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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-24961
AMERICAN NATIONAL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0731548
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
17911 VON KARMAN AVENUE, SUITE 240
IRVINE, CALIFORNIA 92614 (949) 622-4700
(Address of principal executive (Zip (Registrant's telephone number,
offices) Code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
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 29, 2000, 7,281,090 shares of common stock (no par value) were
outstanding, and the aggregate market value of the shares of the common stock
held by non-affiliates of the registrant was $16,339,766. The aggregate market
value was computed with reference to the closing price on the NASDAQ National
Market on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number 59 .
The information in Part III hereof is incorporated herein by reference to
the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended
December 31, 1999, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 16
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Item 7A. Quantitative and Qualitative Market Risk Disclosures........ 24
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 59
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PART I
ITEM 1. BUSINESS
American National Financial, Inc., through its subsidiaries (collectively,
the "Company" or "ANFI") provides title insurance services as well as other real
estate related financial and informational services including escrow, real
estate information, trustee sale guarantees and appraisals. In addition, the
Company obtains specialized services for its customers, which include, but are
not limited to, tax reporting services, exchange intermediary services and
courier services. The company's business is focused on the residential real
estate market. The Company generates the majority of its revenue from issuing
title insurance policies as an independent agent on behalf of an affiliated
title underwriter.
The Company was incorporated in November 1996 by its current management,
and in July 1997 acquired 60% of the outstanding stock of American Title Company
("ATC") from Fidelity National Financial, Inc. ("FNFI") for $6.0 million in
cash. The purchase price was funded with debt incurred by the Company, all of
which has been repaid from operations or as a result of the reorganization
described below. (See "Reorganization" below and Note 13 of Notes to
Consolidated Financial Statements.) In August 1997, ATC purchased all of the
outstanding common stock of Santa Barbara Title Company. In April 1999, Santa
Barbara Title Company was merged with ATC. The Company also formed its other
subsidiaries, American Document Services, Inc., West Point Appraisal Services,
Inc., West Point Support Services, Inc. and West Point Properties, Inc., in
1997.
ATC, the Company's primary subsidiary, commenced business in 1989, and was
acquired by FNFI in January 1996, at which time ATC's operations had been
conducted solely in Kern County, California. Following the acquisition by FNFI,
ATC pursued an expansion strategy that included acquiring and opening offices in
selected other counties located throughout California. In January 1997, FNFI
contributed to ATC all of the outstanding stock of American Title Insurance of
Arizona, Inc. (formerly known as Nations Title Insurance of Arizona, Inc.),
which is an underwritten title company in Phoenix, Arizona and Landmark REO
Management Services, Inc., a property management company.
In June 1999, the Company acquired National Title Insurance of New York
Inc. ("National"), a New York domiciled underwriter, from a subsidiary of FNFI
for $3.25 million. This acquisition will enable the Company to generate
underwriting fees and to expand geographically into counties and states in which
the Company does not presently operate. National is licensed to issue title
insurance in 34 states, the District of Columbia and the U.S. Virgin Islands.
National did not underwrite any significant number of title insurance
policies through direct operations or agency relationships during 1999. The
primary purpose of the acquisition is to own an underwriter, which will enable
the Company to generate underwriting fees and permit the Company to expand
geographically into counties and states in which National is presently licensed.
The Company believes this expansion can be accomplished more quickly and
cost-effectively through the acquisition than through other means. The Company
also believes that the acquisition will expand the business opportunities for
its current and potential employees and affiliates, which will aid in the
Company's recruitment efforts, and will permit the Company to generate
additional revenue by writing title insurance policies in those geographic areas
which are not covered by ATC's exclusive agency arrangements with FNTIC. See
"Relationship with Fidelity National Financial, Inc."
In January 2000, the Company purchased 100% of the stock of Bancserv, Inc.,
a California corporation located in Santa Ana, California. Bancserv, Inc., a
document company, provides outsource services to the real estate and banking
industry through a national network of qualified notaries public. The purchase
price was $1.3 million, payable $400,000 in cash and a $900,000 promissory note
that bears interest at a rate of 7.50% and is due through January 2005. The note
requires monthly principal and interest payments of $18,000 beginning February
1, 2000.
In February 2000, the Company purchased 100% of the stock of Pioneer Land
Title Corporation ("Pioneer"), a New York corporation. Pioneer provides title
and escrow services in the state of New York.
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The purchase price was $1.8 million, payable $360,000 in cash and a $1.44
million promissory note that bears interest at 6.56% per annum from the purchase
date through the fourth anniversary date.
In February 2000, the Company purchased 100% of the membership interests of
Emerald Mortgagee Assistance Company, LLC., ("EMAC"), a full service provider of
release and assignment document preparation, document retrieval and special
title assistance headquartered in Colorado with operations nationwide. The
purchase price of $1.9 million was paid in cash of $1.7 million, subject to
certain purchase price adjustments based on the combined equity of EMAC and
American Research Services, its affiliate, and 58,495 shares of the common stock
of the Company.
REORGANIZATION
In November 1998, the Company acquired the remaining 40% of the outstanding
common stock of ATC from FNFI in exchange for 2,099,996 shares of Company common
stock representing approximately 43% of the outstanding shares immediately prior
to the Company's initial public offering. Concurrent with the Reorganization,
$3.5 million of the Company's acquisition debt was repaid. The remaining unpaid
balance of the acquisition debt in the amount of $1.2 million was assumed by the
shareholders of the Company, other than FNFI. (These transactions are
collectively referred to as the "Reorganization"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 13 of
Notes to Consolidated Financial Statements.
INDUSTRY OVERVIEW
The title insurance industry consists of insurers ("underwriters") who
issue policies through direct operations or through agents. The Company's
principal subsidiary, ATC, is an agent, known in California as an "underwritten
title company." ATC has entered into an Issuing Agency Agreement to issue
policies on behalf of Fidelity National Title Insurance Company ("FNTIC"), a
subsidiary of FNFI, an insurer which is licensed in California and Arizona,
among other states. The Company acquired National, a New York domiciled
underwriter licensed in 34 states, the District of Columbia and the U.S. Virgin
Islands that underwrites title insurance policies in geographic areas not
covered by the ATC's exclusive relationship with FNTIC. See "Relationship with
Fidelity National Financial, Inc."
The Company provides title insurance services as well as other real estate
related financial and informational services including escrow, real estate
information, trustee sale guarantees, and appraisals. In addition, the Company
obtains specialized services for its customers, which include, but are not
limited to, tax reporting services, exchange intermediary services and courier
services. The Company's business is focused on the residential real estate
market and in 1999 generated the majority of its revenues from issuing title
insurance policies as an independent agent on behalf of FNTIC. For the years
ended December 31, 1999, 1998 and 1997 (Combined), net title service revenue
represented approximately 57.5%, 57.0%, and 60.3% of the Company's revenues,
respectively.
The Company's primary operations are conducted through 14 branches,
consisting of 62 offices, located in major counties throughout California and in
Maricopa County, Arizona (Phoenix and surrounding areas). Each of the Company's
branches processes real estate transactions within the geographical area of the
branch or region. Each branch is operated as a separate profit center.
During the fourth quarter, 1999, the Company established offices in
Tennessee and Florida to further expand its current customer base by developing
agency relationships.
TITLE POLICIES
Title insurance policies insure title to real estate. The beneficiaries of
title insurance policies are generally buyers of real property or mortgage
lenders. The policy protects the insured against title defects, liens and
encumbrances not specifically excepted from its coverage. Most mortgage lenders
require title insurance as a condition to making loans secured by real estate.
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Title insurance is different from other types of insurance because it
relates to past events which affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can reduce
or eliminate future losses by accurately performing searches and examinations.
Title insurance policies are issued on the basis of a preliminary title
report or commitment. These reports are prepared after a search of public
records, maps and other relevant documents to ascertain title ownership and the
existence of easements, restrictions, rights of way, conditions, encumbrances or
other matters affecting the title to, or use of, real property. A visual
inspection or survey of the property may also be made prior to the issuance of
certain title insurance policies. Copies of public records, maps and other
relevant historical documents are compiled and indexed in a "title plant" in
order to facilitate the preparation of preliminary reports without the necessity
of manually searching public records. Each title plant relates to a particular
county and is kept current on a periodic basis by the continual addition of
copies of recorded documents which affect real property in the particular
county. Title companies often subscribe to independent title information
services to assist in the updating of their title plants and the maintenance of
title records.
The major expense of a title company is the cost of the search and
examination function performed in preparing preliminary title reports,
commitments and title policies, rather than the claim losses associated with the
issuance of these policies. The premium for title insurance is due in full at
the closing of the real estate transaction and is based upon the purchase price
of the property insured or the amount of the mortgage loan and upon the type of
coverage. Coverage under the policy generally terminates upon resale or
refinance of the property. The terms of coverage have become relatively
standardized in accordance with forms approved by state or national trade
associations, such as the American Land Title Association, the California Land
Title Association and the Land Title Association of Arizona. Among the most
commonly issued title insurance policies are standard or extended coverage
policies for owners and lenders and trustee sale guarantees, which provide
assurances to trustees concerning certain information in connection with
nonjudicial foreclosures.
THE TITLE POLICY AND UNDERWRITING PROCESS
A brief description of the process of issuing a title insurance policy,
which usually occurs over a thirty to ninety day period, is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) After the relevant historical data on the property is compiled,
the title officer prepares a preliminary title report which documents (a)
the current status of title and conditions affecting the property, (b) any
exclusions, exceptions and/or limitations which the title underwriter might
include in the policy and (c) specific issues which need to be addressed
and resolved by the parties to the transaction before the title policy will
be issued. The preliminary report is circulated to all the parties for
consideration of any specific issues.
(iii) After the specific issues identified in the preliminary report
are resolved, an escrow agent closes the transaction in accordance with the
instructions of the parties and the title underwriter's conditions.
(iv) Once the transaction is closed and all monies have been released,
the title underwriter or agent issues the policies (a) to the owner and the
lender on a new home sale or resale transaction or (b) to the lender only,
on a refinance transaction.
The terms and conditions upon which title to real property will be insured
are determined in accordance with the standards, policies and procedures of the
title underwriter. The underwriter may have a relationship with a third party
agent, under which the agent issues the title insurance policy on behalf of the
underwriter. The agent performs the search and examination function and retains
a majority of the title premium as a commission. The underwriter receives the
remainder of the premium collected by the agent in exchange for assuming the
risk on the policy.
Underwriting practices in California and Arizona are generally dictated by
the California and Arizona Land Title Associations, although the underwriter's
personnel interpret the application of these rules to
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specific circumstances. An underwriter, such as FNTIC, also maintains and
distributes current information on title practices and procedures to its issuing
agents. The acquisition of National, which closed in June 1999, positively
impacted the Company's balance sheet and significantly expanded the states in
which the Company is licensed to do business.
The maximum amount of liability for an insurer, under a title insurance
policy is usually the face amount of the policy plus the cost of defending the
insured's title against an adverse claim. The reserve for claim losses is based
upon known claims, as well as losses the insurer expects to incur based on
historical experience and other factors, including industry averages, claim loss
history, legal environment, geographic considerations, expected recoupments and
the types of policies written. The title underwriter establishes a reserve for
each known claim based on a review and evaluation of potential liability.
A third party agent that issues title insurance on behalf of an insurer is
not subject to the same liability that the insurer faces under the policy. The
agent is not assuming risk on the title policy and its liability with respect to
the issuance of the policy is typically limited to a specific amount, pursuant
to an agreement with the insurer.
ECONOMIC FACTORS AFFECTING THE INDUSTRY
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the early
1990's, decreases in mortgage interest rates since late 1995 and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales. The overall economic environment, stable mortgage interest rates and
strength in the real estate market, especially in California, contributed to
very positive conditions for the industry throughout 1997, 1998 and the first
quarter 1999. However, mortgage rates began to climb during the last half of
1999, virtually eliminating the volume of refinance activity experienced in the
prior year and early 1999. It is impossible to predict the future direction
interest rates and the real estate market may move or fluctuate.
COMPETITIVE FACTORS
A key competitive factor in the title insurance business is the ability to
develop and maintain a qualified and experienced group of professionals through
which services are delivered to customers. Title insurance business is typically
generated through relationships with persons in the real estate industry such as
independent escrow companies, real estate brokers and agents, developers,
mortgage brokers, mortgage bankers, financial institutions and attorneys. Thus,
the relationships and contacts maintained by sales personnel are critical to
generating such business. In addition, the quality of a title company's service,
its responsiveness and its ability to adapt to customer's needs are important in
attracting and maintaining customers. Other competitive factors include the
financial strength and reputation of the insurer.
The Company believes that the price of title insurance is typically not an
important competitive factor. In both California and Arizona, where the
Company's primary operations are currently conducted, the minimum price of title
insurance is filed by the title underwriter and is regulated by the Department
of Insurance in California and by the State Banking Commission in Arizona. In
the event the Company expands its operations into states where regulatory
authorities do not control prices, the price of title insurance may also become
an important competitive factor.
TITLE INSURANCE OPERATIONS
The Company's primary subsidiary, ATC, is an underwritten title company
licensed by the Department of Insurance of the State of California. ATC is not a
title underwriter, but rather its current business is limited to issuing
policies as an agent on behalf of FNTIC, a subsidiary of FNFI. ATC acts
exclusively as an agent for FNTIC with respect to the procurement of title
insurance policies in 13 selected counties in California and
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one county in Arizona, subject to certain exceptions. This exclusive arrangement
with FNTIC does not apply to other counties into which the Company may expand in
the future due to the National acquisition. ATC's net title service revenue
consists of 88% of the gross title insurance premiums collected on policies
issued pursuant to its agreement with FNTIC. The remaining 12% is comprised of
an 11% underwriting fee and a 1% administrative service fee, both paid to FNTIC.
As an agent, ATC is not subject to the loss and reserve requirements applicable
to insurers, and pursuant to its agreement with FNTIC, ATC's liability is
limited to the first $5,000 of loss under any policy issued by it on behalf of
FNTIC, except in the case of negligence, or willful or reckless conduct. To
date, the amounts paid by the Company to FNTIC in reimbursement of FNTIC's
claims losses under this arrangement have not been material. See "Relationship
with Fidelity National Financial, Inc."
In May 1999, the Department of Insurance, of the State of New York,
approved the acquisition of National Title Insurance of New York, Inc., a New
York underwriter, by American Title Company, a subsidiary of American National
Financial, Inc. Although it has not recently written any significant amount of
business, National is licensed to issue title insurance in 34 states, the
District of Columbia and the U.S. Virgin Islands. The acquisition is expected to
provide the Company with an opportunity to underwrite title insurance policies
and expand its operations through both direct operations and agency
relationships.
The Company, maintains 16 branches consisting of 62 offices located in
California, Arizona, Tennessee and Florida. During the fourth quarter 1999, the
Company opened the offices in Tennessee and Florida to further expand its
current customer base and provide the opportunity to develop agency
relationships. Each of the Company's branches process real estate transactions
within the geographical area of the branch or region. Each branch is operated as
a separate profit center. In the years ended December 31, 1999, 1998 and 1997,
the following branch operations of the Company accounted for the indicated
percentages of total gross title insurance premium revenues:
YEAR ENDED DECEMBER 31
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1999 1998 1997(1)
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PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
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Alameda, CA............................ $ 3,693 6.3% $ 4,642 7.8% $ 2,340 6.3%
Contra Costa, CA....................... 2,775 4.8 3,257 5.5 1,422 3.8
Fresno, CA............................. -- -- -- -- -- --
Inland Empire, CA
(Riverside and San Bernardino)....... 2,646 4.5 2,842 4.8 3,239 8.7
Kern, CA............................... 3,096 5.3 3,003 5.1 2,569 6.9
Los Angeles, CA........................ 10,013 17.2 8,491 14.3 6,623 17.6
Orange, CA............................. 15,909 27.2 15,766 26.6 9,310 24.8
Phoenix, AZ............................ 4,045 6.8 3,912 6.6 2,680 7.2
Sacramento, CA......................... 1,257 2.2 682 1.2 349 0.9
San Diego, CA.......................... 3,831 6.6 4,615 7.8 2,279 6.1
San Mateo, CA.......................... 1,263 2.2 937 1.6 901 2.4
Santa Barbara, CA...................... 684 1.2 518 0.9 -- --
Santa Clara, CA........................ 4,028 6.9 5,551 9.4 2,864 7.7
Ventura, CA............................ 5,130 8.8 4,990 8.4 2,838 7.6
------- ----- ------- ----- ------- -----
$58,370 100.0% $59,206 100.0% $37,414 100.0%
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(1) Gross premium amounts include premiums generated by the predecessor company
for the period January 1 through June 30, 1997 combined with premiums
generated by the Company for the period July 1 through December 31, 1997.
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TITLE PLANTS
To facilitate the preparation of title reports without the necessity of
manually searching official public records, copies of public records, maps and
other relevant historical documents are sometimes compiled and indexed in a
"title plant." Each title plant relates to a particular county and is kept
current on a frequent basis by the addition of copies of recorded documents
which affect real property. Title companies often subscribe to independent title
information services to assist in the updating of their title plants and the
maintenance of title records.
The Company leases title plants from FNTIC in Kern, San Mateo and Santa
Clara counties for an aggregate payment of $10,000 per month. At the expiration
of the lease, the Company will have an option to acquire these title plants for
nominal consideration. See "Relationship with Fidelity National Financial, Inc."
The Company has also entered into a capital lease with Title Records, Inc. for
the use of a title plant in Los Angeles County, and has the right to acquire a
copy of the public records, maps and other relevant historical documents at that
plant. The Company accesses title plants in the other counties in which it
operates through joint plant user agreements with Experian Group and Security
Union Title Insurance Company, a subsidiary of FNFI. See "Relationship with
Fidelity National Financial, Inc."
Maintenance activities related to title plants constitute a significant
item of expense, since each document must be reviewed and indexed. These costs
plus the costs of subscribing to various title information services and other
plant expenses range from approximately $2,000 to $25,000 per month, per county.
ESCROW SERVICES
The escrow services provided by the Company include all of those typically
required in connection with residential and commercial real estate purchase and
finance activities. Fees from escrow services represented approximately 28.2%,
26.5% and 23.8% of the Company's revenues in 1999, 1998 and 1997 (Combined),
respectively. The growth in 1999 and 1998 compared to 1997 is primarily
attributable to the opening of 10 new escrow offices by the Company in
California during 1999 and 1998.
Escrow operations are regulated by state insurance authorities; the Company
has the flexibility to establish different fee schedules in different counties.
The Company believes that the acquisition of National will enable the Company to
expand its escrow operations into counties in which it does not presently hold
the necessary licenses. The Company intends to evaluate these expansion
opportunities on a county by county basis.
OTHER REAL ESTATE RELATED SERVICES
In addition to issuing title insurance policies and providing escrow
services, the Company provides other real estate related services, including
those described below. Such services accounted for approximately 13.2% in 1999,
16.1% in 1998 and 17.6% in 1997 (Combined), respectively.
Document Preparation Services. The Company offers a variety of services
relating to the documentation of real estate transactions. Such services include
(i) the preparation of reconveyance and assignment documents, (ii) file research
and document retrieval services, and (iii) recording services, including
retrieval of recorded documents. The Company is capable of providing these
services in every county and township in the United States. The Company's
ability to provide these services is facilitated by independent abstract
companies, title companies and law firms.
Appraisal Services. The Company's subsidiary, West Point Appraisal
Services, Inc., is an appraisal management company offering a variety of
residential appraisal services to meet the varying needs of its customers. The
appraisal services are also provided through independent approved fee
appraisers.
Inspection Services. The Company's subsidiary, West Point Properties, Inc,
is an inspection company providing inspection services to its customers. These
services are provided through independently contracted inspectors.
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Shortened Title Assurance Reports ("STAR" Product). The Company's STAR
Product serves as a low-cost, limited form of title protection for the benefit
of lenders in subordinate loan transactions where the primary lending criteria
is the borrower's creditworthiness rather than the security interest in the real
property.
Central Order Processing Unit. The Company's Central Order Processing Unit
("COP Unit") provides customers with a centralized location through which they
can order title and escrow services. The services offered through the COP Unit
can be provided on a nationwide basis.
Trustee Sale Guarantee. The Company's trustee sale guarantee ("TSG")
division provides a central location for all trustee sale guarantee requests
throughout California. The Company's services include providing ten-day letter
information, customized accounting and reporting documents, fast track messenger
services and electronic file transfers. TSG services provide assurances to
trustees concerning certain information in connection with nonjudicial
foreclosures of property secured by a deed of trust. Because the number of
foreclosures tends to increase as the real estate market and the economy
decline, the Company's TSG division tends to be countercyclical to its title
insurance business.
Property Management Services. ATC's subsidiary, Landmark REO Management
Services, Inc., provides property management and disposition services for
foreclosure properties throughout the United States. These services include the
initial property inspection, eviction coordination, property maintenance, the
retention of a local broker, and the supervision of escrow for the sale of the
property. The Company's property management services are provided in connection
with foreclosures and therefore tend to be countercyclical to its title
insurance business.
Document Signing Services. ANFI's subsidiary, Bancserv, Inc. provides
outsource services to the real estate and banking industry through a national
network of qualified notaries public.
TITLE LOSSES AND RESERVES
As an agent, ATC is not subject to the loss and reserve requirements
applicable to insurers, and pursuant to its agreement with FNTIC, ATC's
liability is limited to the first $5,000 of loss under any policy issued by it
on behalf of FNTIC, except in the case of negligence, or willful or reckless
conduct. To date, the amounts paid by the Company to FNTIC in reimbursement of
FNTIC's claims losses under this arrangement have not been material.
UNDERWRITING, LOSSES AND RESERVES
The Company believes that the level of risk undertaken pursuant to
National's underwriting standards is consistent with that of the industry. The
maximum amount of liability under a title insurance policy is usually the face
amount of the policy plus the cost of defending the insured's title against an
adverse claim. The reserve for claim losses includes known claims as well as
losses National expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review as to the estimated amount of the claim
and the costs required to settle the claim. Reserves for claims which are
incurred but not reported are provided for at the time premium revenue is
recognized based on historical loss experience and other factors, including
industry averages, claim loss history, legal environment, geographic
considerations and types of policies written. The occurrence of a significant
major claim (those greater than $500,000) in any given period could have a
material adverse effect on National's financial condition and results of
operations for such period.
If a loss is related to a policy issued by an independent agent, National
may proceed against the independent agent pursuant to the terms of the agency
agreement. In any event, National may proceed against third parties who are
responsible for any loss sustained under the title insurance policy under rights
of subrogation.
National believes that its quality controls and underwriting standards will
help minimize its net title claims paid. The Company will further reduce its
losses by following aggressive recoupment procedures under rights of subrogation
or warranties and by carefully reviewing all claims.
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Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
National has not experienced damage awards materially in excess of policy
limits, the possibility of such bad faith damage awards may cause increased
costs and difficulty in settling title claims.
National generally pays losses in cash. In some instances claims are
settled by purchasing the interest of the insured in the real property or the
interest of the adverse claimant. Such interests are generally recorded as an
asset on National's books at the lower of cost or fair value less selling costs
and any related indebtedness is carried as a liability.
National also accrues reserves related for losses arising from the escrow,
closing and disbursement functions due to fraud or operational error based on
historical experience.
REINSURANCE
In the ordinary course of business, National reinsures certain risks with
other title insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other title insurers for the
purpose of earning additional income. National cedes or assumes a portion of
certain policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that the reinsurer is
liable for loss and loss adjustment expense payments exceeding the amount
retained by the ceding company. However, the ceding company remains primarily
liable in the event the reinsurer does not meet its contractual obligations.
COMPETITION
The title insurance industry is highly competitive in the attraction and
retention of customers and independent agents. The number of competing companies
and the size of such companies varies in the different geographic areas in which
the Company conducts its business. Generally, the Company is in competition with
many other title insurers and agents, with the most effective competition coming
from companies which possess greater capital resources. Approximately 2,400
title companies, less than 75 of which are underwriters, are members of the
American Land Title Association, the title insurance industry's national trade
association.
The title insurance industry, however, is heavily concentrated; for
example, it is estimated that the six largest title insurance underwriters,
either directly or through their agents, accounted for approximately 90% of the
policy premium revenue in the United States in 1999. In the Company's principal
markets, competitors currently include direct operations and agents of the title
insurance subsidiaries of FNFI, Chicago Title Corporation (which was acquired by
FNFI on March 20, 2000), First American Financial Corporation, LandAmerica
Financial Group, Inc., Old Republic International Corporation and Stewart
Information Services Corporation, as well as numerous independent agency
operations at the local level. The Company may also face competition from
entrants into the industry and the markets it plans to service.
The industry for escrow and other real estate related services provided by
the Company is also highly competitive and extremely fragmented. The Company's
competition with respect to such services includes not only other title
underwriters and title agents in the insurance industry, but also companies,
both local and national, that specialize in providing a particular service.
Because the parties to a real estate transaction are usually concerned with
time schedules and costs associated with delays in closing the transaction,
competition is based primarily on the quality and timeliness of service. The
Company believes that its competitive position is enhanced by its quality
customer service. The Company believes that the price of title insurance is
typically not an important competitive factor.
MARKETING
The Company attempts to increase the volume of its title insurance and real
estate related services business primarily through customer solicitation by
sales personnel. The primary source of this business is
8
11
from independent escrow companies, real estate brokers and agents, developers,
mortgage brokers, mortgage bankers, financial institutions and attorneys. The
Company believes that the personal contacts maintained by its sales personnel
with these customers are critical to generating title insurance business. The
Company therefore actively encourages its branch personnel to continually
develop new business relationships with persons in the real estate business
community. In addition to generating business through direct solicitation and
general advertising, the Company believes that excellent service is an important
competitive factor in attracting and retaining customers, and measures customer
service in terms of quality and timeliness in the delivery of services.
REGULATION
Title insurance companies, including underwriters, underwritten title
companies and independent agents, are subject to extensive regulation under
applicable state laws. As an agent, the Company is subject to regulation in
California and Arizona. In California,ATC is regulated by the Department of
Insurance, Arizona is regulated by the State Banking Department, State of
Arizona. See Note 11 of Notes to the Consolidated Financial Statements. Such
regulations include licensing requirements for the counties in which the Company
operates, and regulations relating to minimum levels of net worth and working
capital.
Current regulations require that ATC maintain a minimum net worth of
$400,000. The net worth of ATC was $20.4 million as of December 31, 1999 and
$15.3 million as of December 31, 1998. See Note 9 of Notes to Consolidated
Financial Statements.
Insurance underwriters are usually subject to a holding company act in its
state of domicile which regulates, among other matters, the ability to pay
dividends and investment policies. The laws of most states in which the National
transacts business establish supervisory agencies with broad administrative
powers relating to issuing and revoking licenses to transact business,
regulating trade practices, licensing agents, approving policy forms, accounting
principles, financial practices, establishing reserve and capital and surplus
requirements, defining suitable investments for reserves, capital and surplus
and approving rate schedules. In 1998, the National Association of Insurance
Commissioners approved codified accounting practices that changed the definition
of what constitutes prescribed statutory accounting practices and will result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements commencing in 2001. The Company is
currently evaluating the impact of the rules.
Pursuant to statutory accounting requirements of the various states in
which National is licensed, it must defer a portion of premiums earned as an
unearned premium reserve for the protection of policyholders and must maintain
qualified assets in an amount equal to the statutory requirements. The level of
unearned premium reserve required to be maintained at any time is determined on
a quarterly basis by statutory formula based upon either the age, number of
policies and dollar amount of policy liabilities underwritten or the age and
dollar amount of statutory premiums written. As of December 31, 1999, the
statutory unearned premium reserve required and reported for National was $3.7
million.
National is regulated by the Insurance Commissioner of the State of New
York. Regulatory examinations usually occur at three year intervals and
examination is currently in progress for National (1998). The Company has not
received preliminary reports of examination for National, as the examination is
currently ongoing. Additionally, the Auditor Division of the Controller of the
State of California is currently conducting an examination of the funds due the
State of California under various escheatment regulations for the years ended
December 31, 1998 and prior. The Company has not yet received a preliminary
report as the audit is ongoing. The Company does not believe that either the
examinations performed by the insurance regulators or the Controller of the
State of California will have a material impact on its financial position, its
results of operations or its statutory capital and surplus.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 2000, National's
self-imposed single policy maximum insurable amount, which complies with
statutory limitations, was $2.5 million.
9
12
National is subject to regulations that restrict its ability to pay
dividends or make other distributions of cash or property to its parent company
without prior approval from the Department of Insurance of the State of New
York. The maximum amount of dividends which can be paid by National to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions. No dividends, including all dividends paid in the preceding twelve
months, which exceed 10% of the outstanding capital shares can be paid without
prior approval unless after deducting dividends the Company has surplus to
policyholders at least equal to the greater of 50% of its reinsurance reserves
or 50% of the minimum capital required. Additionally, dividends are further
limited to National's earned surplus. Based on this formula, National could not
pay dividends or make distributions as of January 1, 2000.
Pursuant to statutory requirements of the State of New York, National must
maintain certain levels of minimum capital and surplus. The statutory capital
and surplus of National was $2.5 million as of December 31, 1999. The statutory
earnings of National were $426,000, for the year ended December 31, 1999.
National has complied with the minimum statutory requirements as of December 31,
1999.
RATINGS
National is regularly assigned ratings by independent agencies designed to
indicate their financial condition and/or claims paying ability. Financial data
and other information are supplied to the rating agencies and subjected to
quantitative and qualitative analyses from which the ratings are derived.
National's rating, as assigned during 1999, is listed below:
DEMOTECH, INC.
(FINANCIAL STABILITY RATING)
----------------------------
National Title Insurance of New York, Inc.......... A
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
The Company's and National's investment policy is designed to maintain a
high quality portfolio, maximize income, minimize interest rate risk and match
the duration of the portfolio to the Company's liabilities. It is the practice
of the Company to purchase investment grade fixed maturity securities. The
Company's portfolio is subject to economic conditions and normal market risks
and uncertainties.
All of National's investment assets qualify as "admitted assets" and for
purposes of capital and surplus and unearned premium reserves as prescribed by
various state insurance regulations. These investments are restricted by the
state insurance regulations of its domiciliary state and are limited primarily
to cash and cash equivalents, federal and municipal governmental securities and
other corporate investments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
As of December 31, 1999, the carrying amount, of all of the Company's
investments, which approximates the fair value was $14.0 million.
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity securities at December 31, 1999:
DECEMBER 31, 1999
--------------------------------------------
AMORTIZED % FAIR %
RATINGS(1) COST OF TOTAL VALUE OF TOTAL
- ---------- --------- -------- ------- --------
(DOLLARS IN THOUSANDS)
AAA.................................................. $ 4,002 27.9% $ 3,989 28.4%
AA................................................... 1,830 12.8 1,788 12.8
A.................................................... 6,895 48.1 6,750 48.1
Other................................................ 1,600 11.2 1,495 10.7
------- ----- ------- -----
$14,327 100.0% $14,022 100.0%
======= ===== ======= =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation
10
13
The following table sets forth certain information regarding the Company's
fixed maturity securities at December 31, 1999. Expected maturities may differ
from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Fixed maturity
securities with an amortized cost of $2,902,000 and a fair value of $2,848,000
were callable at December 31, 1999:
DECEMBER 31, 1999
--------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
- -------- --------- -------- ------- --------
(DOLLARS IN THOUSANDS)
One year or less..................................... $ 100 0.7 $ 100 0.7
After one year through five years.................... 12,766 89.1 12,500 89.2
After five years through ten years................... 1,461 10.2 1,422 10.1
------- ----- ------- -----
$14,327 100.0% $14,022 100.0%
======= ===== ======= =====
RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL, INC.
The Company has a relationship with FNFI, resulting from FNFI's involvement
in the organization and growth of the Company, FNFI's equity ownership position
in the Company and existing business and contractual relationships between the
two companies. The Company's principal subsidiary, ATC, was a wholly owned
subsidiary of FNFI until July 1, 1997, when the Company acquired 60% of ATC's
outstanding common stock for $6.0 million in cash. As a result of the
reorganization and following the Company's initial public offering, FNFI
currently owns approximately 29.0% of the outstanding common stock of the
Company. See "Reorganization", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments" and Notes
12 and 13 of Notes to Consolidated Financial Statements.
Operationally, the Company and FNTIC continue to have a close working
relationship. FNTIC and ATC have entered into an Issuing Agency Agreement
pursuant to which ATC has agreed that until June 30, 2007 it will act
exclusively as an agent for FNTIC with respect to the procurement of title
insurance policies in 14 counties in California and Arizona, subject to certain
exceptions. This exclusive arrangement does not apply to other counties into
which the Company may expand in the future. Under the Issuing Agency Agreement,
in addition to furnishing title insurance products and services, FNTIC provides
a wide variety of administrative services for ATC, including accounting, legal
and human resources services. ATC pays FNTIC a management fee of 1% of gross
premiums for these services. This administrative services arrangement is
terminable by ATC upon 90 days notice to FNTIC.
YEAR 2000 ISSUES
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 ("Y2K") issue results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of Y2K issues. The scope of the Y2K program included a
review of the systems used in our title plants, title policy processing, escrow
production, claims processing, real estate related services, financial
management, human resources, payroll and infrastructure. In addition to a review
of internal systems, the Company has formally communicated with third parties
with which it does business in order to determine whether or not they are Y2K
compliant and the extent to which the Company may be vulnerable to third
parties' failure to become Y2K compliant. The Company continues the process of
identifying Y2K compliance issues in its systems, equipment and processes. The
Company will make any necessary changes to such systems, updating or replacing
such systems and equipment, and modifying such processes to make them Y2K
compliant.
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The Company developed a four phase program to become Y2K compliant. Phase I
is "Plan Preparation and Identification of the Problem." This is a continuing
phase. Phase II is "Plan Execution and Remediation." Phase III is "Testing."
Phase IV is "Maintaining Y2K Compliance." The status of the Y2K compliance
program is monitored by senior management of the Company and by the Audit
Committee of the Company's Board of Directors. The costs of the Y2K related
efforts incurred to date have not been material, and the estimate of remaining
costs to be incurred is not considered to be material. These estimates may be
subject to change due to the complexities of estimating the cost of modifying
applications to become Y2K compliant and the difficulties in assessing third
parties', including various local governments upon which the Company relies upon
to provide title related data, ability to become Y2K compliant.
The Company has not experienced any Y2K compliance related issues to date.
Management of the Company believes that its electronic data processing and
information systems are Y2K compliant; however, there can be no assurance all of
the Company's systems are Y2K compliant, or the costs to be Y2K compliant will
not exceed management's current expectations, or that the failure of such
systems to be Y2K compliant will not have a material adverse effect on the
Company's business. The Company believes that functions currently performed with
the assistance of electronic data processing equipment could be performed
manually or outsourced if certain systems are determined not to be Y2K
compliant.
The Company has substantially completed a contingency plan in the event
that any systems are not Y2K compliant.
This entire section "Year 2000 Issues" is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
EMPLOYEES
As of March 15, 2000, the Company, including its subsidiaries, had 712 full
time employees. The Company believes its success depends significantly on
attracting and retaining talented and experienced personnel. The Company locates
and recruits its personnel primarily through personal contacts in the industry.
The Company's executive officers are actively involved in the recruitment
process. The Company offers competitive packages of base and incentive
compensation and benefits in order to attract and motivate its employees. The
Company believes that its relations with employees are good.
RISK FACTORS
The Company's securities are speculative in nature and an investment in
such securities involves a high degree of risk. Prospective investors should
consider, along with the other information contained in this Annual Report, the
following considerations and risks in evaluating an investment in the Company.
CYCLICAL NATURE OF REAL ESTATE MARKET
The title insurance industry is dependent on the volume of real estate
transactions that occur. Substantially all of the Company's title insurance,
escrow and other real estate service business result from sales and refinancings
of real estate, primarily residential properties, and from the construction and
sale of new properties. Real estate activity is cyclical in nature and is highly
sensitive to the cost and availability of long-term mortgage funds and general
economic conditions. Real estate activity and, in turn, the Company's revenue
base, can be adversely affected during periods of high interest rates and/or
limited money supply. During 1998 and first half of 1999, low mortgage interest
rates and a strong California real estate market contributed to increased
residential transaction activity. However, mortgage rates began to climb during
the last half of 1999, virtually eliminating the volume of refinance activity
experienced in the prior year and early 1999. It is impossible to predict the
future direction interest rates and the real estate market may move or
fluctuate. No assurance can be given that historical levels of premiums and fees
received by the Company will be available to the Company in the future.
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GEOGRAPHIC CONCENTRATION
The Company derived substantially all of its revenues from real estate
transactions occurring in California. Due to the relatively high cost of real
estate in California, the real estate market may be more sensitive to
fluctuations in interest rates and general economic conditions than other
regions of the United States. Adverse economic conditions affecting the
California real estate market could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL,
INC.
The Company maintains a close relationship with FNFI and its subsidiaries
and relies upon them for a number of services in connection with its operations.
The Company has agreed that until June 30, 2007 it will act exclusively as an
agent for FNTIC with respect to the procurement of title insurance policies in
13 selected counties in California and one county in Arizona, subject to certain
exceptions. In exchange for a management fee, FNTIC provides a variety of
administrative services for ATC, including accounting, legal and human resources
services. The unexpected loss of FNTIC's underwriting or administrative
services, for any reason, could result in an interruption in the Company's
operations until such services are secured elsewhere, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Certain of FNFI's subsidiaries are competitors of the Company in several of
the markets in which the Company operates. A director and certain officers of
the Company are also directors or officers of FNFI. Accordingly, there is a
possibility that the interests of the Company and FNFI might conflict. There can
be no assurance that the directors or officers of the Company, in satisfying
their fiduciary duties and the requirements of applicable statutory laws to
ensure such conflicts are properly resolved, can or will act in the best
interests of the Company.
RISKS ASSOCIATED WITH NATIONAL
In June 1999, ATC acquired all of the outstanding capital stock of
National. Due to the affiliated nature of the parties this should not be
considered an arm's length transaction. National, a New York domiciled insurance
underwriter, is currently licensed to issue title insurance policies in 34
states, the District of Columbia and the U.S. Virgin Islands. An element of the
Company's business strategy is to utilize National not only as a means to
generate underwriting premiums but to expand geographically into states where
the Company does not currently operate. This is the primary purpose of the
National acquisition. In addition, National does not currently underwrite a
significant amount of title insurance policies through direct operations or
agency relationships and the Company will be required to commit resources to
establish direct operations and agency relationships in order to realize the
benefits of this acquisition. Cash resources for the development of National is
expected to be provided by current cash balances and internally generated funds.
National's principal value lies in the licenses it holds to operate as an
underwriter in 34 states, the District of Columbia and U.S. Virgin Islands, and
the strategic options the Company pursues in utilizing the licenses. There can
be no assurance that the Company will be able to develop any significant
business or generate title insurance premiums through National, or that it will
realize any of the benefits anticipated from the acquisition of National.
COMPETITION
The title insurance business is very competitive, primarily in the areas of
service and expertise. The size and financial strength of the title insurer who
underwrites the policies are also important factors in decisions relating to the
purchase of title insurance. Many of the Company's competitors have greater
financial, personnel, marketing and other resources than the Company, and some
are underwritten by larger title insurance companies. Also, the removal of
regulatory barriers in the future might result in new competitors, including
financial institutions, entering the title insurance business. Intense
competition among the more established title insurance companies and any such
new entrants could have a material adverse effect on the business, financial
condition and results of operations of the Company.
13
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RISKS RELATED TO POSSIBLE ACQUISITIONS
An element of the Company's business strategy is to expand its operations
through the acquisition of complementary businesses. The Company has no
agreements, understandings or commitments and is not currently engaged in
negotiations with respect to any additional acquisition. There can be no
assurance that the Company will be able to identify, acquire, profitably manage
or successfully integrate any businesses into the Company without incurring
substantial expenses, delays or other operational or financial problems.
Moreover, competition for acquisition candidates is intense, which could both
increase the price of any acquisition targets and decrease the number of
attractive companies available for acquisition. Furthermore, acquisitions
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, increased costs to improve
managerial, operational, financial and administrative systems, legal
liabilities, and amortization of acquired intangible assets, some or all of
which could materially and adversely affect the Company's business, operating
results and financial condition. The Company may have to issue additional equity
securities or incur indebtedness in order to finance the acquisition of other
businesses. In addition, there can be no assurance that acquired businesses, if
any, will achieve anticipated revenues and earnings or performance at levels
historically enjoyed by the Company. The failure of the Company to manage its
acquisition strategy successfully could materially and adversely affect the
Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH
The Company is currently experiencing significant growth and intends to
pursue further growth as part of its business strategy. The Company's ability to
effectively manage the growth of its operations will require it to continue to
improve its operational, financial and other internal systems and to attract,
develop, motivate and retain its employees. The Company's rapid growth has
presented and will continue to present numerous operational challenges, such as
the assimilation of financial reporting systems, and will increase the demands
on the Company's senior management and the Company's systems and internal
controls. In addition, the Company's success depends in large part upon its
ability to attract, develop, motivate and retain talented employees with
significant industry experience and contacts. Such employees are currently in
great demand and there is significant competition for employees with the
requisite skills and experience from other national and regional title
companies. There can be no assurance that the Company will be able to attract
and retain the qualified personnel necessary to pursue its growth strategy.
There can be no assurance that the Company will be able to maintain or
accelerate its current growth, effectively manage its expanding operations or
achieve planned growth on a timely or profitable basis. To the extent the
Company is unable to manage its growth effectively and efficiently, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations", "Item
7a. Quantitative and Qualitative Market Risk Disclosures" and elsewhere in this
Form 10-K involve known and unknown risks and uncertainties which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by any forward-looking statements made by or on behalf of the Company.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is filing the following cautionary
statements identifying important factors that in some cases have affected, and
in the future could cause the Company's actual results to differ materially from
those expressed in any such forward-looking statements.
The factors that could cause the Company's results to differ materially
include, but are not limited to, general economic and business conditions,
including interest rate fluctuations; the impact of competitive products and
pricing; success of operating initiatives; adverse publicity; changes in
business strategy or development plans; quality of management; availability,
terms, and deployment of capital; the results of
14
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financing efforts; business abilities and judgment of personnel; Year 2000
issues, availability of qualified personnel; employee benefit costs and changes
in, or the failure to comply with government regulations.
ITEM 2. PROPERTIES
The Company's offices are currently located in Irvine, California. Most of
the Company's offices are leased, with the exception of a branch office in
Phoenix, Arizona, which the Company owns, and an executive office building
purchased in April, 1999.
The future executive office building located at 1111 E. Katella Avenue,
Orange, CA was acquired with the proceeds of a $2,080,000 note that bears
interest at the lending institutions prime rate and monthly principal payments
of $4,442 per month. The note is collateralized by a deed of trust.
ITEM 3. LEGAL PROCEEDINGS
The Company in the ordinary course of business is subject to claims made
under, and from time to time is named as defendants in legal proceedings
relating to, policies of insurance it has issued or other services performed on
behalf of insured policyholders and other customers. The Company also is
involved from time to time in routine litigation incidental to the conduct of
its business, apart from claims made under title insurance policies. There are
currently no material pending litigation proceedings to which the Company is a
party or to which any of its property is subject. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Industry
Overview Recent Developments" and Note 11 of Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company completed an initial public offering on February 12, 1999.
Prior to that time there was no market for the Company's common stock. The
following table sets forth the range of high and low closing prices for the
common stock on the NASDAQ stock exchange.
DIVIDENDS
YEAR ENDED DECEMBER 31, 1999: HIGH LOW DECLARED
- ----------------------------- ----- ----- ---------
First quarter........................................................ $7.25 $5.00 $0.10
Second quarter....................................................... 6.06 4.50 0.10
Third quarter........................................................ 5.25 3.38 0.10
Fourth quarter....................................................... $4.06 $3.12 $0.10
DIVIDEND POLICY AND RESTRICTION ON DIVIDEND PAYMENTS
Since the first quarter of 1999, the Company has paid cash dividends on a
quarterly basis, which payments have been made at the discretion of the
Company's Board of Directors. The continued payment of dividends will depend
upon operating results, business requirements, regulatory considerations and
other factors. As of March 27, 2000, the Company had less than 800 shareholders
of record.
ITEM 6. SELECTED FINANCIAL DATA
The Predecessor financial information included in the selected financial
data below includes the historical financial information of the operations
previously owned by FNFI and acquired by the Company on July 1, 1997 and
excludes the impact of the goodwill and minority interest associated with the
Company's acquisition of 60% of the common stock of ATC from FNFI on July 1,
1997. The Company's financial information included herein includes only the
historical financial information of the Company since its formation in 1996.
Although incorporated in 1996, the Company had no operations until it acquired
60% of the outstanding common stock of ATC in July 1997.
The Company balance sheet data as of December 31, 1999 and 1998 and the
statement of operations data for the years ended December 31, 1999, 1998 and for
the six months ended December 31, 1997 have been derived from the Company's
consolidated financial statements and notes thereto, which statements have been
audited by KPMG LLP, independent auditors, and are included elsewhere herein.
The Predecessor statement of operations data for the six months ended June 30,
1997 have been derived from the Predecessor's financial statements and notes
thereto, which statements have been audited by KPMG LLP, independent auditors,
and are included elsewhere herein. The following information should be read in
conjunction with the financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this 10K.
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COMPANY PREDECESSOR COMBINED
------------------------------------------ ----------- ------------
YEAR YEAR SIX MONTHS SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1998 1997 1997 1997
------------ ------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS OTHER THAN EARNINGS PER SHARE,
ORDER AND FEE PER FILE DATA)
BALANCE SHEET DATA:
Cash and short-term investments..... $ 4,875 $ 10,495 $ 7,224 N/A N/A
Investments......................... 14,022 N/A N/A N/A N/A
Working capital..................... 3,667 8,776 5,047 N/A N/A
Total assets........................ 47,324 37,376 22,365 N/A N/A
Due to affiliate.................... 1,642 1,893 1,411 N/A N/A
Shareholders' equity................ 32,031 19,898 1,123 N/A N/A
STATEMENT OF OPERATIONS DATA:
Net title service revenue -- related
party............................. 51,366 $ 52,092 $18,026 $14,768 $32,794
Escrow fees......................... 25,190 24,267 7,353 5,581 12,933
Other fees and income............... 11,814 14,697 5,428 3,100 8,528
Investment and interest income...... 930 369 104 62 167
-------- -------- ------- ------- -------
Total revenue..................... 89,300 91,425 30,911 23,511 54,422
-------- -------- ------- ------- -------
Personnel costs..................... 54,277 49,435 16,599 13,953 30,552
Other operating expenses............ 19,226 17,477 8,084 6,521 14,605
Title plant rent and maintenance.... 6,264 7,156 2,664 2,009 4,673
Earnings before minority interest... 5,625 10,100 1,790 592 2,382
Net earnings........................ $ 5,625 $ 6,865 $ 709 $ 592 $ 1,301
PER SHARE DATA:
Earnings per share:
Basic............................. $ .82 $ 2.13 $ 0.24 N/A N/A
Diluted........................... .81 1.96 0.23 N/A N/A
Weighted average common shares
outstanding:
Basic............................. 6,869 3,223 2,972 N/A N/A
Diluted........................... 6,902 3,500 3,107 N/A N/A
OTHER OPERATING DATA:
Gross title insurance premiums...... $ 58,370 $ 59,206 $20,641 $16,773 $37,414
Orders opened(1).................... 119,034 146,932 46,800 40,700 87,500
Orders closed(1).................... 88,899 98,319 32,600 28,200 60,800
Average fee per file(1)............. $ 940 $ 825 $ 886 $ 835 $ 863
- ---------------
(1) Average fee per file information consists of gross title insurance premiums,
escrow fees and other title-related fees divided by the number of closed
files (not including revenue generated by, or closed files relating to, the
Company's STAR Product, which are excluded due to the abbreviated
characteristics of the policy). In addition, non title-related revenues and
investment income are excluded as there are no associated closed files. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
N/A -- Not applicable
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QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
Revenue...................................... $24,411 $25,367 $21,470 $18,052
Earnings (loss) before income taxes.......... 4,822 4,563 1,260 (1,111)
Net earnings (loss), basic and diluted
basis...................................... 2,796 2,646 743 (561)
Basic earnings (loss) per share.............. .47 .37 .10 (.08)
Diluted earnings (loss) per share............ .46 .37 .10 (.08)
Dividends paid per share..................... .10 .10 .10 .10
1998
Revenue...................................... $18,243 $23,732 $23,748 $25,702
Earnings before income taxes................. 3,009 5,654 3,988 4,706
Net earnings basic and diluted basis......... 1,132 1,954 1,390 2,389
Basic earnings per share..................... .39 .68 .49 .57
Diluted earnings per share................... .36 .62 .49 .53
Dividends paid per share..................... N/A N/A N/A N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere herein.
OVERVIEW
The Company's revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, reductions in mortgage interest rates beginning in
the latter part of 1991 triggered an increase in refinancing activity, which
continued at then record levels through 1993 and into the first quarter of 1994.
During 1994 and early 1995, steady interest rate increases caused by actions
taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Since late 1995, decreases in mortgage interest rates and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales. The overall economic environment, stable mortgage interest rates and
strength in the California and West Coast real estate market contributed to very
positive conditions for the industry throughout all of 1996, 1997 and 1998 and
the first six months of 1999. However, mortgage rates began to climb during the
last half of 1999, virtually eliminating the volume of refinance activity
experienced in the prior year and early 1999. It is impossible to predict the
direction interest rates and the real estate market may move in the future.
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The Company's revenues include net title service revenue (which also
includes trustee sale guarantee fees), escrow fees, and other fees and revenues.
The Company's operations generate escrow fees from holding and disbursing funds
and documents in connection with the closing of real estate transactions. Escrow
fees generally fluctuate in a pattern consistent with the fluctuation in net
title service revenue. Other fees and revenue primarily consist of real estate
information fees, reconveyance fees, recording fees and appraisal fees, and
include fees related to the Company's STAR product. Other fees and revenue trend
closely with the level of title and escrow business.
Net title service revenue and escrow fee revenues are recognized as income
at the time the underlying real estate transaction closes. Expenses directly
related to the title and escrow process are recognized as they are incurred,
throughout the duration of the transaction. As a result, the Company's
recognition of revenue lags approximately 60-90 days behind the recognition of
the corresponding expenses. Other fees and revenue are generally recognized as
income at the time the underlying transaction closes; however, certain other
fees and revenue are recognized as income over the period during which the
service is provided. These factors may result in fluctuations in gross margins.
Net title service revenues consist of gross title insurance premiums less
fees paid to underwriters. Fees to underwriters represent the portion of gross
title insurance premiums paid by the Company's underwritten title companies to
FNTIC, pursuant to the terms of the Issuing Agency Agreement, and similar fees
paid by the Company's other underwritten title company subsidiaries.
Beginning in January 1997, ATC entered into an Issuing Agency Agreement
with FNTIC under which ATC pays FNTIC an underwriting fee equal to 11% of the
gross title insurance premiums received. In addition, ATC pays FNTIC a fee equal
to 1% of gross title insurance premiums for certain accounting, human resources
and legal services provided by FNFI. Although the fee for these management
services was not negotiated in an arm's length transaction, the Company believes
that the amount of these fees is reasonable in light of the level of services
received and the estimated costs of performing these services internally.
While the number of orders that are closed affects the Company's revenue,
the largest component of the Company's expenses are personnel costs. Since
personnel costs are relatively fixed over the short-term, in a rapidly declining
market, reductions in the number of orders can adversely affect margins. Gross
margins are also affected by the relative numbers of orders that relate to
refinancing transactions as compared to those relating to real estate sale
transactions.
The average fee per file and corresponding gross margins are higher for
real estate sale and resale transactions than refinance transactions for three
principal reasons: (i) a larger percentage of sale and resale orders close as
compared to refinance orders, (ii) typically two policies are issued in a resale
transaction (one each to the buyer and lender) whereas only one is issued in a
refinance transaction and (iii) the base rate charged on sale and resale
transactions is typically higher than that charged on refinance transactions.
Because title insurance premiums are calculated with regard to the purchase
price of the property or the amount of the related mortgage, average fees per
file will also increase during periods in which real estate prices, and
corresponding mortgage loans, are increasing.
The Company was incorporated in November 1996, but had no operations until
it acquired 60% of the outstanding stock of ATC in July 1997. For the year 1997,
the Company's revenue and expenses included only six months of ATC's operations
compared to a full year of ATC-related operations included in the year ended
December 31, 1999 and 1998. Therefore, revenue and expenses related to the
historical operations of the Company since its inception are not comparable from
year to year.
RESULTS OF OPERATIONS
The following discussion presents a comparison of (1) the Company for 1999,
1998 and the six month ended December 31, 1997, (2) the Company and Predecessor
combined for 1997. Information provided for the six months ended June 30, 1997
is that of the Company's Predecessor, and should not be considered an indicative
measure or comparison of the Company's current financial position or results of
operations.
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REVENUE
The following table presents information regarding the components of the
Company's revenue:
COMPANY PREDECESSOR COMBINED
------------------------------------------ ----------- ------------
YEAR YEAR SIX MONTHS SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1998 1997 1997 1997
------------ ------------ ------------ ----------- ------------
(DOLLARS IN THOUSANDS OTHER THAN ORDERS AND FEE PER FILE)
Net title service
revenue-related party......... $51,366 $52,092 $18,026 $14,768 $32,795
Escrow fees..................... 25,190 24,267 7,353 5,581 12,933
Other services charges.......... 11,814 14,697 5,428 3,100 8,528
Investment income............... 930 369 104 62 166
------- ------- ------- ------- -------
Total revenue................. $89,300 $91,425 $30,911 $23,511 $54,422
======= ======= ======= ======= =======
Orders closed................... 88,899 98,319 32,600 28,200 60,800
Average fee per file............ $ 940 $ 825 $ 886 $ 835 $ 886
Favorable interest rates in 1997, 1998 and through early 1999 triggered
refinancing activity at then record levels. The overall economic environment,
stable mortgage interest rates and strength in real estate market, especially
California, the Company's primary market, were positive factors for the
industry. However, interest rates began to climb during the last six months of
1999, eliminating the volume of refinance activity experienced in the prior
year.
Total revenues in 1999 decreased slightly, $2.1 million, or 2.3%, to $89.3
million from $91.4 million in 1998. Revenues in 1998 of $91.4 million reflect a
68.0% increase in 1997 revenues of $54.4 million. Beginning in mid-1999 interest
rate increases caused by actions taken by the Federal Reserve Board resulted in
a significant decline in refinancing transactions, which impacted the Company's
order count and premium volume.
Net Title Service Revenue. Net title service revenue decreased $726,000 or
1.4%, to $51.4 million from $52.1 million in 1999. In 1998, net title service
revenue increased by 58.8%, to $52.1 million, from $32.8 million in 1997. The
decrease in 1999 net title service revenue is consistent with the current real
estate environment and the decline in closed title orders during the second half
of 1999. The average fee per file increased to $940 in 1999 compared to $825 in
1998 and $886 in 1997. The fee per file increase is indicative of a change in
the mix of closed title orders from a refinance driven market to a resale
market, which generates higher fee per file business. Gross title premiums were
$58.4 million, $59.2 million and $37.4 million in 1999, 1998 and 1997,
respectively.
Escrow Fees. Revenues from escrow fees increased by $923,000 or 3.8% to
$25.2 million in 1999 from $24.3 million in 1998. In 1998, escrow fees increased
$11.3 million or 87.6% to $24.3 million compared to $12.9 million in 1997.
Escrow fees trend primarily with title insurance activity generated by the
Company's direct operations. The increase is primarily the result of the first
half of 1999 market conditions and the Company's focused efforts to expand its
escrow market presence in certain areas, such as southern California.
Other Services Charges. Other services charges were $11.8 million for 1999
as compared to $14.7 million for 1998, a decrease of $2.9 million, or 19.6%. In
1998, other services charges increased $6.2 million, or 72.3%, to $14.7 million
from $8.5 million in 1997. The fluctuation in other service charges is a result
of the level and mix of business related to the decrease in closed title orders.
Additionally, the Company closed a branch operation related to the STAR product
which accounted for a significant portion of the decline in 1999. The Company's
strategy is to strengthen the ancillary service businesses through acquisitions.
The Company anticipates leveraging its core title and escrow businesses and
national presence to successfully expand ancillary service businesses.
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23
Investment Income. Investment income is primarily a function of securities
markets asset base interest rates. Prior to 1999, the Company primarily invested
in interest bearing accounts and certificate of deposit. During 1999, the
Company strengthened its balance sheet with the acquisition of National,
proceeds from the Initial Public Offering in addition to shifting the emphasis
to a fixed income portfolio. In 1999, investment income increased $561,000, or
152.0% to $930,000 compared to $369,000 in 1998. During 1998, investment income
increased 122.3% to $369,000 from $166,000 in 1997.
EXPENSES
The following table presents the components of the Company's expenses:
COMPANY PREDECESSOR COMBINED
------------------------------------------ ----------- ------------
SIX MONTHS SIX MONTHS YEAR
YEAR ENDED YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1998 1997 1997 1997
------------ ------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
Personnel costs................. $54,277 $49,435 $16,599 $13,953 $30,552
Other operating expenses........ 19,226 17,477 8,084 6,521 14,605
Title plant rent and
maintenance................... 6,264 7,156 2,664 2,009 4,673
------- ------- ------- ------- -------
Total expenses.................. $79,767 $74,068 $27,347 $22,483 $49,830
======= ======= ======= ======= =======
The Company's principal costs include personnel costs, other operating
expenses and title plant rent and maintenance. Personnel costs include both base
salaries and commission expense paid to employees and are the most significant
operating expense incurred by the Company.
Other operating expenses consist of facilities expenses, postage and
courier services, computer services, professional services, advertising expense,
general insurance, trade and note receivable allowances, depreciation and
amortization expense and interest expense.
Title plant rent and maintenance costs consist of payments to access title
plants and the costs of updating these plants. Title plant rent and maintenance
costs include daily update expenses that are dependent on the volume of real
estate transaction activity and a rental charge that is based on actual usage.
Personnel Costs. Personnel costs totaled $54.3 million, $49.4 million and
$30.6 million for the years ended December 31, 1999,1998 and 1997. As a
percentage of total revenue, personnel costs increased to 60.8% in 1999 from
54.1% in 1998, which had previously decreased from 56.1% in 1997. Personnel
costs include base salaries, commissions and bonuses paid to employees and are
the most significant operating expense incurred by the Company. These costs
fluctuate with the level of orders opened and closed and the mix of revenue. The
fluctuation in the Company's personnel expenses is due to the expansion of its
direct operation business, in addition to acquiring other operations and hiring
additional personnel to expand its national market. The Company has taken
significant measures to maintain appropriate personnel levels and costs relative
to the volume and mix of business and revenues. The Company continues to monitor
the prevailing market conditions and attempts to respond as necessary.
Other Operating Expenses. Other operating expenses consist of facilities
expenses, provision for claim losses, postage and courier services, data
processing expense, general insurance, trade and notes receivable allowance and
depreciation. Other operating expense increased slightly as a percentage of
total revenue to 21.5% in 1999 from 19.1% in 1998, which previously decreased
from 26.8% in 1997. Other operating expenses totaled $19.2 million, $17.5
million and $14.6 million in 1999, 1998 and 1997, respectively. In response to
market conditions, the Company implemented aggressive cost control programs in
order to maintain operating expenses consistent with levels of revenue; however,
certain fixed costs are incurred regardless of revenue levels, resulting in year
over year percentage fluctuations. The Company continues to review and evaluate
operating expenses relative to existing and projected market conditions.
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Title Plant Rent and Maintenance Expense. Title plant rent and maintenance
expense totaled $6.3 million, $7.2 million and $4.7 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Title plant rent and maintenance
expense decreased as a percentage of total revenue to 7.0% in 1999 from 7.8% in
1998, which had previously decreased from 8.6% in 1997. The year over year
decreases in plant expense is primarily a result of various contract
negotiations within several counties in California and Arizona and a reduction
of the volume of business in 1999 compared to 1998. These negotiated agreements
resulted in significant cost reductions for the Company.
Income Tax Expense. Income tax expense for 1999, 1998 and 1997 as a
percentage of earnings before income taxes was 41.0%, 41.8% and 49.8%,
respectively. The fluctuations in income tax expense as a percentage of earnings
before income taxes are attributable to the effect of state income taxes on the
Company's wholly-owned underwritten title company and the ancillary service
companies; a change in the amount and the characteristics of net income,
operating income versus investment income; and the tax treatment of certain
items.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash requirements include debt service, debt relating
to capital leases, personnel and other operating expenses, taxes and dividends
on its common stock. The Company believes that all anticipated cash requirements
for current operations will be met from internally generated funds. In the
future, the Company's cash requirements will include those relating to the
development of National's business. While the Company presently has in place
much of the infrastructure (principally consisting of personnel) that will be
used for this development, management believes that additional cash resources
will be required. The development of direct sales operations for the expansion
of National would require more cash resources than developing these operations
using agency relationships. Cash requirements for the development of National
are expected to be met from current cash balances and internally generated
funds.
Two significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The Company's
underwritten title companies collect premiums and fees and pay underwriting fees
and operating expenses. These companies are restricted only to the extent of
maintaining minimum levels of working capital and net worth, but are not
restricted by state regulations or banking authorities in their ability to pay
dividends and make distributions.
National is subject to regulations that restrict its ability to pay
dividends or make other distributions of cash or property to its parent company
without prior approval from the Department of Insurance of the State of New
York. The maximum amount of dividends which can be paid by National to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions. No dividends, including all dividends paid in the preceding twelve
months, which exceed 10% of the outstanding capital shares can be paid without
prior approval unless after deducting dividends the Company has surplus to
policyholders at least equal to the greater of 50% of its reinsurance reserves
or 50% of the minimum capital required. Additionally, dividends are further
limited to the Company's earned surplus.
The Company's other subsidiary operations collect revenue and pay operating
expenses; however, they are not regulated by insurance regulatory or banking
authorities. Positive cash flow from the underwritten title companies and other
subsidiary operations is invested primarily in cash and cash equivalents.
In December 1998, the Company entered into an agreement to purchase a home
office building in Orange, CA for $2.6 million. On April 14, 1999 the Company
completed the purchase of the home office building. The Company financed $2.1
million, secured by a first trust deed. The terms of the note require monthly
interest payments at prime and monthly principal payments of $4,000. The note
matures on April 1, 2004. Currently, the Orange County operations moved to the
new facility, and the Company expects to complete the relocation of its
executive and other related offices in third quarter 2000. The Company estimates
the costs associated with the relocation to be minimal.
22
25
In January 1999, the Company agreed to purchase 100% of the assets of
Pacific Printers, a printing company providing affiliated and non-affiliated
reproduction of forms and printing material. The purchase price of this
acquisition was $125,000, paid in cash.
Net proceeds of approximately $8.4 million were received by the Company in
connection with its initial public offering on February 12, 1999. The
underwriters exercised an option for over allotment to purchase an additional
150,000 shares at $6 per share on March 31, 1999, which resulted in net proceeds
in the amount of $804,000.
In February 1999, a director of the Company exercised options resulting in
the Company receiving proceeds in the amount of $220,000.
In May 1999, the Department of Insurance, State of New York approved the
acquisition of National Title Insurance Company of New York, Inc. by ATC. The
transaction was completed in June 1999, the purchase price of $3.25 million, was
paid in cash.
RECENT DEVELOPMENTS
The State Banking Department, State of Arizona ("State Banking Department")
delivered their Report of Examination of American Title Insurance of Arizona,
Inc. (formerly known as Nations Title Insurance of Arizona, Inc.) as of and for
the three-year period ending October 31, 1998 on March 4, 1999. The report as
forwarded to the Company by State Banking Department indicates that the Company
may not be in compliance with certain State Banking Department regulations. The
State Banking Department is providing the Company with an opportunity to present
additional information prior to making their final determination as to
compliance. The Company does not believe that resolution of this matter will
have a material impact upon the financial statements of the Company. The Company
provided additional information to the State Banking Department for review. As
of March 2000, the Company has not received any further correspondence from the
State Banking Department.
In September 1999, the Company's Board of Directors approved the adoption
of the American National Financial, Inc. Employee Stock Purchase Loan Plan
("Employee Plan") and the Non-Employee Director Stock Purchase Loan Program
("Director Program"). The purpose of the Loan Plan and Director Program is to
provide key employees and directors with further incentive to maximize
shareholder value. The Company authorized an aggregate of $2.0 million in loans.
Loan Plan and Loan Program funds must be used to make private or open market
purchases of Company common stock through a broker-dealer designated by the
Company. All loans are full recourse and unsecured, and will have a five-year
term. Interest will accrue on the loans at a rate of six and one quarter percent
(6 1/4%) per annum due at maturity. Loans may be prepaid any time without
penalty. Through December 31, 1999, the Company purchased 316,767 shares at an
average purchase price of $3.95 per share totaling $1,253,000. Purchases may be
made from time to time by the Company in the open market depending on market
conditions and other factors.
SEASONALITY
Historically, the greatest volume of residential resale activity has
usually occurred in the spring and summer months. However, events during the
past five years, including numerous actions taken by the Federal Reserve Board,
have caused unusual fluctuations in real estate activity, particularly in the
seasonal pattern of residential resale and refinance activity. The Company
cannot predict whether this pattern will continue to be affected by such
factors.
INFLATION
To the extent real estate prices or mortgage interest rates increase due to
inflationary factors, the Company's title service revenue generally increases
because premiums are determined in part by the value of property or the amount
of the mortgage loan. The Company's personnel costs and other operating expenses
are also sensitive to inflation.
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RECENT ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), in March 1998. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 requires that certain costs related to the
development or purchase of internal use computer software be capitalized and
amortized over the estimated useful life of the software. Costs related to the
preliminary project stage and the post-implementation/operations stage, as
defined, in an internal use computer software development project are to be
expensed as incurred. Costs incurred prior to initial application of SOP 98-1,
whether capitalized or not, are not adjusted to the amounts that would have been
capitalized had SOP 98-1 been in effect when those costs were incurred. SOP 98-1
is applicable to all non-governmental entities and effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 has not had a
material impact on the Company's financial position, results of operations or
financial reporting
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively, "derivatives") and for
hedging activities. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. It requires changes in the fair value of a derivative instrument
and the changes in fair value of assets or liabilities hedged by that instrument
to be included in earnings. To the extent that the hedge transaction is
effective, earnings are equally offset by both investments. Currently, changes
in the fair value of derivative instruments and hedged items are reported in
accumulated other comprehensive earnings (loss).
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The adoption of SFAS 133 is not expected to have a material
impact on the Company's financial position, results of operations or financial
reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
THE MARKET RISK OF FINANCIAL INSTRUMENTS
The Company's Consolidated Balance Sheets includes a substantial amount of
assets and liabilities whose fair values are subject to market risks. The
following sections address the significant market risks associated with the
Company's financial activities as of year ended 1999.
INTEREST RATE RISK
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.
EQUITY PRICE RISK
The carrying values of investments subject to equity price risks are based
on quoted market prices or management's estimates of fair value as of the
balance sheet date. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in
24
27
the underlying economic characteristics of the investee, the relative price of
alternative investments and general market conditions. Furthermore, amounts
realized in the sale of a particular security may be affected by the relative
quantity of the security being sold.
Caution should be used in evaluating the Company's overall market risk from
the information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because the Company's reserve for claim losses (representing 15.3% of total
liabilities) is not included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would have been as follows as of December 31,
1999:
a. An approximate $1.0 million net increase (decrease) in the fair value
of fixed maturity securities would have occurred if interest rates
had (decreased) increased by 100 basis points. The change in fair
values was determined by estimating the present value of future cash
flows using various models, primarily duration modeling.
b. It is not anticipated that there would be a significant change in the
fair value of other long-term investments or short-term investments
if there was a change in market conditions, based on the nature and
duration of the financial instruments involved.
c. Interest expense on outstanding debt would have increased (decreased)
approximately $19,000, if interest rates increased (decreased) 100
basis points.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL INFORMATION
PAGE
----
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ 27
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 28
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997.......................... 29
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1999, 1998 and 1997.............. 30
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 31
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 32
Notes to Consolidated Financial Statements.................. 34
AMERICAN NATIONAL FINANCIAL, INC. PREDECESSOR
Independent Auditors' Report................................ 50
Statements of Combined Operations for the six months ended
June 30, 1997 and the year ended December 31, 1996........ 51
Statements of Shareholder's Equity for the six months ended
June 30, 1997............................................. 52
Statements of Cash for the six months ended June 30, 1997
and the year ended December 31, 1996...................... 53
Notes to Financial Statements............................... 54
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29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American National Financial, Inc.:
We have audited the accompanying consolidated balance sheets of American
National Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of earnings, comprehensive earnings,
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American National Financial, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
KPMG LLP
Los Angeles, California
February 29, 2000
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30
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
------------------
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 3,361 $10,345
Short-term investments, at cost, which approximates fair
market value.............................................. 1,514 150
Accrued investment interest................................. 245 --
Trade receivables, net of allowance for doubtful accounts of
$2,097 in 1999 and $1,896 in 1998......................... 4,526 8,576
Notes receivables........................................... 1,329 --
Deferred tax asset.......................................... 2,082 2,395
Income tax receivable....................................... 1,128 --
Prepaid expenses and other current assets................... 995 2,797
------- -------
Total current assets................................... 15,180 24,263
Investment securities available for sale, at fair market
value..................................................... 14,022 --
Property and equipment, net................................. 7,633 4,010
Title plants................................................ 2,377 2,252
Deposits with the Insurance Commissioner.................... 113 113
Intangibles, net of accumulated amortization of $959 in 1999
and $609 in 1998.......................................... 7,999 6,738
------- -------
Total assets........................................... $47,324 $37,376
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses, including $60
to affiliates in 1999 and $124 in 1998.................... $ 5,506 $ 6,354
Customer advances........................................... 1,779 2,190
Current portion of long-term debt........................... 53 443
Current portion of obligations under capital leases with
affiliates................................................ 67 742
Current portion of obligations under capital leases with
non-affiliates............................................ 125 116
Reserve for claim losses.................................... 2,341 --
Income taxes payable........................................ -- 3,750
Due to affiliate............................................ 1,642 1,893
------- -------
Total current liabilities.............................. 11,513 15,488
Long-term debt.............................................. 1,991 --
Obligations under capital leases with affiliates............ 602 669
Obligations under capital leases with non-affiliates........ 1,187 1,321
------- -------
Total liabilities...................................... 15,293 17,478
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares;
issued and outstanding, none.............................. -- --
Common stock, no par value; authorized, 50,000,000 shares;
issued and outstanding, 7,180,495 in 1999 and 4,917,096 in
1998...................................................... -- --
Additional paid in capital.................................. 21,884 12,324
Retained earnings........................................... 10,336 7,574
Accumulated other comprehensive loss........................ (189) --
------- -------
Total shareholders' equity............................. 32,031 19,898
------- -------
Total liabilities and shareholders' equity............. $47,324 $37,376
======= =======
See accompanying notes to consolidated financial statements
28
31
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Revenues:
Net title service revenue -- related party.................. $51,366 $52,092 $18,026
Escrow fees................................................. 25,190 24,267 7,353
Other service charges....................................... 11,814 14,697 5,428
Investment income........................................... 930 369 104
------- ------- -------
Total revenues......................................... 89,300 91,425 30,911
------- ------- -------
Expenses:
Personnel costs............................................. 54,277 49,435 16,599
Other operating expenses includes $3,789, $4,198 and $1,184
with affiliate for the years ended December 31, 1999, 1998
and 1997, respectively.................................... 19,226 17,477 8,084
Title plant rent and maintenance............................ 6,264 7,156 2,664
------- ------- -------
Total expenses......................................... 79,767 74,068 27,347
------- ------- -------
Earnings before income taxes and minority interest in net
earnings of consolidated subsidiary....................... 9,533 17,357 3,564
Provision for income taxes.................................. 3,908 7,257 1,774
------- ------- -------
Earnings before minority interest in net earnings of
consolidated subsidiary................................... 5,625 10,100 1,790
Minority interest in net earnings of consolidated
subsidiary................................................ -- (3,235) (1,081)
------- ------- -------
Net earnings................................................ $ 5,625 $ 6,865 $ 709
======= ======= =======
Basic net earnings.......................................... $ 5,625 $ 6,865 $ 709
======= ======= =======
Basic earnings per share.................................... $ .82 $ 2.13 $ .24
======= ======= =======
Weighted average shares outstanding, basic basis............ 6,869 3,223 2,972
======= ======= =======
Diluted net earnings........................................ $ 5,625 $ 6,865 $ 709
======= ======= =======
Diluted earnings per share.................................. $ .81 $ 1.96 $ .23
======= ======= =======
Weighted average shares outstanding, diluted basis.......... 6,902 3,500 3,107
======= ======= =======
Cash dividends per share.................................... $ .40 $ -- $ --
======= ======= =======
See accompanying notes to condensed consolidated financial statements
29
32
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ----
Net earnings................................................ $5,625 $6,865 $709
Other comprehensive loss -- unrealized loss on investment,
securities available for sale(1).......................... (189) -- --
------ ------ ----
Comprehensive earnings...................................... $5,436 $6,865 $709
====== ====== ====
- ---------------
(1) Net of income tax benefit of $(116), $0 and $0, for the years ended December
31, 1999, 1998 and 1997, respectively.
See accompanying notes to condensed consolidated financial statements
30
33
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
--------- ------- ---------- -------- ------------- -------------
BALANCE, DECEMBER 31, 1996...... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock........ 3,026,400 -- -- -- -- --
Forfeiture of common stock
issued........................ (115,984) -- -- -- -- --
Stock options granted........... -- -- 414 -- -- 414
Net earnings.................... -- -- -- 709 -- 709
--------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1997...... 2,910,416 $ -- $ 414 $ 709 $ -- $ 1,123
--------- ------- ------- ------- ----- -------
Forfeiture of common stock
issued........................ (93,316) -- -- -- -- --
Capital contribution............ -- -- 1,200 -- -- 1,200
Issuance of shares.............. 2,099,996 -- 10,710 -- -- 10,710
Net earnings.................... -- -- -- 6,865 -- 6,865
--------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1998...... 4,917,096 $ -- $12,324 $ 7,574 $ -- $19,898
--------- ------- ------- ------- ----- -------
Unrealized loss on investment
securities available for
sale.......................... -- -- -- -- (189) (189)
Stock options exercised......... 332,904 -- 220 -- -- 220
Cash dividends ($0.40 per
share)........................ -- -- -- (2,863) -- (2,863)
Issuance of shares.............. 1,930,495 -- 9,340 -- -- 9,340
Net earnings.................... -- -- -- 5,625 -- 5,625
--------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1999...... 7,180,495 $ -- $21,884 $10,336 $(189) $32,031
========= ======= ======= ======= ===== =======
See accompanying notes to consolidated financial statements
31
34
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
Cash flows from operating activities:
Net earnings................................................ $ 5,625 $ 6,865 $ 709
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization............................. 2,415 1,477 645
Loss (gain) on sale of property and equipment............. 18 (14) --
Change in provision for claim losses...................... (1,970) -- --
Minority interest in net earnings of consolidated
subsidiary............................................. -- 3,235 1,080
Loss on sales of investments.............................. -- 30 --
Compensation expense...................................... -- -- 414
Changes in:
Trade receivables, net................................. 4,053 (1,767) (2,493)
Accrued investment interest............................ (245) -- --
Prepaid expenses and other assets...................... 503 (344) 94
Income taxes payable and deferred income taxes......... (3,876) 992 342
Accounts payable and other accrued expenses............ (1,016) 956 2,157
Due to (from) affiliate................................ (251) 482 233
Customer advances...................................... (411) 1,035 (340)
-------- ------- -------
Total cash provided by operating activities....... 4,845 12,947 2,841
-------- ------- -------
Cash flow from investing activities:
Advance to related party.................................... -- (1,561) --
Acquisition of subsidiary, net of cash received............. (2,550) (149) (816)
Purchase of title plant..................................... (75) -- --
Collection of notes receivable.............................. 72 11 28
Purchase of property and equipment.......................... (6,011) (2,481) (999)
Proceeds from sale of property and equipment................ 395 25 --
Proceeds from sale of investment............................ -- 70 --
Issuance of notes receivable................................ (1,401) -- --
Purchase of investments..................................... (9,690) (250) --
-------- ------- -------
Total cash used in investing activities........... (19,260) (4,335) (1,787)
-------- ------- -------
Cash flows from financing activities:
Net borrowings.............................................. 1,601 (4,830) 6,472
Proceeds from stock options exercised....................... 220 -- --
Proceeds from issuance of common stock...................... 9,340 -- --
Payments under capital lease obligations.................... (867) (661) (302)
Dividends paid.............................................. (2,863) -- --
-------- ------- -------
Total cash provided by (used in) financing
activities...................................... 7,431 (5,491) 6,170
-------- ------- -------
(Decrease) increase in cash and cash equivalents............ (6,984) 3,121 7,224
Cash and cash equivalents at the beginning of year.......... 10,345 7,224 --
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,361 $10,345 $ 7,224
======== ======= =======
See accompanying notes to consolidated financial statements
32
35
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest............................................... $ 174 $ 589 $ 473
Income taxes........................................... 7,441 5,212 1,885
Non-cash investing activities:
Title plant acquired under non-affiliated capital
lease................................................ -- 1,437 --
Purchase of subsidiary:
Assets acquired........................................... 7,029 -- 6,094
Liabilities assumed....................................... (4,479) -- (5,278)
------- ------ ------
Net cash used to acquire business......................... $ 2,550 $ -- $ 816
------- ------ ------
Non-cash financing activities:
Assumption of debt by shareholders..................... $ -- $1,200 $ --
See accompanying notes to consolidated financial statements
33
36
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
American National Financial, Inc., formerly ATC Holdings, Inc., was
incorporated in the State of California in November 1996 as a holding company
for certain investments in title and real estate related service companies. In
March 1997, 3,026,400 of shares were issued to founding shareholders. Prior to
1997, American National Financial, Inc. and subsidiaries (collectively, "the
Company") had substantially no operations. In April 1997, the Company received
$6.0 million in proceeds from the issuance of short-term notes payable, of which
$870,000 was due to certain members of management and the remainder to a
financial institution, in connection with an agreement with Fidelity National
Financial, Inc. ("FNFI") to acquire a 60% interest in American Title Company
("ATC"). Upon consummation of the sale in July 1997, the Company paid FNFI $6.0
million for 60% of ATC. In August 1997, the Company refinanced all debt issued
in April 1997. In November 1998, the Company acquired the remaining 40% interest
in ATC in connection with the Reorganization. See Note 13.
The Company's principal operations are those of ATC. ATC is an underwritten
title company in the state of California and is engaged in the business of
providing title insurance and other related product services in connection with
real estate transactions. The Company operates throughout California and in
Maricopa County, Arizona. ATC functions as an exclusive agent of Fidelity
National Title Insurance Company ("FNTIC"), an affiliate and a wholly-owned
subsidiary of FNFI. Title insurance policies are underwritten by FNTIC for an
underwriting fee. The underwriting agreement generally provides that ATC is
liable under any single policy for only the first $5,000 of losses. As a result
of the July 1997 transaction with the Company, FNFI agreed to make no claim on
ATC for claims arising from policies written prior to January 1, 1997.
In May 1999, the Department of Insurance, State of New York, approved the
acquisition of National Title Insurance of New York, Inc. ("National"), a New
York domiciled underwriter, by American Title Company, a subsidiary of American
National Financial Inc. from Fidelity National Financial, Inc. National is
licensed to issue title insurance policies in 34 states, the District of
Columbia and the U.S. Virgin Islands. The $3.25 million dollar purchase price
was paid in cash and the transaction was completed in June 1999.
National did not underwrite any significant title insurance policies
through direct operations or agency relationships during 1999. The primary
purpose of the acquisition is to acquire an underwriter, which will enable the
Company to generate underwriting fees and permit the Company to expand
geographically into counties and states in which the Company is not presently
licensed. The Company believes this expansion can be accomplished more quickly
and cost-effectively through this acquisition than through other means. The
Company also believes that the acquisition will expand the business
opportunities for its current and potential employees and affiliates, which will
aid in the Company's recruitment efforts, and will permit the Company to
generate additional revenue by writing title insurance policies in those
geographic areas which are not covered by ATC's exclusive agency arrangements
with FNTIC. See Note 12.
The Company's other subsidiaries include American Title Insurance of
Arizona, Inc., (formerly known as Nations Title Insurance of Arizona, Inc.);
Landmark REO Management Services, Inc.; American Document Services, Inc.; West
Point Appraisal, Inc.; West Point Properties, Inc.; West Point Support Services,
Inc. and Pacific Printers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated.
34
37
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturities of three months or less are considered cash
equivalents. The carrying amounts reported in the consolidated balance sheet for
these instruments approximate their fair value.
TRADE RECEIVABLES
The carrying amounts reported in the consolidated balance sheet for trade
receivables approximate their fair value. Trade receivables are reported net of
allowance for doubtful accounts which represents management's estimates of those
balances that are uncollectible as of the balance sheet date.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less depreciation and
amortization. Depreciation is computed using the straight-line method based on
the estimated useful lives of the related assets which range from three to 30
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the term of the applicable lease or the estimated useful lives of such
assets.
TITLE PLANTS
Title plants are historical title information organized and maintained for
use in performing title searches. The December 31, 1999 and 1998 title plant
balances relate to capital leases. See note 11. Costs incurred to maintain,
update and operate title plants are expensed as incurred. Title plants are not
amortized as it is considered to have an indefinite life if maintained.
INVESTMENTS
Fixed maturity securities are purchased to support the investment
strategies of the Company, which are developed based on many factors including
rate of return, maturity, credit risk, tax considerations and regulatory
requirements. Fixed maturity securities which may be sold prior to maturity to
support the Company's investment strategies are carried at fair value and are
classified as available for sale. Fair values for fixed maturity securities are
principally a function of current interest rates and are based on quoted market
prices.
Equity securities are considered to be available for sale and carried at
fair value. Fair values are based on quoted market prices.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains or losses on fixed maturity
and equity securities which are classified as available for sale, net of
applicable deferred income taxes (benefits), are excluded from income and
credited or charged directly to a separate component of stockholders' equity. If
any unrealized losses on fixed maturity or equity securities are deemed other
than temporary, such unrealized losses are recognized as realized losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments presented in the Company's
Consolidated Financial Statements are estimates of the fair values at a point in
time using available market information and appropriate valuation methodologies.
These estimate are subjective in nature and involve uncertainties and
significant judgement in
35
38
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the interpretation of the current market data. Therefore, the fair values
presented are not necessarily indicative of the amounts the Company could
realize or settle currently. See Note 5 and Note 10
INTANGIBLE ASSETS
Intangible assets include acquired licenses to operate within various
counties and the cost in excess of net assets acquired in connection with the
acquisitions. Intangibles are amortized on a straight-line basis over a
composite life of 25 years. Impairment of intangible assets is monitored on a
continual basis and is assessed based on an analysis of the cash flows generated
by the underlying assets. No impairment of intangible assets has been
recognized.
CAPITAL LEASE OBLIGATIONS
Capital lease obligations for title plants are recorded at the present
value of the minimum lease payments at the beginning of the lease terms. The
monthly payments under the leases are allocated between a reduction of the
obligation and interest expense so as to produce a constant periodic rate of
interest on the remaining balance of the obligation.
REVENUE RECOGNITION
Net title insurance premiums, escrow fees and other service charges are
recognized as revenue at the time of closing of the related real estate
transaction. Premiums from title policies written other than those underwritten
by National are presented net of the underwriting fee to affiliated underwriters
on the accompanying consolidated statements of operations.
TITLE AND CLAIM LOSSES
Expenses are recognized when incurred. A provision for claim losses on
title policies is provided at the time of closing of the related real estate
transaction to cover anticipated losses up to $5,000 per policy under the
underwriting fee with FNTIC. The Company's reserve for claim losses on these
policies is included in accounts payable and other accrued expenses as of
December 31, 1999 and 1998.
RESERVE FOR CLAIM LOSSES
National's reserve for claim losses includes known claims as well as losses
the Company expects to incur, net of recoupments. Each known claim is reserved
for on the basis of a review by the Company as to the estimated amount of the
claim and the costs required to settle the claim. Reserves for claims which are
incurred but not reported are provided for at the time premium revenue is
recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. The occurrence of a significant major
claim (those greater than $500,000) in any given period could have a material
adverse effect on the Company's financial condition and results of operations
for such period. See Note 8.
REINSURANCE
In the ordinary course of business, the Company reinsures certain risks
with other insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other insurers for the purpose of
earning additional revenue. The Company cedes or assumes a portion of certain
policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that in the event of a
loss (including costs, attorneys' fees and expenses) exceeding the retained
amounts, the reinsurer is liable for the excess amount assumed. However, the
ceding company remains primarily liable in
36
39
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the event the reinsurer does not meet its contractual obligations. Reinsurance
activity is not considered significant.
INCOME TAXES
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The impact on deferred taxes of changes in tax rates and laws, if any,
are applied to the years during which temporary differences are expected to be
settled and reflected in the consolidated financial statements in the period
enacted.
SEGMENT REPORTING
The Company provides a broad range of real estate services. While the
Company's chief decision makers monitor the revenue streams by different real
estate services, operations are managed and financial performance is evaluated
on a Company wide basis. Accordingly, all of the Company operations are
considered by management to be aggregated in one reportable operating segment.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common shareholder by the weighted average number of common shares outstanding
during the period. Dilutive earnings per share is calculated by dividing net
earnings available to common shareholders by the weighted average number of
common shares outstanding plus the assumed conversions of dilutive potential
securities. The Company has granted certain options which have been treated as
common share equivalents for purposes of calculating diluted earnings per share.
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net earnings................................................ $5,625 $6,865 $ 709
====== ====== ======
Weighted average basic shares............................. 6,869 3,223 2,972
====== ====== ======
Basic earnings per share.................................... $ .82 $ 2.13 $ .24
====== ====== ======
Weighted average basic shares............................. 6,869 3,223 2,972
Effect of dilutive options................................ 33 277 135
------ ------ ------
Weighted average dilutive shares.......................... 6,902 3,500 3,107
====== ====== ======
Diluted earnings per share.................................. $ .81 $ 1.96 $ .23
====== ====== ======
MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
37
40
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CERTAIN RECLASSIFICATIONS
Certain reclassifications have been made in 1999 and 1998 Consolidated
Financial Statements to conform to the classifications used in 1999.
3. ACQUISITIONS
On July 1, 1997, the Company acquired 60% of the outstanding stock of ATC
for a purchase price of $6 million. The $6 million purchase price was paid in
cash and financed by a bank loan in the same amount. This transaction has been
accounted for as a purchase. Accordingly, assets and liabilities of ATC have
been reflected at their fair values at the date of acquisition for the 60% of
outstanding stock acquired and at historical cost for the 40% minority interest.
The earnings of ATC have been included in the accompanying consolidated
statement of operations since July 1, 1997, for the Company's 60% ownership
interest.
Assets and liabilities of ATC at acquisition were as follows (dollars in
thousands):
Cash and cash equivalents................................... $5,288
Accounts receivable......................................... 4,316
Other assets................................................ $1,583
======
Amounts due to affiliates................................... $1,178
Payables and accrued expenses assumed at fair value......... $4,100
======
Intangibles resulting from the 60% acquisition amounted to $2,460,000 and
are being amortized over a composite life of 25 years.
Selected unaudited pro forma combined results of operations for the year
ended December 31, 1997, assuming that the acquisition of 60% of ATC occurred on
January 1, 1997 is presented as follows (dollars in thousands, except per share
data):
Total revenue............................................... $54,422
Net earnings................................................ 972
Basic earnings per share.................................... .33
Diluted earnings per share.................................. .31
These amounts are computed based upon the historical financial statements
of the Company and ANFI predecessor. The total revenues consist of the Company's
1997 revenues of $30.9 million plus the revenues of the ANFI Predecessor for the
six months ended June 30, 1997 of $23.5 million. The pro forma net earnings
includes the 1997 net earnings of the Company of $709,000 plus 60% of the net
income of ANFI Predecessor for the six months ended June 30, 1997 of $592,000
and has been adjusted to reflect an increase in goodwill amortization of $27,000
and an increase in interest expense of $110,000, less income taxes of $44,000.
As a result of the July 1997 transaction with the Company, FNFI agreed to
make no claim on ATC for claims arising from policies written prior to January
1, 1997. Such indemnification is not expected to have a material effect on the
financial results of the Company.
In November 1998, the Company acquired the remaining 40% interest in ATC in
connection with the Reorganization. See Note 13.
On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast
Title of Santa Barbara County for the purchase of 100% of the issued and
outstanding stock of Santa Barbara Title Company. On January 9, 1998, the
Insurance Commissioner of the State of California approved the transaction and
the sale was consummated. The purchase price of $160,000 was paid in cash. The
impact of the Santa Barbara Title
38
41
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company acquisition has not been material to the financial position or result of
operations of the Company. In April 1999, Santa Barbara Title was merged with
ATC.
In May 1999, the Department of Insurance, State of New York, approved the
acquisition of National, a New York domiciled underwriter by ATC a subsidiary of
American National Financial Inc., from Fidelity National Financial, Inc.
National is licensed to issue title insurance policies in 34 states, the
District of Columbia and the U.S. Virgin Islands. The $3.25 million dollar
purchase price was paid in cash and the transaction was completed in June 1999.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the National acquisition were as follows (dollars in
thousands):
Tangible assets acquired at fair value...................... $6,224
Cost in excess of net assets acquired....................... 1,505
Liabilities assumed at fair value........................... (4,479)
------
Total purchase price...................................... $3,250
======
The result of operations for National are insignificant for 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------
1999 1998
------ ------
(DOLLARS IN
THOUSANDS)
Furniture, fixtures and equipment........................... $5,436 $4,452
Leasehold improvements...................................... 1,153 802
Office building............................................. 3,275 668
------ ------
9,864 5,922
Accumulated depreciation and amortization................... (2,231) (1,912)
------ ------
$7,633 $4,010
====== ======
39
42
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
It is the practice of the Company to purchase investment grade fixed
maturity securities. The securities in the Company's portfolio are subject to
economic conditions and normal market risks and uncertainties.
As of December 31, 1999, the carrying amount, which approximates the fair
value, of total investments was $14.0 million.
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
U.S. government and agencies..................... $ 1,477 $ 7 $ 10 $ 1,474
States and political subdivisions................ 2,552 6 17 2,541
Corporate securities............................. 10,298 -- 291 10,007
------- --- ---- -------
$14,327 $13 $308 $14,022
======= === ==== =======
The following table sets forth certain information regarding the Company's
investment securities at December 31, 1999. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Investment
securities with an amortized cost of $2,902,000 and a fair value of $2,848,000
were callable at December 31, 1999:
DECEMBER 31, 1999
----------------------
AMORTIZED FAIR
MATURITY COST VALUE
- -------- ---------- --------
(DOLLARS IN THOUSANDS)
One year or less............................................ $ 100 $ 100
After one year through five years........................... 12,766 12,500
After five years through ten years.......................... 1,461 1,422
------- -------
$14,327 $14,022
======= =======
6. INCOME TAXES
Income tax expense (benefit) for years ended December 31, 1999, 1998 and
1997 consists of the following (dollars in thousands):
1999
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal..................................................... $4,024 $(783) $3,241
State and local............................................. 854 (187) 667
------ ----- ------
$4,878 $(970) $3,908
====== ===== ======
1998
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal..................................................... $7,528 $(1,334) $6,194
State and local............................................. 1,292 (229) 1,063
------ ------- ------
$8,820 $(1,563) $7,257
====== ======= ======
40
43
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal..................................................... $1,608 $(240) $1,368
State and local............................................. 477 (71) 406
------ ----- ------
$2,085 $(311) $1,774
====== ===== ======
The effective tax rate for the period reported differs from the Federal
statutory income tax rate as follows:
1999 1998 1997
---- ---- ----
Statutory Federal income tax rate........................... 34.0% 34.0% 35.0%
Non-deductible expenses..................................... 1.9 2.4 7.0
Amortization of intangibles................................. 1.1 0.4 1.6
State taxes, net of Federal benefit......................... 4.3 5.3 6.6
Other....................................................... (.3) (.3) (.4)
---- ---- ----
41.0% 41.8% 49.8%
==== ==== ====
The deferred tax assets and liabilities at December 31, 1999 consist of the
following:
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(DOLLARS IN THOUSANDS)
Excess state income tax..................................... $ 259 $ --
Provision for claim losses in excess of statutory amounts... 217
Excess book over tax provision for bad debts................ 892 --
Employee benefit and vacation accruals...................... 212 --
Accrued liabilities......................................... 803 --
Other....................................................... 172
Excess tax depreciation over book........................... 262 --
Net operating loss available for carryover.................. 998 --
Investment securities....................................... 116 --
Statutory unearned premium reserve.......................... -- (1,004)
------ -------
3,931 (1,004)
Less: valuation allowance................................... (845) --
------ -------
Total deferred taxes................................... $3,086 $(1,004)
====== =======
41
44
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities at December 31, 1998 consist of the
following:
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(DOLLARS IN THOUSANDS)
Excess state income tax..................................... $ 590 $ --
Excess book over tax provision for bad debts................ 881 --
Employee benefit and vacation accruals...................... 532 --
Accrued liabilities......................................... 395 --
Other....................................................... 4 --
Excess tax depreciation over book........................... -- (7)
------ -------
Total deferred taxes........................................ $2,402 $ (7)
====== =======
Based upon the Company's current and historical pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of its existing net deferred tax assets. Management believes the
existing net deductible temporary differences will reverse during periods in
which the Company generates net taxable income. However, there can be no
assurance that the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other strategies
could be implemented, if necessary, to supplement income from operations to
fully realize recorded tax benefits. The valuation allowance of $845,000 relates
to National whose net operating losses are restricted as to their availability.
7. NOTES PAYABLE
The Company had a $6.0 million note payable to a financial institution that
bears interest at the institutions' prime lending rate due in November 2002. The
note required monthly payments in the amount of $33,000 beginning in May 1998.
Interest was payable monthly. Additionally, the Company was required to pay 75%
of the excess cash flow of ATC (as defined) as supplemental principal payments.
This amount must be paid prior to the end of the first quarter following the end
of each fiscal year. The additional cash payment under this provision as of
December 31, 1997 was $670,000, which had been classified as a current
liability. The note was collateralized by a first priority lien on all the
Company's assets and all of its outstanding common stock. In conjunction with
the Reorganization, the Company voluntarily prepaid $3.5 million on the note.
The assets and outstanding common stock collaterized by the debt was released.
The remaining $1.2 million debt was assumed by the remaining shareholders.
The Company had a $473,000 note payable bearing interest at prime due in
full in December 1999 with interest payable monthly. The note was collateralized
by a deed of trust on the office building. At December 31, 1998, the principal
balance was $443,000. In March 1999, the Company paid the remaining principal
balance of this note in full.
In April 1999, the Company completed the purchase of a home office building
located in Orange, California for $2.6 million. The Company financed $2.1
million, secured by a first trust deed. The terms of the note require monthly
interest payments at prime (8.50%) at December 31, 1999 and monthly principal
payments of $4,000. The note matures on April 1, 2004.
42
45
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
YEAR ENDED
DECEMBER 31, 1999
----------------------
(DOLLARS IN THOUSANDS)
Beginning balance........................................... $ --
Acquisition of National................................... 4,311
Change in provision for claim loss........................ (1,979)
Claims paid, net of recoupments........................... 9
-------
Ending balance.............................................. $ 2,341
=======
Subsequent to the acquisition of National, the Company re-evaluated the
reserve for claim losses for National. Based on that analysis of historical
experience, the reserve was reduced by $2.0 million.
9. SHAREHOLDERS' EQUITY
CAPITAL RESTRICTIONS
Underwritten title companies are subject to certain regulations by
insurance regulatory or banking authorities, primarily relating to minimum net
worth and working capital. Minimum net worth of $400,000 and minimum working
capital of $10,000 is required for ATC. The net worth of ATC was $20.5 million
and $15.3 million at December 31, 1999 and 1998, respectively. The working
capital of ATC was $3.7 million and $5.9 million on December 31, 1999 and 1998,
respectively.
National is subject to regulations that restrict its ability to pay
dividends or make other distributions of cash or property to its parent company
without prior approval from the Department of Insurance of the State of New
York. The maximum amount of dividends which can be paid by National to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions. No dividends, including all dividends paid in the preceding twelve
months, which exceed 10% of the outstanding capital shares can be paid without
prior approval unless after deducting dividends the Company has surplus to
policyholders at least equal to the greater of 50% of its reinsurance reserves
or 50% of the minimum capital required. Additionally, dividends are further
limited to the Company's earned surplus. Based on this formula, National could
not pay dividends or make distributions as of January 1, 2000.
The statutory capital and surplus of National was $2.5 million as of
December 31, 1999. The statutory earnings of the National was $426,000 for the
year ended December 31, 1999.
STOCK ISSUANCE
The Company issued 3,026,400 shares to several key executives in March
1997. The shares were deemed to have no value as of this date of issuance.
Subsequently, certain of these executives surrendered a total of 93,316 and
115,984 shares in 1998 and 1997, respectively.
In February 1999, the Company completed an Initial Public Offering of
1,750,000 million shares at $6 per share, resulting in Fidelity National
Financial, Inc. owning 31.5% of the outstanding shares and 37.0% owned by
management. Net proceeds of approximately $8.4 million was received by the
Company. Expenses incurred were approximately $2.1 million, net of gross
proceeds of $10.5 million. In connection with the offering the underwriters
exercised an option for over allotment to purchase an additional 150,000 shares
at $6 per share on March 31, 1999.
43
46
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, shareholders approved the adoption of an Employee Stock
Purchase Plan ("ESPP"). Under the terms of the ESPP the plan encourages a sense
of proprietorship on the part of the employees of American National Financial,
Inc. and its subsidiary corporations by assisting them in making regular
purchases of shares of stock of the Company. Company employees may contribute an
amount between 5% and 15% of their base salary and certain commissions per pay
period. The Company contributes varying amounts as specified in the plan. During
1999, 30,500 shares were purchased for the benefit of the employees based on
their contributions, at an average market price for the corresponding quarter.
The Company made no contributions to the Plan during 1999.
401(K) PLAN
The Company offers the American National Financial, Inc. 401(k) Profit
Sharing Plan, a qualified voluntary contributory savings plan, available to
substantially all employees. Eligible employees may contribute up to 15% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company may elect to make matching contributions. The
Company has historically not made matching contributions.
EMPLOYEE AND NON-EMPLOYEE DIRECTOR STOCK PURCHASE LOAN PROGRAM
In September 1999, the Company's Board of Directors approved the adoption
of the American National Financial, Inc. Employee Stock Purchase Loan Plan
("Employee Plan") and the Non-Employee Director Stock Purchase Loan Program
("Director Program"). The purpose of the Loan Plan and Loan Program is to
provide key employees and directors with further incentive to maximize
shareholder value. The Company authorized an aggregate of $2.0 million in loans.
Loan Plan and Loan Program funds must be used to make private or open market
purchases of Company common stock through a broker-dealer designated by the
Company. All loans are full recourse and unsecured, and will have a five-year
term. Interest will accrue on the loans at a rate of six and one quarter percent
(6 1/4%) per annum due at maturity. Loans may be prepaid any time without
penalty. Through December 31, 1999, loans were made in the amount of $1,253,000
to purchase 316,767 shares of the Company's common stock at an average purchase
price of $3.95 per share. The fair values of notes receivable are established
using current market rates. The fair value calculated at December 31, 1999 is
$1,134,000.
STOCK OPTION PLAN
In June 1999, shareholders approved the adoption of the Stock Option Plan
("1999 Option Plan"). Under the terms of the 1999 Option Plan, the Company may
grant stock options to certain executives, key employees and branch managers of
the Company and its subsidiaries. The purpose of the 1999 Plan is to attract,
retain and reward key employees and to provide incentives to those persons to
improve operations and increase profits. Individuals to whom options are granted
may reduce the exercise price of such options by electing to defer a portion of
their annual bonuses which would otherwise be payable in cash. The maximum
number of shares for which options may be granted to any one person during any
one calendar year under the 1999 Plan is two hundred thousand (200,000) shares.
The number of shares reserved for issuance under the 1999 Plan and subsequent
amendments is 1,775,000 shares of common stock. The per share option price is
determined at the grant date. The option price may be less than the fair market
value of the common stock at the date of grant to reflect the application of the
optionee's deferred bonus, if applicable. Options granted under the 1999 Option
Plan, shall be fully vested after three years and be exercisable in such
installments and for such periods as may be fixed at the time of grant, however,
in no event should any stock options extend for a period in excess of 10 years
from the date of grant.
44
47
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, the shareholders approved the adoption of the 1998
Incentive Stock Plan (1998 Incentive Plan). Under the terms of the 1998
Incentive Plan, the Company may grant incentive or nonqualified stock options to
certain key employees and non-employee directors or officers. The number of
shares issuable under the 1998 Incentive Plan is 650,000 shares at not less than
100% and 85% of fair market value on the date of the grant for incentive options
and nonqualified options, respectively. An additional 200,000 shares of common
stock may be authorized on the date of each annual meeting of shareholders.
Officers and other key employees of the Company or of an affiliated company are
eligible to receive incentive stock options. Officers and other key employees of
the Company or of an affiliated company, members of the Board and other service
providers are eligible to receive nonqualified stock options. The term and
provision for the termination of each option shall be fixed by the Board of
Directors, but no option may be exercisable more than 10 years after the date it
is granted. An incentive option granted to a person who is a 10% shareholder on
the date of the grant shall not be exercisable more than 5 years after the date
it is granted. Each option shall vest and become exercisable in one or more
installments at such time or times and subject to such conditions, including
within limitation the achievement of specified performance goals or objectives,
as shall be determined by the Board of Directors. As of December 31, 1998, no
options had been granted under the 1998 Incentive Plan. In connection with the
February 1999 Initial Public Offering, 340,040 options were granted under the
1998 Incentive Plan at an exercise price of $6 per share.
Concurrent with the acquisition of ATC, the Chairman of the Board of FNFI
was granted fully vested options for 332,904 shares of the Company's common
stock at an exercise price of $0.66 per share. The options expire in 10 years.
The Company recognized $414,000 in compensation expense to reflect the excess of
fair market value over the exercise price of the options in 1997. Subsequent to
the initial public offering these options were exercised.
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1999:
1999
---------------------------
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Stock options outstanding, beginning of year................ 332,904 $0.66
Stock options granted....................................... 376,540 6.00
Stock options exercised..................................... (332,904) 0.66
Stock options cancelled..................................... (40,264) 6.00
-------- -----
Stock options outstanding, end of year...................... 336,276 6.00
Exercisable at end of year.................................. 112,753 6.00
Weighted-average fair value of options granted during the
year...................................................... -- 1.39
The weighted average remaining contractual life of the options outstanding
at December 31, 1999 is 9.18 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (Opinion 25) and related
Interpretations in accounting for its 1997 Incentive Plan. As discussed below,
in management's opinion, the alternative fair value accounting provided for
under Statement of Accounting Standards No. 123, "Accounting for Stock Based
Compensation (Statement 123) requires use of option valuation models that were
not developed for use in valuing employee stock options. Under Opinion 25,
because the exercise price of the Company's stock options exceeds the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
45
48
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the minimum fair value method of that Statement.
The minimum fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions. The risk free interest rate used for options granted during 1997
was 6.45%. The expected dividend yield used for 1997 was 0%. A weighted average
expected life of 10 years was used. There were no options granted in 1998. The
risk free interest rate used for options granted during 1999 was 5.19%. The
expected dividend yield used for 1999 was 10%. The weighted average expected
life of 7 years was used for 1999. The volatility factor for 1999 was 50%.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information for the years ended December 31, 1999, 1998 and
1997 follows (dollars in thousands, except per share data):
1999 1998 1997
------ ------ -----
Pro forma basic and diluted net earnings.................... $5,509 $6,865 $ 607
Pro forma basic earnings per share.......................... $ 0.80 $ 2.13 $0.20
Pro forma diluted earnings per share........................ 0.80 1.96 0.20
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
From time to time, the Company is subject to legal proceedings associated
with claims made under policies of insurance they have issued or other services
performed on behalf of insured policyholders and other customers. Management
believes that no such actions depart from customary litigation incidental to the
business of the Company and that resolution of all such litigation will not have
a material adverse effect on the Company.
TRUST DEPOSITS
In conducting its operations, ATC routinely holds customers' assets in
trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and have not been included in the
accompanying consolidated balance sheets. ATC has a contingent liability
relating to proper disposition of these balances for its customers, which
amounted to $67,513,000 and $104,688,000 at December 31, 1999 and 1998,
respectively.
COMPLIANCE REPORTING
The State Banking Department, State of Arizona ("State Banking Department")
delivered their report of Examination of Nations Title Insurance of Arizona,
Inc. ("Nations") as of and for the three-year period ending October 31, 1998, on
March 4, 1999. The report as forwarded to the Company by State Banking
Department indicates that the Company may not be in compliance with certain
State Banking Department Regulations. The State Banking Department is providing
the Company with an opportunity to present additional information prior to
making their final determination as to compliance. The Company does not believe
that resolution of this matter will have a material impact upon the financial
statements of the Company. The Company provided additional information for the
State Banking Department to review. As of December 31, 1999, the Company has not
received any further correspondence from the State Banking Department.
DEPOSITS WITH INSURANCE COMMISSIONER
ATC is required to maintain certain amounts on deposit with the California
Insurance Commissioner in order to operate in certain counties. At December 31,
1999 the amount required by the Department of
46
49
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance, State of California is $112,500. Additionally, National is required
to maintain certain amounts on deposit for compliance requirements. The amount
at December 31, 1999 is $515,000.
OPERATING LEASES
ATC leases certain of its premises and equipment under operating leases
that expire at various dates. Several of these agreements include escalation
clauses and provide for purchases and renewal options for periods ranging from
one to five years. Certain of those leases are with subsidiaries of FNFI.
Future minimum operating lease payments are as follows:
TO-NON- TO
AFFILIATE AFFILIATES TOTAL
--------- ---------- -------
(DOLLARS IN THOUSANDS)
2000....................................................... $ 3,861 $231 $ 4,092
2001....................................................... 3,344 -- 3,344
2002....................................................... 2,221 -- 2,221
2003....................................................... 1,469 -- 1,469
2004....................................................... 480 -- 480
Thereafter................................................. 279 -- 279
------- ---- -------
Total future minimum operating lease payments.............. $11,654 $231 $11,885
======= ==== =======
Rent expense incurred under operating leases during the years ended
December 31, 1999, 1998 and 1997 was $4.4 million, $3.5 million and $2.4 million
respectively, including $416,000, $357,000 and $208,000 paid to an affiliate.
CAPITAL LEASES
In 1997, ATC entered into a capital lease arrangement with a subsidiary of
FNFI, which terminated in December 1999, for certain equipment. The capital
lease pertaining to certain equipment was paid in full in March 1999.
Accumulated depreciation related to this equipment was $623,000, $935,000 and
$312,000 at December 31, 1999, 1998 and 1997, respectively. Also in 1997, ATC
entered into a capital lease agreement with FNTIC, which expires in June 2007,
for three title plants. The gross amount of the title plant recorded under
affiliated capital lease is $815,000 at December 31, 1999, 1998 and 1997,
respectively.
In a separate, non-affiliated transaction, ATC entered into a capital lease
agreement during 1998 to purchase a copy of a title plant. The gross amount of
the title plant recorded under the capital lease is $1.4 million at December 31,
1999 and 1998. The capital lease agreement expires in August 2007.
47
50
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum capital lease payments are as follows:
TO-NON TO
AFFILIATE AFFILIATE TOTAL
--------- ---------- -------
(DOLLARS IN THOUSANDS)
2000....................................................... 222 120 342
2001....................................................... 222 120 342
2002....................................................... 222 120 342
2003....................................................... 222 120 342
2004....................................................... 222 120 342
Thereafter................................................. 649 300 949
------- ---- -------
Total future minimum capital lease payments................ 1,759 900 2,659
Portion relating to interest............................... (447) (231) (678)
------- ---- -------
Present value of minimum capital lease payments............ $ 1,312 $669 $ 1,981
======= ==== =======
Depreciation of the equipment held under capital leases is included in
other operating expenses for the years ended December 31, 1999, 1998 and 1997.
12. RELATED PARTY TRANSACTIONS
The Company pays fees to affiliated underwriters for underwriting services
and management services under an exclusive agency agreement with FNTIC.
Underwriting services are provided for five years commencing July 1997, and
subject to a mutually agreed five year extension to the original term, for a fee
of 11% of gross title insurance premiums. Management services are cancelable
with 90 days notice and cost 1% of gross title insurance premiums.
ATC leases office space and title plants from subsidiaries of FNFI. See
note 11. Additionally, the Company reimburses subsidiaries of FNFI for expenses
incurred on its behalf. Such reimbursements aggregated $3.8 million, $4.2
million and $1.2 million for years ended December 31, 1999, 1998 and 1997,
respectively.
In June 1999, the Company acquired National from a subsidiary of FNFI for
$3.25 million. Pursuant to the terms of the Stock Purchase Agreement, effective
with the purchase date, National pays FNFI specific fees for certain
administrative functions performs on behalf of the Company. The fee related to
National at December 31, 1999 was $64,000.
13. REORGANIZATION
In August 1998, the Company agreed to acquire the remaining 40% of the
outstanding common stock of ATC from FNFI in exchange for 43% of the then
outstanding common stock of the Company (2,099,996 shares). The exchange was
consummated in November 1998 upon receipt of regulatory approval. The 40%
interest was accounted for at the fair value of ANFI shares of $10.7 million
which resulted in the recognition of goodwill in the amount of $3.9 million,
which is being amortized over 25 years. In connection with this transaction, the
shareholders of the Company, other than FNFI, assumed $1.2 million of the note
payable incurred in connection with the Company's acquisition of ATC. The
assumption of debt by the non-FNFI shareholders was accounted for as a capital
contribution. Additionally, the Company used the proceeds of a dividend from ATC
of $3.5 million to repay the remaining balance of the note payable.
48
51
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected unaudited pro forma results of operations assuming the acquisition
of 40% of ATC at December 31, 1998 and 1997 is presented as follows (dollars in
thousands, except per share data):
1998 1997
------- -------
Total revenue............................................... $91,425 $54,422
Net earnings................................................ 9,155 2,397
Basic earnings per share.................................... 1.84 .47
Diluted earnings per share.................................. 1.74 .46
14. SUBSEQUENT EVENTS
On January 14, 2000, the Company purchased 100% of the stock of Bancserv,
Inc., a California corporation located in Santa Ana, California. Bancserv, Inc,
is a document company providing outsource services to the real estate and
banking industry through a national network of qualified notaries public. The
purchase price is $1.3 million, payable $400,000 in cash and a $900,000
promissory note that bears interest at a rate of 7.50%, and is due in full on
January 2005. The note requires monthly payments of $18,000 beginning February
1, 2000.
On February 29, 2000, the Company purchased 100% of the stock of Pioneer
Land Title Corporation ("Pioneer"), a New York corporation. Pioneer provides
title and escrow services in the state of New York. The purchase price is $1.8
million, payable $360,000 in cash and a $1.4 million promissory note that bears
interest at 6.56% per annum from the purchase date through the fourth
anniversary date.
On February 29, 2000, the Company purchased 100% of the membership
interests of Emerald Mortgagee Assistance Company, L.L.C., ("EMAC"), a full
service provider of release and assignment document preparation, document
retrieval and special title assistance headquartered in Colorado with operations
nationwide. The purchase price of $1.9 million was paid in cash of $1.7 million,
subject to certain purchase price adjustments based on the combined equity of
EMAC and American Research Services, its affiliate, and 58,495 shares of the
common stock of the Company.
49
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American National Financial, Inc.:
We have audited the accompanying statements of combined operations,
statements of shareholders' equity and cash flows of ANFI Predecessor, as
defined in Note 1 to the financial statements, for the six months ended June 30,
1997 and the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of ANFI
Predecessor for the six months ended June 30, 1997 and for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
January 22, 1999
50
53
ANFI PREDECESSOR
STATEMENTS OF COMBINED OPERATIONS
FOR THE SIX
MONTHS ENDED
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
Revenues:
Net title service revenue-related party..................... $14,767,825 $32,702,365
Escrow fees................................................. 5,581,285 9,872,057
Other service charges....................................... 3,162,335 6,127,087
----------- -----------
Total revenues......................................... 23,511,445 48,701,509
----------- -----------
Expenses:
Personnel costs............................................. 13,952,776 28,966,154
Other operating expenses.................................... 6,520,630 15,925,037
Title plant rent and maintenance............................ 2,009,188 4,306,505
----------- -----------
Total expenses......................................... 22,482,594 49,197,696
----------- -----------
Earnings (losses) before income taxes....................... 1,028,851 (496,187)
Pro forma provision for income taxes........................ -- 28,309
Provision for income taxes.................................. 436,981 (182,043)
----------- -----------
Net earnings (losses)....................................... $ 591,870 $ (342,453)
=========== ===========
See accompanying notes to financial statements
51
54
ANFI PREDECESSOR
STATEMENTS OF SHAREHOLDER'S EQUITY
ATC NATIONS RETAINED
COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------- --------------- PAID-IN (ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIENCY) EQUITY
------ -------- ------ ------ ---------- ------------ -------------
BALANCE, JANUARY 1, 1996.... 3,000 $300,000 1,000 $1,000 $ 505,710 $(289,802) $ 516,908
Capital contribution
Predecessors of American
Title Company............. -- -- -- -- 6,197,497 -- 6,197,497
Net losses.................. -- -- -- -- -- (342,453) (342,453)
----- -------- ----- ------ ---------- --------- ----------
BALANCE, DECEMBER 31,
1996...................... 3,000 300,000 1,000 1,000 6,703,207 (632,255) 6,371,952
Capital contribution --
Cash...................... -- -- -- -- 257,869 -- 257,869
Net earnings................ -- -- -- -- -- 591,870 591,870
----- -------- ----- ------ ---------- --------- ----------
BALANCE, JUNE 30, 1997...... 3,000 $300,000 1,000 $1,000 $6,961,076 $ (40,385) $7,221,691
===== ======== ===== ====== ========== ========= ==========
See accompanying notes to financial statements
52
55
ANFI PREDECESSOR
STATEMENTS OF CASH FLOWS
FOR THE FOR THE
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
Cash flows from operating activities:
Net earnings (losses)....................................... $ 591,870 $ (342,453)
Adjustments to reconcile net earnings (losses) to cash
provided by operating activities:
Depreciation and amortization............................. 169,079 126,932
Changes in:
Accounts receivable.................................... 2,574,688 (690,548)
Prepaid expenses and other asset....................... 273,969 (237,208)
Due to/from affiliates................................. 138,835 (1,363,685)
Payables and accruals.................................. 893,286 1,455,034
---------- -----------
Total cash (used in) provided by operating
activities...................................... 4,641,727 (1,051,928)
---------- -----------
Cash flows from investing activities:
Net sales (purchase) of property and equipment.............. (286,414) 43,994
Net collection from notes receivable........................ -- 7,457
---------- -----------
Total cash provided by (used in) investing
activities...................................... (286,414) 51,451
---------- -----------
Cash flows from financing activities:
Contribution from Parent.................................... 257,869 --
---------- -----------
Decrease (increase) in cash and cash equivalents............ 4,613,182 (1,000,477)
Cash and cash equivalents at beginning of year.............. 419,592 1,420,069
---------- -----------
Cash and cash equivalents at end of year.................... $5,032,774 $ 419,592
========== ===========
See accompanying notes to financial statements
53
56
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements include the divisions and/or
subsidiaries of Fidelity National Financial, Inc. ("FNFI") which were
subsequently merged into or acquired by American Title Company ("ATC" or "the
Company"). ATC was acquired by FNFI in January 1996 for $772,000 from an
unaffiliated party. The purchase price primarily represented the value of
licenses to operate as an underwritten title company in various counties in
California. At the time of acquisition, the operations of the acquired company
were not significant. In July 1997, 60% of ATC was sold to American National
Financial, Inc. ("ANFI") for $6,000,000. ANFI is owned by certain members of
management of ATC. Reference to "ANFI Predecessor" in these financial statements
refers to operations of these entities.
The predecessor operations included in the accompanying financial
statements are those of ATC since it was acquired by FNFI, other operations of
FNFI that were operated as separate profit centers but not separate legal
entities, and were contributed to ATC since its acquisition by FNFI, and Nations
Title Insurance of Arizona, Inc. ("Nations") and Landmark REO Management
Services, Inc. ("Landmark") which were contributed to ATC on July 1, 1997. The
profit centers or divisions of the Predecessor operations include all charges
incurred in operating these operations as if they were a separate legal entity.
All such charges including rent, depreciation, officer salaries, advertising,
utilities, accounting and legal costs have been specifically identified and
charged to the various Predecessor operations. No general or non-specific
allocations have been made.
2. DESCRIPTION OF BUSINESS
ATC, an underwritten title company in the state of California, and the
other subsidiaries and operations of FNFI that were contributed to ATC, are
engaged in the business of providing title insurance services and other related
services in connection with real estate transactions. The Company operates
throughout California and in Maricopa County, Arizona. ATC and Nations function
as exclusive agents of Fidelity National Title Insurance Company ("FNTIC"), an
affiliate and a wholly owned subsidiary of FNFI. Title insurance policies are
underwritten by FNTIC for an underwriting fee. The underwriting agreement
generally provides that ATC and Nations are liable under any single policy for
only the first $5,000 of losses. As a result of the sale of 60% of ATC to ANFI,
FNFI agreed to make no claim on ATC for claims arising from policies written
prior to January 1, 1997.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following briefly describes the significant accounting policies of the
Company which have been followed in preparing the accompanying financial
statements.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturity dates of three months or less are considered cash
equivalents.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method based on the
estimated useful lives of the related assets, which range from three to five
years. Leasehold improvements are amortized on a straight- line basis over the
lesser of the term of the applicable lease or the estimated useful lives of such
assets.
54
57
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLES
Intangible assets include acquired licenses to operate within various
counties and cost in excess of net assets acquired in connection with certain
acquisitions. Intangibles are amortized over a composite life of 25 years.
Impairment of intangible assets is monitored on a continual basis and is
assessed based on an analysis of the cash flows generated by the underlying
assets. No impairment of intangible assets has been recognized.
INCOME TAXES
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The impact on deferred taxes of changes in tax rates and laws, if any,
are applied to the years during which temporary differences are expected to be
settled and reflected in the financial statements in the period enacted.
REVENUE RECOGNITION
Net title service revenue, escrow fees and the majority of other service
charges are recognized as revenue at the time of closing of the related real
estate transaction. Certain other service charges are recognized over the period
during which the services are provided. Net title service revenue is presented
net of the underwriting fee to affiliated underwriters on the accompanying
statement of combined operations. Related expenses are recognized when incurred.
A provision for losses on title policies is accrued at the time of closing of
the related real estate transaction to cover anticipated losses up to $5,000 per
policy under the underwriting agreement with FNTIC.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. INCOME TAXES
ANFI Predecessor's operating results through July 1, 1997 are included in
the income tax returns of FNFI for all periods since their acquisition by FNFI.
The entities that comprise ANFI Predecessor have formal tax allocation
agreements with FNFI whereby if these entities have taxable income, they will
pay FNFI a monthly amount equal to the GAAP book tax provision established for
Federal and state income taxes. If these entities have a taxable loss, FNFI will
pay to them an amount equal to the tax benefits received by FNFI from the
inclusion of these entities in the consolidated Federal and state income tax
returns even if the entities could not have utilized its losses and/or credits
on a separate return basis.
All tax benefits generated by the branches were utilized to offset taxable
income generated by other FNFI subsidiaries. However, for purposes of these
financial statements, a pro forma tax benefit has been provided in the
statements of combined operations for 1996 to reflect an estimate of the tax
benefit that would have been available if these operations had been legally a
part of ATC during these periods. The tax rate used for this estimate is a
combination of the statutory Federal and state tax rates.
55
58
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Provision (benefit) for income taxes for the six months ended June 30, 1997
and for the year ended December 31, 1996 consists of the following:
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------
CURRENT DEFERRED TOTAL
---------- ----------- ----------
Federal................................................... $549,478 $(214,398) $335,080
State and local........................................... 161,009 (59,108) 101,901
-------- --------- --------
$710,487 $(273,506) $436,981
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
CURRENT DEFERRED TOTAL
--------- ---------- ----------
Federal.................................................. $395,116 $(550,860) $(155,744)
State and local.......................................... 111,557 (137,856) (26,299)
-------- --------- ---------
$506,673 $(688,716) $(182,043)
======== ========= =========
The effective tax rate for the periods reported differs from the Federal
statutory income tax rate as follows:
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------------- ------------
Statutory Federal income tax rate........................... 35.0% (34.0)%
Non-deductible expenses..................................... 1.1 2.0
State taxes, net of Federal benefit......................... 6.3 (6.0)
Amortization of intangibles................................. .6 --
Other....................................................... (.5) 1.3
---- -----
42.5% (36.7)%
==== =====
The deferred tax assets and liabilities consist of excess book over tax
provision for bad debts and employee benefit and vacation accruals.
Based upon the Company's current and historical pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of its existing deferred tax assets. Management believes the existing
net deductible temporary differences will reverse during periods in which the
Company generates net taxable income. However, there can be no assurance that
the Company will generate any earnings or any specific level of continuing
earnings in future years. Certain tax planning or other strategies could be
implemented, if necessary, to supplement income from operations to fully realize
recorded tax benefits.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
From time to time the Company is subject to legal proceedings associated
with claims made under policies of insurance they have issued or other services
performed on behalf of insured policyholders and other customers. Management
believes that no such actions depart from customary litigation incidental to the
business of the Company and that resolution of all such litigation will not have
a material adverse effect on the Company.
56
59
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TRUST DEPOSITS
In conducting its operations, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and are not included in the balance
sheet. The Company has a contingent liability relating to proper disposition of
these balances for its customers, which amounted to $47,490,068 at December 31,
1996.
DEPOSITS WITH INSURANCE COMMISSIONER
The Company is required to maintain certain amounts on deposit with the
Insurance Commissioner in order to operate in certain counties.
OPERATING LEASES
The Company leases certain of its premises and equipment under leases that
expire at various dates. Several of these agreements include escalation clauses
and provide for purchases and renewal options for periods ranging from one to
five years.
Future minimum operating lease payments at December 31, 1996 are as
follows:
1997........................................................ $2,439,937
1998........................................................ 1,894,742
1999........................................................ 922,414
2000........................................................ 545,747
2001........................................................ 298,664
Thereafter.................................................. 27,848
----------
Total future minimum operating lease payments.......... $6,129,352
==========
Rent expense for the six months ended June 30, 1997 and the year ended
December 31, 1996 was $2,279,989 and $4,316,326, respectively, of which $630,753
and $1,374,308, respectively were amounts paid to affiliates.
UNDERWRITING AGREEMENT
On July 1, 1997, the Company signed an exclusive underwriting agreement
with FNTIC which is effective for five years. Under the agreement, the Company
is generally limited to write policies only for FNTIC within certain geographic
territories. Underwriting fees are based on a percentage of the gross title
insurance premiums written and approximate 12%. The 12% underwriting fee
includes a one percent fee paid to a FNFI affiliate for management services
provided by these affiliates for ATC.
6. RELATED PARTY TRANSACTIONS
ANFI predecessor has cost reimbursement agreements with a FNFI subsidiary
whereby certain expenses are paid on behalf of and are later reimbursed by ATC.
7. SUBSEQUENT EVENTS
Additionally, title insurance premiums are collected by ANFI Predecessor on
behalf of FNFI in accordance with an underwriting agreement (see Note 5).
57
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. THROUGH 13.
Within 120 days after the close of its fiscal year, the Company intends to
file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended,
which will include the election of directors, the report of compensation
committee on annual compensation, certain relationships and related transactions
and other business.
58
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. The following is a list of the Consolidated
Financial Statements of American National Financial, Inc. and its subsidiaries
included in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Comprehensive Earnings for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
The following is a list of the financial statements of ANFI Predecessor
included in Item 8 of Part II.
Independent Auditors' Report.
Statements of Combined Operations for the six months ended June 30,
1997.
Statements of Shareholder's Equity for the six months ended June 30,
1997 and for the year ended December 31, 1996.
Statements of Cash Flows for the six months ended June 30, 1997.
Notes to Financial Statements.
(a) (2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K.
Schedule V: Valuation and Qualifying Accounts.
Investments In and Advances to Affiliates and Income Thereon.
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements of notes thereto.
(a) The following exhibits are filed herewith or are incorporated by
reference.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement dated January 1, 1997 by and among
the Registrant, Fidelity National Financial, Inc. and
American Title Company, together with amendment,
incorporated by reference from Form S-1, Registration No.
333-62353.
2.2 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Fidelity National Asset
Recovery Services, Inc. and Fidelity National Financial,
Inc., incorporated by reference from Form S-1, Registration
No. 333-62353.
2.3 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Nations Title Insurance of
Arizona, Inc. and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353.
59
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.4 Stock Purchase Agreement dated March 16, 1998 by and among
Fidelity National Title Insurance Company of New York,
National Title Insurance of New York, Inc. and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
2.5 Stock Purchase Agreement dated August 9, 1997 by and between
Pacific Coast Title of Santa Barbara County and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
2.6 Stock Exchange Agreement dated August 21, 1998 between the
Registrant and Fidelity National Financial, Inc,
incorporated by reference from Form S-1, Registration No.
333-62353.
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from Form S-1, Registration No. 333-62353.
3.2 Bylaws of the Registrant, as amended, incorporated by
reference from Form S-1, Registration No. 333-62353.
4.1 Form of Common Stock Certificate, incorporated by reference
from Form S-1, Registration No. 333-62353, incorporated by
reference from Form S-1, Registration No. 333-62353.
10.1 1998 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive
Stock Option Agreement, incorporated by reference from Form
S-1, Registration No. 333-62353.
10.2 Employment Agreement between the Registrant and Michael C.
Lowther, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.3 Employment Agreement between the Registrant and Wayne D.
Diaz, incorporated by reference from Form S-1, Registration
No. 333-62353.
10.4 Employment Agreement between the Registrant and Dennis R.
Duffy, incorporated by reference from Form S-1, Registration
No. 333-62353.
10.5 Employment Agreement between the Registrant and Barbara
Ferguson, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity
National Title Insurance Company and American Title Company,
incorporated by reference from Form S-1, Registration No.
333-62353.
10.7 Issuing Agency Agreement dated August 25, 1997 between
Fidelity National Title Insurance Company and Santa Barbara
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.8 Credit Agreement dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.9 Note dated August 7, 1997 of the Registrant in favor of
Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.10 Addendum to Note dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.11 Standard Sublease dated January 28, 1998 between American
Title Company and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353.
10.12 Form of Indemnification Agreement, incorporated by reference
from Form S-1, Registration No. 333-62353.
10.13 Title Plant Lease Agreement dated July 1, 1997 between
Fidelity National Title Insurance Company and American Title
Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
60
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Letter of Grant dated July 1, 1997 granting William P.
Foley, II options to purchase 55,000 shares of common stock
of the Registrant, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.15 Stock Purchase Agreement dated January 14, 2000 by and
between Bancserv, Inc. and American National Financial, Inc.
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353.
23.1 KPMG Consent.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
the fourth quarter ending December 31, 1999.
61
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN NATIONAL FINANCIAL, INC.
By: /s/ MICHAEL C. LOWTHER
------------------------------------
Michael C. Lowther
Chief Executive Officer
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM P. FOLEY, II Chairman of the Board of Directors March 27, 2000
- ---------------------------------------------
William P. Foley, II
/s/ MICHAEL C. LOWTHER Chief Executive Officer and March 27, 2000
- --------------------------------------------- Director
Michael C. Lowther
/s/ WAYNE D. DIAZ President and Director March 27, 2000
- ---------------------------------------------
Wayne D. Diaz
/s/ CARL A. STRUNK Executive Vice President and March 27, 2000
- --------------------------------------------- Chief Financial Officer (Principal
Carl A. Strunk Financial and Accounting Officer)
/s/ DENNIS R. DUFFY Executive Vice President and March 27, 2000
- --------------------------------------------- Director
Dennis R. Duffy
/s/ BARBARA A. FERGUSON Executive Vice President and March 27, 2000
- --------------------------------------------- Director
Barbara A. Ferguson
/s/ BRUCE ELIEFF Director March 27, 2000
- ---------------------------------------------
Bruce Elieff
/s/ MATTHEW K. FONG Director March 27, 2000
- ---------------------------------------------
Matthew K. Fong
62
65
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American National Financial, Inc.:
Under date of February 29 2000, we reported on the consolidated balance
sheets of American National Financial, Inc. and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of earnings,
comprehensive earnings, shareholders' equity and cash flows for each of the
years in the three year period ended December 31, 1999, which are included in
the Annual Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule in the Annual Report on Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
February 29, 2000
63
66
SCHEDULE V
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ---------- ------------------------- ---------- ---------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
YEAR ENDED DECEMBER 31, 1999:
Reserve for claim losses.............. $ -- $(1,979)(6) $4,320(5) $ -- $2,341
Reserve for title and escrow losses... $ 991 $ 10 $ 5(4) $ 185(1) $ 821
Allowance on:
Trade receivables................... 1,896 1,385 252(4) 1,436(1) 2,097
Amortization of cost in excess of net
assets acquired and other intangible
assets.............................. 609 350 -- -- 959
YEAR ENDED DECEMBER 31, 1998:
Reserve for title losses.............. $ 465 $ 526 $ -- $ -- $ 991
Allowance on:
Trade receivables................... 1,100 341 1,241(2) 786(1) 1,896
Amortization of cost in excess of net
assets acquired and other intangible
assets.............................. 257 352 -- -- 609
YEAR ENDED DECEMBER 31, 1997:
Reserve for title losses.............. $ -- $ 465 $ -- $ -- $ 465
Allowance on:
Trade receivables................... -- 553 837(3) 290(1) 1,100
Amortization of cost in excess of net
assets acquired and other intangible
assets.............................. -- 181 76(3) -- 257
- ---------------
(1) Represents uncollectible accounts written off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(2) Represents balance sheet reclassification entries.
(3) Balances from July 1, 1997 acquisition of American Title Company and
subsidiaries by American National Financial, Inc.
(4) Recovery on previous accounts written off.
(5) Reserves assumed from National acquisition in June 1999.
(6) Represents claim loss provision for current year.
64
67
SCHEDULE V
(CONTINUED)
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INVESTMENTS IN AND ADVANCES TO AFFILIATES AND INCOME THEREON
YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ----------- ------ -------- -------------------
AMOUNT OF INTEREST
PRINCIPAL -------------------
AMOUNT OF CARRYING CREDITED
DESCRIPTION INVESTMENT COST VALUE TO INCOME OTHER
----------- ----------- ------ -------- ---------- -----
Year ended December 31, 1999:
CKE Restaurants(1)........................ $1,500 $1,433 $1,395(2) $91 $--
- ---------------
(1) Bond purchase.
(2) The basis for fixed maturity securities is the fair value.
65
68
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement dated January 1, 1997 by and among
the Registrant, Fidelity National Financial, Inc. and
American Title Company, together with amendment,
incorporated by reference from Form S-1, Registration No.
333-62353.
2.2 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Fidelity National Asset
Recovery Services, Inc. and Fidelity National Financial,
Inc., incorporated by reference from Form S-1, Registration
No. 333-62353.
2.3 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Nations Title Insurance of
Arizona, Inc. and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353.
2.4 Stock Purchase Agreement dated March 16, 1998 by and among
Fidelity National Title Insurance Company of New York,
National Title Insurance of New York, Inc. and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
2.5 Stock Purchase Agreement dated August 9, 1997 by and between
Pacific Coast Title of Santa Barbara County and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
2.6 Stock Exchange Agreement dated August 21, 1998 between the
Registrant and Fidelity National Financial, Inc,
incorporated by reference from Form S-1, Registration No.
333-62353.
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from Form S-1, Registration No. 333-62353.
3.2 Bylaws of the Registrant, as amended, incorporated by
reference from Form S-1, Registration No. 333-62353.
4.1 Form of Common Stock Certificate, incorporated by reference
from Form S-1, Registration No. 333-62353, incorporated by
reference from Form S-1, Registration No. 333-62353.
10.1 1998 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive
Stock Option Agreement, incorporated by reference from Form
S-1, Registration No. 333-62353.
10.2 Employment Agreement between the Registrant and Michael C.
Lowther, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.3 Employment Agreement between the Registrant and Wayne D.
Diaz, incorporated by reference from Form S-1, Registration
No. 333-62353.
10.4 Employment Agreement between the Registrant and Dennis R.
Duffy, incorporated by reference from Form S-1, Registration
No. 333-62353.
10.5 Employment Agreement between the Registrant and Barbara
Ferguson, incorporated by reference from Form S-1,
Registration No. 333-62353.
69
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity
National Title Insurance Company and American Title Company,
incorporated by reference from Form S-1, Registration No.
333-62353.
10.7 Issuing Agency Agreement dated August 25, 1997 between
Fidelity National Title Insurance Company and Santa Barbara
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.8 Credit Agreement dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.9 Note dated August 7, 1997 of the Registrant in favor of
Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.10 Addendum to Note dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.11 Standard Sublease dated January 28, 1998 between American
Title Company and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353.
10.12 Form of Indemnification Agreement, incorporated by reference
from Form S-1, Registration No. 333-62353.
10.13 Title Plant Lease Agreement dated July 1, 1997 between
Fidelity National Title Insurance Company and American Title
Company, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.14 Letter of Grant dated July 1, 1997 granting William P.
Foley, II options to purchase 55,000 shares of common stock
of the Registrant, incorporated by reference from Form S-1,
Registration No. 333-62353.
10.15 Stock Purchase Agreement dated January 14, 2000 by and
between Bancserv, Inc. and American National Financial, Inc.
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353.
23.1 KPMG Consent.
27 Financial Data Schedule.