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.
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.
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.
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.
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.
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.
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.
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.
In February 1999, a director of the Company exercised options resulting in the Company receiving proceeds in the amount of $220,000.
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.
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.
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).
(1) Net of income tax benefit of $(116), $0 and $0, for the years ended December 31, 1999, 1998 and 1997, 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. See Note 13.
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.
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.
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.
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.
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
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 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 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.
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.
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.
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.
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 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.
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.
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):
Intangibles resulting from the 60% acquisition amounted to $2,460,000 and are being amortized over a composite life of 25 years.
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.
In November 1998, the Company acquired the remaining 40% interest in ATC in connection with the Reorganization. See Note 13.
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.
As of December 31, 1999, the carrying amount, which approximates the fair value, of total investments was $14.0 million.
The deferred tax assets and liabilities at December 31, 1999 consist of the following:
The deferred tax assets and liabilities at December 31, 1998 consist of the following:
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.
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.
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.
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.
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.
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.
The weighted average remaining contractual life of the options outstanding at December 31, 1999 is 9.18 years.
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):
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.
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
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.
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.
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 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.
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):
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.
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.
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.
The effective tax rate for the periods reported differs from the Federal statutory income tax rate as follows:
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 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.