The Company's corporate offices are currently located in Orange, California. Most of the Company's offices are leased, with the exception of a branch office building in Phoenix, Arizona, which the Company owns, and the corporate office building purchased in April, 1999.
The corporate office building located at 1111 E. Katella Avenue, Orange, CA was acquired with the proceeds of a $2.1 million dollar original note that bears interest at the lending institutions prime rate, and monthly principal payments of $4,400 per month and is collateralized by a deed of trust. The outstanding balance at December 31, 2000 is $2.0 million dollars.
- --------------- (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."
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.
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.
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 following discussion presents a comparison of the Company for 2000, 1999 and 1998.
The premium increases from 1998 through the first half of 1999 were indicative of the favorable market conditions existing during that period. In 1999 and continuing through the year 2000, refinancing transactions declined from the 1998 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.
Total revenues in 2000 decreased $6.6 million or 7.4% to $82.7 million from $89.3 million in 1999. Revenues in 1999 of $89.3 million reflect a 2.3% decrease in 1998 revenues of $91.4 million. Beginning in mid-1999 interest rate increase caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and residential resales and new home sales.
2000 compared to $940 in 1999 and $825 in 1998. The fee per file increase is indicative of a change in the percentage mix of title orders closing in a refinance market to the resale higher fee per file business. Gross title premiums were $50.0 million, $58.4 million and $59.2 million in 2000, 1999 and 1998, respectively.
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 will attempt to respond as necessary.
Title Plant Rent and Maintenance Expense. Title plant rent and maintenance expense totaled $5.3 million, $6.3 million and $7.2 million for the years ending December 31, 2000, 1999 and 1998, respectively. Title plant rent and maintenance expense decreased as a percentage of total revenue to 6.4% in 2000 from 7.0% in 1999, which had previously increased to 7.8% in 1998. The year over year fluctuations in plant expense is primarily a result of various contract negotiations within several counties in California and Arizona combined with a reduction of the volume of business during 2000 compared to 1999. The agreements negotiated during 2000 and 1999 resulted in significant cost reductions for the Company.
Income Tax Expense. Income tax expense for 2000, 1999 and 1998 as a percentage of earnings before income taxes was 41.0%, 41.0% and 41.8%, 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.
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 and through cash received from its subsidiaries. In the future, the Company's cash requirements will include those relating to the development and expansion 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.
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.
On April 14, 1999 the Company purchased a home office building located in Orange, CA for $2.6 million. The Company borrowed $2.1 million, secured by a first trust deed. The terms of the note payable require monthly interest payments at prime 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.
In May 1999, the Department of Insurance, State of New York approved the acquisition of National Title Insurance Company of New York, Inc. by the ATC. The $3.25 million transaction was paid in cash in June 1999.
These transactions were accounted for under the purchase accounting method. The results of operations were included in earnings from the date of the acquisitions through December 31, 2000.
compliance with certain State Banking Department Regulations. The State Banking Department provided the Company with an opportunity to present additional information prior to making their final determination as to compliance. The Company subsequently provided additional information to the State Banking Department for review.
In December 2000, the Company purchased 13,870 shares, in the amount of $40,000, at an average price of $2.89 per share, pursuant to the Stock Repurchase Program approved by the Board of Directors in September 1999, authorizing the repurchase of 500,000 shares of the Company's common stock.
We have audited the accompanying Consolidated Balance Sheets of American National Financial, Inc. and subsidiaries as of December 31, 2000 and 1999 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, 2000. 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.
- --------------- (1) Net of income tax expense (benefit) of $31, ($116) and $0, for the years ended December 31, 2000, 1999 and 1998, 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, 3,026,400 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.
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 American Title Company, a subsidiary of American National Financial Inc. from FNFI. 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 accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated.
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 Condensed Consolidated Balance Sheets for these instruments approximate their fair value.
Title plants are historical title information organized and maintained for use in performing title searches. The December 31, 2000 and 1999 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.
The Company'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 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.
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
Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is calculated by dividing net earnings 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.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
In January 2000, the Company 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 paid by the company for the acquisition 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 price adjustment of $118,000. This transaction was accounted for as a purchase. The balance of the promissory note at December 31, 2000 was $652,000.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Pioneer acquisition were as follows (amounts in thousands):
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the EMAC acquisition were as follows (amounts in thousands):
In September 2000, the Company purchased 100% of the assets of CTIC's Pima County, Arizona operations. The purchase price was $105,000 and paid in cash. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed, which represents the fair market value of a title plant located in Tucson, in the Pima acquisition were as follows (amounts in thousands):
The carrying amount, which approximates the fair value, of total investments was $10.5 million and $14.0 million at December 31, 2000 and 1999, respectively.
The following tables sets forth certain information regarding the Company's investment securities at December 31, 2000. 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 $1.7 million and $2.9 million and a fair value of $1.2 million and $2.8 million were callable at December 31, 2000 and 1999, respectively:
During the years ended December 31, 2000 and 1999, gross realized losses on sales of fixed maturity securities considered available for sale were $134,000 and $0, respectively. Gross realized gains were zero for the years ended December 31, 2000 and 1999.
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 after considering the valuation allowance 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 in 2000 and 1999 relates to National whose net operating losses are restricted as to their availability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999 AND 1998
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, the Company could not pay dividends or make distributions as of January 1, 2001.
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. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 2000 and 1999, 200,946 shares and 30,495 shares were issued and allocated to the employees based on their contributions, at an average price of $3.10 and $4.17 per share, respectively. The Company contributed $41,000 or the equivalent of 13,523 shares for the year ended December 31, 2000 and zero shares in 1999 and in accordance with the employee's matching contribution. A total of 231,452 shares have been issued by the ESPP since the adoption of the 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 not made any matching contributions.
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 $6.00 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 from the grant date. 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, 2000 and 1999:
The weighted average remaining contractual life of the options outstanding at December 31, 2000 is 9.27 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
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, 2000, 1999 and 1998 follows (amounts in thousands, except per share data):
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.
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 indicated that the Company may not have been in compliance with certain State Banking Department Regulations. The State Banking Department provided the Company with an opportunity to present additional information prior to making their final determination as to compliance. The Company subsequently provided additional information to the State Banking Department for review.
On September 15, 2000, the Company received notice from the State Banking Department stating the matters detailed in the Report of Examination were complete and required no further response.
ATC is required to maintain certain amounts on deposit with the California Insurance Commissioner in order to operate in certain counties. The amount required by the Department of Insurance, State of California and the Department of Insurance, State of New York is $112,500 and $20,000 at December 31, 2000, and $112,500 and $0 at December 31, 1999. Additionally, National is required to maintain certain amounts on deposit for compliance requirements. The amount at December 31, 2000 and 1999 is $1.3 million and $515,000, 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, 2000 and 1999. The capital lease agreement expires in August 2007.
The Company pays fees to affiliated underwriters for underwriting services and management services under the exclusive agency agreements with FNTIC and 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. Management services payable to FNTIC are cancelable with 90 days notice and costs 1% of gross title insurance premiums.