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. 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. All Predecessor information 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 balance sheet data as of December 31, 1998 and 1997 and the statement of operations data for the year ended December 31, 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 balance sheet data at December 31, 1996 and the Predecessor statement of operations data for the six months ended June 30, 1997 and for the year ending December 31, 1996 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.
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
The Company's revenues include net title service revenues (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 title insurance premiums. Other fees and revenue primarily consist of real estate information fees, reconveyance fees, recording fees and appraisal fees, in connection with real estate transactions, and include fees related to the Company's STAR product. Other fees and revenue trend closely with the level of title insurance 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 escrow. As a result, the Company's recognition of revenue relating to a given escrow lags approximately 60-90 days behind the opening of that escrow and 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 from quarter to quarter.
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 an Issuing Agency Agreement, and similar fees paid by the Company's other underwritten title company subsidiaries.
While the number of orders that close 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 Company was incorporated in November 1996, but had no operations until it acquired 60% of the outstanding common 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, 1998. Therefore, revenue and expenses related to the historical operations of the Company since its inception are not comparable from year to year.
Total revenues were $91.4 million and $54.4 million for the years ended December 31, 1998 and 1997, respectively. Since commencing operations in July 1997, the Company expanded its services and acquired other operations. The Company's revenues have been increasing as a result of such expansion and due to an increase in real estate activity and home prices, as well as an increase in the number of real estate transactions handled by the Company. Total revenues increased to $54.4 million in 1997 from $48.7 million in 1996, primarily as a result of improving market conditions and an improved contribution from escrow fees and other fees and revenue.
Escrow Fees. Revenues from escrow fees were $24.3 million for 1998, as compared to $12.9 million for 1997, an increase of $11.3 million or 87.6%. This increase is consistent with the trend in title premiums but is also due to the Company's focused efforts to expand its escrow market presence in certain areas, such as southern California. Escrow fees increased to $12.9 million in 1997, an increase of $3.0 million, or 31%, from $9.9 million in 1996, primarily as a result of market conditions.
The Company's principal costs include personnel costs, title plant rent and maintenance costs, and other operating expenses. Personnel costs include both base salaries and commissions 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 expenses, general insurance, trade and notes receivable allowances, depreciation and amortization and interest expense.
The repayment of debt pursuant to the terms of the Reorganization will result in a material decrease in future interest expense. Interest expense incurred during 1998 and 1997, related to the debt repaid in the Reorganization, was $391,469 and $413,000 respectively.
The period over period of fluctuations in personnel costs and other operating expenses are primarily the result of the fluctuations in total revenue and the impact of continued implementation of title and escrow related technology on productivity and efficiency.
The Company's current cash requirements include debt service, debt relating to capital leases, personnel, 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 amount of such resources will be dependent on the Company's resource allocation plan for National, which has not been completed. 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. National is presently owned by a subsidiary of FNFI, and therefore its acquisition by the Company should not be considered an arm's length transaction.
On February 12, 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 36.7% owned by management. Net proceeds of approximately $9.7 million were received by the Company. 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.
On March 18, 1999, ANFI announced that its Board of Directors declared an initial quarterly cash dividend in the amount of $.10 per share. The dividend will be payable on May 27, 1999 to stockholders of record as of April 8, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive earnings to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive earnings by their nature in a financial statement and (b) display the accumulated balance of other comprehensive earnings separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 became effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 130 has not had an impact on the Company's financial reporting.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 became effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The adoption of SFAS 131 has not had an impact on the Company's financial reporting as they operate in only one industry segment.
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 $6,000,000 in proceeds from the issuance of short-term notes payable, of which $870,000 was due to certain members of management and the remainder was due 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 $6,000,000 for 60% interest in 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 11.
The Company's other subsidiaries include Nations Title Insurance of Arizona, Inc.; Landmark REO Management Services, Inc.; American Document Services, Inc.; West Point Appraisal, Inc.; West Point Properties, Inc. and West Point Support Services, Inc.
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.
Title plant is historical title information organized and maintained for use in performing title searches. The December 31, 1998 and 1997 title plant balances relate to capital leases. See note 9. 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.
Intangible assets include acquired licenses to operate within various counties and the cost in excess of net assets acquired in connection with the ATC acquisition. 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.
The Company adopted, Statement of Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131 establishes standards for reporting financial and descriptive information about a company's operating segments in its annual financial statements and selected information in interim financial reports. The Company operates in one industry segment: diversified real estate services.
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 by 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.
In November 1998, the Company acquired the remaining 40% interest in ATC in connection with the Reorganization. See Note 11.
In August 1998, the stockholders approved the adoption of the 1998 Stock Incentive 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 have 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 chief executive officer 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.
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 use for 1997 was 0%. A weighted average expected life of 10 years was used. There were no options granted in 1998.
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 $104,687,729 at December 31, 1998.
In 1997, ATC entered into a capital lease arrangement with a subsidiary of FNFI, which terminates in December 1999, for certain equipment. 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 equipment recorded under capital lease is $1,558,290 at December 31, 1998 and 1997. Accumulated depreciation related to this equipment was $934,974 and $311,658 at December 31, 1998 and 1997, respectively. The gross amount of title plants recorded under capital leases is $2,252,023 and $815,310 at December 31, 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 $1,436,713 at December 31, 1998. The capital lease agreement expires in August 2007.
Depreciation of the equipment held under capital leases is included in other operating expenses for the year ended December 31, 1998.
In March 1998, the Company agreed to acquire National Title Insurance of New York Inc. ("National"), a New York domiciled underwriter, from a subsidiary of FNFI for $3.25 million. This acquisition is intended to 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 35 states and the U.S. Virgin Islands. The completion of this transaction is subject to certain conditions, including receipt of approval from the New York Department of Insurance.
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 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 $10,709,980 which resulted in the recognition of goodwill in the amount of $3,901,160, 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.
Selected unaudited pro forma results of operations assuming the acquisition of 40% of ATC at December 31, 1998 and 1997, is presented as follows:
On February 12, 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 36.7% owned by management. Net proceeds of approximately $9.7 million were received by the Company. 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.
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 this will have a material impact upon the financial statements of the Company.
On March 18, 1999, ANFI announced that the Company's Board of Directors declared an initial quarterly cash dividend in the amount of $.10 per share. The dividend will be payable on May 27, 1999 to stockholders of record as of April 8, 1999.
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.
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.
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.
For purposes of reporting cash flows, highly liquid instruments purchased with original maturity dates of three months or less are considered cash equivalents.
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.
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.
The deferred tax assets and liabilities consist of excess book over tax provision for bad debts and employee benefit and vacation accruals.
Future minimum operating lease payments at December 31, 1996 are as follows:
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.