In February 2002, we entered into an agreement to purchase an office building located in the County of Orange for $1.1 million, based on certain conditions and inspections. The close of escrow is anticipated on or around April 15, 2002.
The following information should be read in conjunction with the consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10K. Share per and share data has been retroactively adjusted for the 10% stock dividend in May 2001.
Average fee per file information for ATC, Pioneer 	Land Title and National direct branches 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 our 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.”
The following discussion provides information to help understand and assess significant changes and trends related to our financial condition and results of operations. You should read this discussion and analysis in conjunction with the consolidated financial statements and the notes thereto.
Our 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. 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 resale transactions. 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 and continued through 2000, virtually eliminating the volume of refinance activity experienced in the prior year and early 1999. Beginning in late 2000 and continuing throughout 2001 interest rate decreases caused by actions taken by the Federal Reserve Bank resulted in bringing interest rates to their lowest levels in approximately two years, which was a 475 basis point reduction since January 1, 2001. The interest rate decreases created opportunity for the industry.
Our ancillary services complement title and escrow services. In addition, many of these real estate related services are counter-cyclical to our title insurance and escrow services.
Beginning in January 1997, ATC entered into an Issuing Agency Agreement under which ATC pays CTIC an underwriting fee equal to 11% of the gross title insurance premiums received. In addition, ATC pays FNF a administrative fee equal to 1% of gross title insurance premiums for certain accounting, human resources and legal services provided by FNF. We believe 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 our revenue, personnel costs are the largest component of our expenses. 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
The premium increases from the first half of 1999 were indicative of the favorable market conditions existing during that period. In the last six months of 1999 and continuing through the year 2000, refinancing transactions declined from the prior record levels. As the refinance transactions decreased our fee per file increased due to the shift from a refinance market to a market driven by new home purchases and resales. The trend reversed in 2001 with the decline in interest rates.
Ancillary Service Fees. Ancillary service fees increased $4.5 million, or 36.1% to $17.1 million in 2001, from $12.6 million in 2000. In 2000, ancillary fees increased $1.2 million, or 10.5% to $12.6 million compared with $11.4 million in 1999. The steady increase in ancillary service fees is a result of the level and mix of business related to the decrease of closed title orders. In 2000 we acquired certain ancillary service companies in various separate transactions. Our strategy is to strengthen the ancillary service businesses through acquisitions and we continue to evaluate opportunities to expand our ancillary services through our core title and escrow business and our national presence. In 1999, we closed a branch operation related to the STAR product that accounted for a portion of the decline in ancillary service fees in that year.
Other Revenue. Other revenue in 2001 increased $5.4 million, or 156.9%, to $8.9 million from $3.5 million in 2000. During 2000, other revenue increased $3.0 million, or 665.7% from $452,000 in 1999. The increase from 1999 is attributed to our strategy to expand our National business.
Our 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. These expenses fluctuate with the level or orders opened and closed and the mix of revenue.
Other operating expenses consist of facilities expenses, postage and courier services, computer services, professional services, advertising expense, general insurance, provision for claim losses, trade and note receivable allowances, depreciation and amortization expense and interest expense.
Income Taxes. Income taxes for 2001, 2000 and 1999 as a percentage of earnings before income taxes was 43.0%, 41.0% and 41.0%, respectively. The fluctuations in income taxes as a percentage of earnings before income taxes are attributable to the effect of state income taxes on our 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.
In February 2000, we purchased 100% of the stock 	of Pioneer Land Title Corporation. The purchase price was 	$1.8 million, $360,000 paid in cash and a $1.4 million 	promissory note that bears interest at 6.6% per annum from the 	purchase date through the fourth anniversary date.
Financing Obligations. Our financing obligation includes notes payable in connection with the corporate office building purchase, Pioneer Land Title Corporation and Bancserv, Inc. acquisitions together with capital lease payments and operating lease commitments. As of December 31, 2001, our annual payments relating to these obligations are as follows:
The accounting policies described below are those we consider critical in preparing our Consolidated Financial Statements. Certain of these policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of certain 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 those estimates. See Note 2 of Notes to the Consolidated
Financial Statements for a more detailed description of our significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Revenue Recognition. Revenue fluctuates primarily with changes in mortgage interest rates and economic conditions in our markets, primarily California. While the number of orders that are closed affects our revenue, personnel costs are the largest component of our expenses. 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.
To the extent real estate prices or mortgage interest rates increase due to inflationary factors, our title service revenue generally increases because premiums are determined in part by the value of property or the amount of the mortgage loan. Our personnel costs and other operating expenses are also sensitive to inflation.
Investments. Our investment portfolio is subject to risk of potential impairment with economic downturns or a downgrade by individual securities. We evaluate our portfolio periodically for other than temporary declines, which, if identified, are recorded as realized losses.
Escrow Accounts. In conducting our operations, we routinely hold customers’ assets in trust, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in our Consolidated Balance Sheets. We have a contingent liability relating to proper disposition of these balances for its customers which amounted to $283.8 million at December 31, 2001.
Recent Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets. The statement applies to all business combinations initiated after June 30, 2001.
The following events affected our financial statements over the past several years.
In December 2000 and continuing through 	April 2001, we purchased 378,293 shares of our common stock 	at a cost of $1.4 million (an average price per share of 	$3.67), pursuant to the Stock Repurchase Program approved by the 	Board of Directors in September 1999, authorizing the repurchase 	of 550,000 shares of our common stock.
During the third quarter, we entered into a 	settlement agreement relating to an acquisition that resulted in 	a goodwill reduction in the amount of $620,000, thereby reducing 	intangible assets on the balance sheet.
In December 2001, the Board approved the 	cancellation and retirement of 1,336,637 shares of our common 	stock previously held in treasury.
In January 1999, we 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 was $125,000, paid in cash.
On April 14, 1999, we purchased a corporate 	office building located in Orange, California for 	$2.6 million. We borrowed $2.1 million, secured by a 	first trust deed. The terms of the note payable require monthly 	interest payments at prime rate and monthly principal payments 	of $4,000. The note matures on April 1, 2004. The costs 	associated with the relocation to the executive offices were 	minimal.
price was $1.3 million, $400,000 paid in 	cash and a $900,000 promissory note that bears interest at a 	rate of 7.5%, and is due in full on January 2005. The note 	requires monthly payments of $15,500 beginning February 14, 	2000.
In February 2002, we entered into an agreement with Clark County Title Service, Inc. in order to gain access to the Clark County title plant, at a purchase price of $1.2 million.
Also in February 2002, we entered into a purchase agreement with Sommerset Group, LLC, a California limited liability company to purchase real property in the County of Orange, California. Based upon certain conditions the purchase price is $1.1 million, payable at the close of escrow, which is anticipated on or about April 15, 2002.
On February 28, 2002, Pioneer National Title of Nevada, Inc., a subsidiary of ATC, was licensed to engage in the business of title insurance in the state of Nevada.
On March 13, 2002, the Company’s Board of Directors declared a quarterly cash dividend of $.125 per share, payable on April 8, 2002 to stockholders of record as of March 25, 2002.
We have audited the accompanying Consolidated Balance Sheets of American National Financial, Inc. and subsidiaries as of December 31, 2001 and 2000 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, 2001. 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.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Net of income taxes (benefit) of 	$1.3 million, ($20,000) and ($116,000) for 2001, 2000 and 	1999, respectively.
Net of income taxes (benefit) of $420,000, 	($57,000) and $0 for 2001, 2000 and 1999, respectively.
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, 3,329,040 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, we 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. (“FNF”) to acquire a 60% interest in American Title Company (“ATC”). Upon consummation of the sale in July 1997, we paid FNF $6.0 million for 60% of ATC. In August 1997, we refinanced all debt issued in April 1997. In November 1998, we acquired the remaining 40% interest in ATC in connection with the reorganization.
Our principal operations are those of ATC. ATC is an underwritten title company (“UTC”) 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. We operate throughout California, and Maricopa, Pinal and Pima counties located in Arizona. ATC functions as an agent of Chicago Title Insurance Company (“CTIC”), affiliate and wholly-owned subsidiary of FNF, owner of 19.5% of the Company common stock at December 31, 2001. Title insurance policies are underwritten by CTIC 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, 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 FNF. 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 carrying amounts 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 not collectible as of the balance sheet date.
Title plants are historical title information organized and maintained for use in performing title searches. The December 31, 2001 and 2000 title plant balances are comprised of the Company’s capital leases. See Note 11. Costs incurred to maintain, update and operate title plants are expensed as incurred. Sales of title plants are reported at the amount received net of the adjusted costs of the title plant sold. Sales of title plant copies are reported at the amount received. No cost is allocated to the sale of copies of a title plant unless the carrying value of the plant is diminished or impaired. Title plants are not amortized as they are considered to have an indefinite life, if maintained.
Equity securities are considered to be available for sale and carried at fair value. Fair values are based on quoted market prices.
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 shareholders’ equity. If any unrealized losses on fixed maturity or equity securities are deemed other than temporary, such unrealized losses are recognized as realized losses.
In the ordinary course of business, we reinsure 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. We may cede or assume 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 the event the reinsurer does not meet its contractual obligations. Reinsurance activity is not considered significant.
Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of our 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 recorded in the period enacted.
All data, with respect to earnings per share, dividends per share and share information, including price per share, where applicable, in the Consolidated Financial Statements, has been retroactively adjusted to reflect the 10% stock dividend.
In May 1999, the Department of Insurance, State of New York, approved the acquisition of National Title Insurance of New York, Inc., a New York domiciled underwriter by ATC a subsidiary of American National Financial Inc., from Fidelity National Financial, Inc. National Title Insurance of New York, Inc. 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. While the results of operations for National continue to increase due to agency operations the amounts are insignificant for 2001, 2000 and 1999.
In January 2000, we completed the acquisition of Bancserv, Inc. a California corporation located in the county of Orange, California. Bancserv, Inc. a document company, provides outsource services to the real estate and banking industry through a network of qualified notaries public. The purchase price was $1.3 million, payable $400,000 in cash and a $900,000 promissory note subject to certain purchase price adjustments based on the audited closing date balance sheet. The effects of the audit resulted in a purchase
In February 2000, we purchased 100% of the stock of Pioneer, a New York corporation providing title and escrow services in the state of New York. The purchase price was $1.8 million, payable $360,000 in cash
In February 2000, we purchased 100% of the membership interests of EMAC, a full service provider of release and assignment document preparation, document retrieval and special title assistance located in Colorado. The purchase price was $1.9 million, $1.7 million was paid in cash, subject to certain purchase price adjustments based on the combined equity of EMAC and American Research Services, its affiliate, and 64,350 shares of the our common stock. This transaction was accounted for as a purchase. In July 2001, based on a settlement of the original purchase price, the shares of common stock and cash returned to the company resulted in a goodwill reduction in the amount of $620,000 on the balance sheet.
In September 2000, we purchased 100% of the assets of CTIC’s Pima County, Arizona operations, American Title Agency of Pima County, Inc. The purchase price was $105,000 and paid in cash. This transaction was accounted for as a purchase. The assets acquired represents the fair market value of a title plant located in Tucson.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed, in the acquisitions of National Title Insurance of New York, Inc., Bancserv Inc., Pioneer Land Title Corporation, Emerald Mortgagee Assistance Company, LLC, and the CTIC Pima County operation are summarized in the following table:
It is our practice to purchase investment grade fixed maturity securities. The securities in our portfolio are subject to economic conditions and normal market risks and uncertainties.
The carrying amount and fair values of the Company’s fixed maturity at December 31, 2001 and 2000 are as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2001, 2000 and 1999 was $677,000, ($271,000) and $0, respectively.
The following tables sets forth certain information regarding our investment securities at December 31, 2001. 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 $1.5 million and $1.7 million and a fair value of $1.3 million and $1.2 million were callable at December 31, 2001 and 2000, respectively:
The change in unrealized gains (losses) on equity securities for the years ended December 31, 2001, 2000 and 1999 was $1.7 million, $414,000 and $0 million, respectively.
Net realized gains (losses) included in interest and investment income amounted to $1.0 million, ($139,000) and $0 for the years ended December 31, 2001, 2000 and 1999, respectively. All amounts are before applicable income taxes.
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 $33.4 million, $23.0 million and $20.5 million at December 31, 2001, 2000 and 1999, respectively. The working capital of ATC was $15.6 million, $7.0 million and $3.7 million on December 31, 2001, 2000 and 1999, respectively.
In June 2001, we purchased 894,000 shares of our common stock from Fidelity National Financial, Inc. for $4.9 million or $5.45 per share, which is FNF’s cost. The fair market value of our common stock on date of transaction was $4.99 per share. After this transaction FNF owned approximately 19.5% of our common stock.
regular purchases of shares of our common stock. Our employees may contribute an amount between 5% and 15% of their base salary and certain commissions. We contribute varying amounts as specified in the ESPP. During the years ended December 31, 2001, 2000 and 1999, 235,581 shares, 221,041 shares and 33,545 shares were allocated to the employees based on their contributions, at an average price of $7.42, $2.82 and $3.79 per share, respectively. We contributed $200,700 and $37,200 or the equivalent of 44,574 shares and 14,875 shares for the years ended December 31, 2001 and 2000 and zero shares in 1999, and in accordance with the employee’s matching contribution. A total of 490,167 shares have been issued by the ESPP since the adoption of the plan.
We offer 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. We may elect to make matching contributions. We have not made any matching contributions.
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 Employee Plan and Directors Program is to provide key employees and directors with further incentive to maximize shareholder value. We authorized an aggregate of $2.0 million in loans. The Employee Plan and the Director 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. At December 31, 2001 and 2000, interest was paid to the Company in the amount of $10,000 and $105,000. Loans may be prepaid any time without penalty. Loans were made in the amount of $1.7 million to purchase 516,347 shares of our common stock at an average purchase price of $3.61 per share. The fair values of the note receivable are established using current market rates. The fair value calculated at December 31, 2001 and 2000 was $1.7 million and $1.5 million, respectively.
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
The weighted average remaining contractual life of the options outstanding at December 31, 2001 is 5 years.
We have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”) and related Interpretations in accounting for its 1998 and 1999 Stock Option 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 equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
Pro forma information regarding net earnings per share is required by Statement 123, and has been determined as if we 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 2001, 2000 and 1999 was 4.33%, 6.28% and 5.19%. The expected dividend yield used for 2001, 2000 and 1999 was 6.58%, 10% and 10%. The weighted average expected life of 5 years was used for 2001, 7 years was used for 2000 and 1999. The volatility factor for 2001, 2000 and 1999 was 84%, 48% and 80%, respectively.
For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options’ vesting period. Our pro forma information for the years ended December 31, 2001, 2000 and 1999 follows (amounts in thousands, except per share data):
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 during 2001.
Rent expense incurred under operating leases during the years ended December 31, 2001, 2000 and 1999 was $4.8 million, $4.6 million and $4.4 million, respectively, including $0, $216,000 and $416,000 paid to an affiliate.
In 1997, ATC entered into a capital lease agreement with FNTIC, which expires in June 2007, for three title plants. The gross amount of title plant recorded under affiliated capital lease is $815,000 at December 31, 2001 and 2000, 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, 2001 and 2000. The capital lease agreement expires in August 2007.
We pay fees to affiliated underwriter for underwriting services and administrative services under the exclusive agency agreement with CTIC. Underwriting services are provided for five years commencing July 1997, and subject to a mutually agreed five year extension to the original term expiring in 2007, for a fee of 11% of gross title insurance premiums. Administration fees payable to FNF is 1% of gross title insurance premiums and is cancelable with 90 days notice.
ATC leases a title plant from a subsidiary of FNF. See Note 11. Additionally, the Company reimburses subsidiaries of FNF for expenses incurred on its behalf. Such reimbursements aggregated $3.7 million, $3.8 million and $3.8 million for years ended December 31, 2001, 2000 and 1999, respectively.