The Company's executive offices are located in Irvine, California. All offices of the Company are leased, except for an approximately 11,000 square foot branch office in Phoenix, Arizona, which the Company owns. This property was acquired with the proceeds of a $472,500 note that bears interest at the lending institution's prime lending rate and is due in full in December 1999. The principal balance of this note is $442,500 at December 31, 1998. The note is collateralized by a deed of trust on the Phoenix, Arizona property. The Company believes that its facilities are adequate for its current level of operations. In March 1999, the Company paid the remaining principal balance of this note in full.
factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, reductions in mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity, which continued at then record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the California and West Coast real estate market contributed to very positive conditions for the industry throughout all of 1996, 1997 and 1998. It is impossible to predict the direction interest rates and the real estate market may move in the future.
Because title insurance premiums are calculated with regard to the purchase price of the property or the amount of the lender's 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 (1) the Company for 1998 with (2) the Company and Predecessor combined for 1997 and (3) the Predecessor for 1996. Information provided for the six months ended June 30, 1997 and for the year ended December 31, 1996 is that of the Company's Predecessor, and should not be considered an indicative measure or comparison of the Company's current financial position or results of operations.
The following table presents information regarding the components of the Company's revenue:
Net Title Service Revenue. Net title service revenue was $52.1 million for 1998, as compared to $32.8 million for 1997, an increase of $19.3 million or 58.8%. This fluctuation is primarily attributable to increases in both refinancing and real estate sale transactions during 1998, which largely resulted from stable mortgage interest rates and improvements in the overall economic environment in the California real estate market, offset in part by a reduction in revenues related to the countercyclical trustee sale guarantee and foreclosure business. Net title service revenue was essentially flat in 1997 compared to 1996. The Company's average fee per file for orders closed in 1998 was $825 compared to $886 in 1997 and $773 in 1996. The decrease in fee per file in 1998 compared to 1997 is a result of escrow orders closing without the title order and an increase in the number of refinancing transactions, which result in a lower fee per file than resale transactions. Fee per file increased in 1997 over 1996 primarily as a function of rising home prices, which results in an increase in fee per file. Gross title insurance premiums were $59.2 million, $37.4 million and $36.6 million in 1998, 1997, and 1996, respectively.
Other Fees and Revenue. Other fees and revenue were $15.1 million for 1998 as compared to $8.7 million for 1997, an increase of $6.4 million or 73.3%. Other fees and revenue increased $2.6 million, or 41.9% to $8.7 million in 1997 from $6.1 million in 1996. This increase is primarily a result of the additional services offered by the Company from its support services, appraisal, asset management and property inspection divisions.
Title plant rent and maintenance costs consist of payments for access to title plants, and costs of updating these title plants. Title plant rent and maintenance costs includes daily update expenses that are dependent on the volume of real estate transaction activity in the market generally and a rental charge that is based on actual utilization.
Personnel Costs. Personnel costs were $49.4 million for 1998, as compared to $30.6 million for 1997. As a percentage of total revenue, personnel costs decreased to 54.1% in 1998 from 56.1% in 1997. In 1996, personnel costs as a percentage of total revenue were 59.5%. Personnel costs totaled $29.0 million in 1996. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. The Company's personnel expenses have decreased as a percentage of total revenue, but increased in absolute dollar amount since its inception as the Company has acquired other operations, hired additional personnel expanded its business and handles more real estate transaction. 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 will not, however, compromise its customer service standards or quality controls in responding to market conditions. The Company continues to monitor the prevailing conditions and will respond as necessary.
Other Operating Expenses. Other operating expenses were $17.5 million in 1998 as compared to $14.6 million in 1997, an increase of $2.9 million or 19.7%. As a percentage of total revenue, other operating expenses decreased to 19.1% in 1998 from 26.8% in 1997. In 1996, other operating costs totaled $15.9 million, or 32.7%, of total revenue. In response to market conditions, the Company implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of revenue; however, certain fixed costs are incurred regardless of revenue levels, resulting in the year over year percentage fluctuations.
Title Plant Rent and Maintenance Expenses. Title plant rent and maintenance expenses were $7.2 million, $4.7 million and $4.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. This increase is primarily due to the variable component relating to the volume of orders As a percentage of title revenue, title plant rent and maintenance expenses totaled 7.8%, 8.6% and 8.8% for the years ended December 31, 1998, 1997 and 1996, respectively.
Current regulations require that ATC maintain a minimum net worth of $400,000 and that Santa Barbara Title Company maintain a minimum net worth of $120,000. The net worth of ATC was $15.3 million as of December 31, 1998 and $8.6 million as of December 31, 1997. The net worth of Santa Barbara Title Company was $136,000 as of December 31, 1998 and $380,000 as of December 31, 1997.
In December 1998, the Company entered into an agreement to purchase a home office building in Orange, California for $2,600,000. The Company has deposited $100,000 in an escrow account. This transaction is subject to certain conditions prior to closing.
Net proceeds of approximately $9.7 million were received by the Company in connection with its Initial Public 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.
We have audited the consolidated balance sheets of American National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. 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, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
The Company's principal operations are those of ATC. ATC is an underwritten title company in the state of California and is engaged in the business of providing title insurance services and other related services in connection with real estate transactions. The Company operates throughout California and in Maricopa County, Arizona. ATC functions as an exclusive agent of Fidelity National Title Insurance Company ("FNTIC"), an affiliate and a wholly owned subsidiary of FNFI. Title insurance policies are underwritten by FNTIC for an underwriting fee. The underwriting agreement generally provides that ATC is liable under any single policy for only the first $5,000 of losses. As a result of the July 1997 transaction with the Company, FNFI agreed to make no claim on ATC for claims arising from policies written prior to January 1, 1997.
Short-term investments, which consist primarily of securities purchased under agreements to resell, commercial paper and money markets investments, which have an original maturity of one year or less, are carried at amortized cost, which approximates market value.
The carrying amounts reported in the consolidated balance sheet for accounts receivable approximate their fair value. Accounts receivable is reported net of allowance for doubtful accounts which represents management's estimates of those balances that are uncollectible as of the balance sheet date.
Capital lease obligations with affiliates and 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.
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 the policies is immaterial as of December 31, 1998 and 1997.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Selected unaudited pro forma combined results of operations for the year ended December 31, 1997, assuming that the acquisition of 60% of ATC occurred on January 1, 1997 is presented as follows:
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 $708,563 plus 60% of the net income of ANFI Predecessor for the six months ended June 30, 1997 of $591,870 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.
Income tax expense (benefit) for years ended December 31, 1998 and December 31, 1997 consists of the following:
The Company had a $6,000,000 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 $33,334 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 $3,500,000 on the note. The assets and outstanding common stock collateralized by the debt was released. The remaining $1,200,000 debt was assumed by the remaining shareholders.
The Company also has a $472,500 note payable to the same financial institution that bears interest at the institution's prime lending rate (7.758% at December 31, 1998) due in full in December 1999 with interest payable monthly. The note is collateralized by a deed of trust on the office building. At December 31, 1998, the principal balance is $442,500. In March 1999, the Company paid the remaining principal balance of this note in full. The carrying value of the Company's notes payable approximate fair value.
In August 1998, the Company declared a 6.0528 for 1 stock split. All share and per share information has been retroactively adjusted to reflect this stock split.
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 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 shares and 115,984 in 1998 and 1997, respectively.
The Company offers the American National Financial, Inc. 401(k) Profit Sharing Plan, a qualified voluntary contributory savings plan, available to substantially all employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company may elect to make matching contributions. The Company has historically not made matching contributions. AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
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 year ended December 31, 1998 and December 31, 1997 follows:
ATC is required to maintain certain amounts on deposit with the Insurance commissioner in order to operate in certain counties.
ATC leases certain of its premises and equipment under operating leases that expire at various dates. Several of these agreements include escalation clauses and provide for purchases and renewal options for periods ranging from one to five years. Certain of those leases are with subsidiaries of FNFI.
Rent expense incurred under operating leases during the years ended December 31, 1998 and 1997 was $3,546,607 and $2,373,097, respectively, including $356,515 and 207,708 paid to an affiliate.
The Company pays fees to affiliated underwriters for underwriting services and management services under an exclusive agency agreement with FNTIC. Underwriting services are provided for five years commencing July 1997, and subject to a mutually agreed five year extension to the original term, for a fee of 11% of gross title insurance premiums. Management services are cancelable with 90 days notice and cost 1% of gross title insurance premiums.
ATC leases office space, title plants, and certain equipment from subsidiaries of FNFI. See note 9. Additionally, the Company reimburses subsidiaries of FNFI for expenses incurred on its behalf. Such reimbursements aggregated $4,198,188 and $1,184,136 for years ending December 31, 1998 and 1997.
On January 4, 1999, the Company agreed to purchase 100% of the assets of Pacific Printers, a printing company providing affiliated and non-affiliated reproduction of forms and printing material. The purchase price of this acquisition was $125,000, paid in cash.
Net title service revenue, escrow fees and the majority of other service charges are recognized as revenue at the time of closing of the related real estate transaction. Certain other service charges are recognized over the period during which the services are provided. Net title service revenue is presented net of the underwriting fee to affiliated underwriters on the accompanying statement of combined operations. Related expenses are recognized when incurred. A provision for losses on title policies is accrued at the time of closing of the related real estate transaction to cover anticipated losses up to $5,000 per policy under the underwriting agreement with FNTIC.
In conducting its operations, the Company routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and are not included in the balance sheet. The Company has a contingent liability relating to proper disposition of these balances for its customers, which amounted to $47,490,068 at December 31, 1996.
ANFI predecessor has cost reimbursement agreements with a FNFI subsidiary whereby certain expenses are paid on behalf of and are later reimbursed by ATC.