis for our opinion. In our opinion, Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company, for the years then ended in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examinations of the basic Statements of Assets and Liabilities, and is fairly stated in all material respects in relation to the basic Statements of Assets and Liabilities, taken as a whole. /s/ DOSHIER, PICKENS & FRANCIS, P.C. - ---------------------------------------- DOSHIER, PICKENS & FRANCIS, P.C. January 14, 1997 -30-
33 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Stewart Title of Corpus Christi, Inc. Corpus Christi, Texas We have audited the Statements of Assets and Liabilities of Trust [Escrow] Fund Accounts as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at Corpus Christi, Texas. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 of the financial statements provide a reasonable basis for our opinion. In our opinion, the Statements of Assets and Liabilities of Trust [Escrow] Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts managed by Stewart Title Company, Corpus Christi Branch, as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion of the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examinations of the basic statements of assets and liabilities, and is fairly stated in all material respects in relation to the basic statements of assets and liabilities, taken as a whole. /s/ FANCHER & COMPANY - -------------------------------------- FANCHER AND COMPANY January 27, 1997 -31-
34 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Stewart Title of Lubbock, Inc. 7802 Indiana Avenue Lubbock, Texas 79423 I have audited the accompanying Statement of Assets and Liabilities of Trust (Escrow) Accounts as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at 7802 Indiana Avenue, Lubbock, TX 79423. These financial statements are the responsibility of the company's management. My responsibility is to express an opinion of these financial statements based on my audits. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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. I believe that my audits provides a reasonable basis for my opinions. In my opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such escrow accounts handled by Stewart Title of Lubbock, Inc., as of December 31, 1996, and 1995 in conformity with generally accepted accounting principles. My audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information contained in Exhibit C through F, inclusive, and Exhibit H of these reports, is presented as additional information and is not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examination of the basic Statement of Assets and Liabilities, and is fairly stated in all material respects in relation to the basic statements of assets and liabilities taken as a whole. /s/ JESUS YEPEZ Jesus Yepez Certified Public Accountant Lubbock, Texas -32-
35 REPORT OF INDEPENDENT ACCOUNTANT Board of Directors Stewart Title Guaranty Company Houston, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996 and 1995, prepared from the accounts maintained at your office at 2401 Moores Lane, Texarkana, Texas. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these 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 audits 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 opinions. In our opinion, the Statements of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above present fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of Texarkana as of December 31, 1996 and 1995, in conformity with generally accepted accounting principles. Our audits have been made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information contained in Exhibits C through F, inclusive, and Exhibit H of these reports are presented as additional information and are not a required part of the basic financial statements. Such information has been subjected to the audit procedures applied in the examinations of the basic statements of assets and liabilities, and is fairly stated in all material respects in relation to the basic statements of assets and liabilities, taken as a whole. /s/ WILLIAMS & PEARCY Williams & Pearcy, P.C. January 25, 1996 -33-
36 Independent Auditor's Report Stewart Title Company of Rockport, Inc. Rockport, Texas 78382 We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996 prepared from the accounts maintained at your office at Rockport, Texas. The financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title Company of Rockport, Inc. as of December 31, 1996, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through H, inclusive, of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ FLUSCHE, VAN BEVEREN, KILGORE, P.C. Flusche, Van Beveren, Kilgore, P.C. Corpus Christi, Texas February 6, 1997 -34-
37 Independent Auditor's Report Stewart Title of San Patricio County, Inc. Portland, Texas We have audited the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts as of December 31, 1996 prepared from the accounts maintained at your office at Portland, Texas. The financial statement is the responsibility of the company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the Statement of Assets and Liabilities of Trust (Escrow) Fund Accounts referred to above presents fairly, in all material respects, the assets and liabilities of such accounts handled by Stewart Title of San Patricio County, Inc. as of December 31, 1996, in conformity with generally accepted accounting principles. Our audit has been made for the purpose of forming an opinion on the basic financial statement taken as a whole. The supplemental information contained in Exhibits C through Exhibit H of this report are presented as additional information and is not a required part of the basic financial statement. Such information has been subjected to the audit procedures applied in the examination of the basic statement of assets and liabilities, and is fairly stated in all material respects in relation to the basic statement of assets and liabilities, taken as a whole. /s/ FLUSCHE, VAN BEVEREN, KILGORE, P.C. Flusche, Van Beveren, Kilgore, P.C. Corpus Christi, Texas February 6, 1997 -35-
38 SCHEDULE II STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) INCOME AND RETAINED EARNINGS INFORMATION <TABLE> <CAPTION> Year Ended December 31, ------------------------------ 1996 1995 1994 -------- -------- -------- (In thousands) <S> <C> <C> <C> Revenues Investment income ..................................... $ 439 $ 224 $ 201 Other income............................................ - 12 28 -------- -------- -------- 439 236 229 Expenses Employee costs ......................................... 163 211 288 Other operating expenses ............................... 1,515 1,634 1,211 Depreciation and amortization .......................... 100 101 21 -------- -------- -------- 1,778 1,946 1,520 Loss before taxes and equity in earnings of investees .... (1,339) (1,710) (1,291) Income taxes (benefit) ................................... (458) (592) (444) Equity in earnings of investees .......................... 15,318 8,125 10,525 -------- -------- -------- Net income ............................................... 14,437 7,007 9,678 Retained earnings at beginning of year ................... 118,547 112,754 106,262 Cash dividends on Common Stock ($.24, $.21 and $.20 per share) ................................................. (1,488) (1,214) (1,118) Stock dividend ........................................... - - (2,068) -------- -------- -------- Retained earnings at end of year ......................... $131,496 $118,547 $112,754 ======== ======== ======== </TABLE> See accompanying note to financial statements. (Schedule continued on following page.) -36-
39 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) BALANCE SHEET INFORMATION <TABLE> <CAPTION> December 31, -------------------- 1996 1995 -------- -------- (In thousands) <S> <C> <C> Assets Cash and cash equivalents ...................................................... $ 100 $ 54 -------- -------- Short-term investments .......................................................... 10,620 4,373 -------- -------- Receivables: Notes, including $6,960 and $7,057 from affiliates .............................. 7,094 7,251 Other, including $2,493 and $5,000 from affiliates .............................. 6,140 6,873 Less allowance for uncollectible amounts ........................................ (20) - -------- -------- 13,214 14,124 Furniture and equipment at cost ................................................. 167 167 Less accumulated depreciation ................................................... (85) (67) -------- -------- 82 100 Title plants, at cost ........................................................... 48 48 Investments in investees ......................................................... 168,243 155,408 Other assets ..................................................................... 3,168 3,241 -------- -------- $195,475 177,348 ======== ======== Liabilities Payables: Notes, including $ - and $ - from affiliates ................................... $ 580 $ - Accounts payable and accrued liabilities ....................................... 3,905 2,496 Contingent liabilities and commitments Stockholders' equity Common - $1 par, authorized 15,000,000, issued and outstanding 6,216,441 and 5,864,758 ................................................................ 6,216 5,865 Class B Common - $1 par, authorized 1,500,000, issued and outstanding 525,006... 525 525 Additional paid-in-capital ..................................................... 50,833 45,945 Net unrealized investment gains, net of deferred taxes ........................ 1,920 3,970 Retained earnings (1) ......................................................... 131,496 118,547 -------- -------- Total stockholders' equity ($28.33 and $27.36 per share) ............... 190,990 174,852 -------- -------- $195,475 $177,348 ======== ======== </TABLE> (1) Includes undistributed earnings of subsidiaries of $130,708 in 1996 and $126,480 in 1995. See accompanying note to financial statements. (Schedule continued on following page.) -37-
40 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION (PARENT COMPANY) CASH FLOWS INFORMATION <TABLE> <CAPTION> Year Ended December 31, ---------------------------- 1996 1995 1994 ------- ------ -------- (In thousands) <S> <C> <C> <C> Cash flow from operating activities (Note) ................... $ 7,033 $1,169 $ (281) Cash flow from investing activities: Purchases of furniture and equipment and title plants - net......................................................... - - (56) Proceeds from investments sold ............................. 11,520 7,011 4,076 Purchases of investments, excluding mortgage loans .......... (17,767) (6,865) (4,901) Increases in mortgages and other notes receivable ........... (70) (262) - Collections on mortgages and other notes receivable ......... 227 31 698 ------- ------ -------- Cash used by investing activities ............................ (6,090) (85) (183) ------- ------ -------- Cash flow from financing activities: Dividends paid .............................................. (1,488) (1,214) (1,118) Proceeds of notes payable ................................... 610 - - Payments on notes payable ................................... (30) - - Proceeds from issuance of stock ............................. 11 - 837 ------- ------ -------- Cash used by financing activities ............................ (897) (1,214) (281) ------- ------ -------- Increase (decrease) in cash and cash equivalents ............. $ 46 $ (130) $ (745) ======= ====== ======== Note: Reconciliation of net income to the above amounts: Net income .................................................. $14,437 $7,007 $ 9,678 Add (deduct): Depreciation and amortization .............................. 100 101 21 Provision for uncollectible amounts - net ................. 20 64 - Increase in accounts receivable - net ...................... (3,207) (1,326) (378) Increase (decrease) in accounts payable and accrued liabilities - net ......................................... 264 (2,668) 195 Equity in net earnings of investees ........................ (15,318) (8,125) (10,525) Dividends received from investees........................... 11,090 5,650 1,340 Stock bonuses .............................................. - - 61 Other - net ................................................ (353) 466 (673) ------- ------ -------- Cash provided (used) by operating activities ................. $ 7,033 $1,169 $ (281) ======= ====== ======== Supplemental information: Income taxes paid .......................................... - - - Interest paid .............................................. - - - </TABLE> See accompanying note to financial statements. (Schedule continued on following page.) -38-
41 SCHEDULE II (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. Total dividends received from unconsolidated subsidiaries for 1996, 1995 and 1994 were $8,583,000, $9,390,000 and $2,600,000, respectively. -39-
42 SCHEDULE II (CONTINUED) STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES SHORT-TERM BORROWINGS THREE YEARS ENDED DECEMBER 31, 1996 <TABLE> <CAPTION> ======================================================================================================================== Col. A Col. B Col. C Col. D Col. E Col. F ========================================================================================================= ============= Maximum Average Weighted Weighted amount amount average Balance average outstanding outstanding interest rate Category of aggregate at end interest during the during the during the short-term borrowings (1) of period rate period period (2) period (3) ========================================================================================================= ============= <S> <C> <C> <C> <C> <C> December 31, 1994: Banks ........................................... $4,456,107 8.58% $4,456,107 $2,739,508 7.38% ========== ==== ========== ========== ==== December 31, 1995: Banks ........................................... $3,380,430 8.61% $5,055,807 $4,487,714 8.82% ========== ==== ========== ========== ==== December 31, 1996: Banks ........................................... $2,646,893 7.55% $4,046,900 $3,145,603 8.03% ========== ==== ========== ========== ==== </TABLE> (1) Bank borrowings represent short-term notes due within one year of the loan's origination. (2) Computed by summing each month-end balance and dividing the total by twelve. (3) Computed by dividing total yearly interest expense by the average of the month-end principal balances. -40-
43 SCHEDULE V STEWART INFORMATION SERVICES CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1996 <TABLE> <CAPTION> =================================================================================================================================== Col. C Col. A Col. B Additions Col. D Col. E =================================================================================================================================== Balance Charged Charged to at to other Balance beginning cost and accounts -Deductions- at end Description of period expenses describe described of period =================================================================================================================================== <S> <C> <C> <C> <C> <C> Stewart Information Services Corporation and subsidiaries: Year ended December 31, 1994: Estimated title losses .................... $117,585,559 $40,211,895 - $23,481,018(A) $134,316,436 Allowance for uncollectible amounts .................................. 5,268,419 2,233,675 - 1,379,045(B) 6,123,049 Year ended December 31, 1995: Estimated title losses .................... 134,316,436 29,590,891 - 25,594,793(A) 138,312,534 Allowance for uncollectible amounts................................... 6,123,049 1,333,744 - 957,846(B) 6,498,947 Year ended December 31, 1996: Estimated title losses .................... 138,312,534 33,829,851 - 21,810,822(A) 150,331,563 Allowance for uncollectible amounts................................... 6,498,947 1,575,000 - 1,404,356(B) 6,669,591 Stewart Information Services Corporation - Parent: Year ended December 31, 1994: Allowance for uncollectible amounts $ 8,198 - - - $ 8,198 Year ended December 31, 1995: Allowance for uncollectible amounts 8,198 $ 64,382 - $ 72,580(C) - Year ended December 31, 1996: Allowance for uncollectible amounts - 20,000 - - 20,000 </TABLE> (A) Represents payments of policy losses and loss adjustment expenses during the year, less salvage collections. (B) Represents uncollectible accounts written off. (C) Represents an adjustment to accounts receivable previously reserved and current year write-off of uncollected accounts. -41-
44 INDEX TO EXHIBITS <TABLE> <CAPTION> Sequentially Numbered Exhibit Page - ------- ------------ <S> <C> <C> 3.1 - Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) 3.2 - By-laws of the Registrant 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 between the Registrant and certain executive officers (incorporated by reference to Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) 13. - Annual Report to Stockholders for 1996 (the financial text of the annual report incorporated herein by reference in Item 6 of Part II of this report) 21. - Subsidiaries of the Registrant 23. - Consents of Independent Certified Public Accountants, including consents to incorporation by reference of their reports to previously filed Securities Act registration statements 27. - Financial Data Schedule </TABLE>