Our corporate office is currently located in Orange, California. Most of our offices are leased, with the exception of two buildings we own: a branch office building in Phoenix, Arizona, and the corporate office building located at 1111 E. Katella Avenue, Orange, CA. The corporate office building was acquired with the proceeds of a $2.1 million original note that bears interest at the lending institutions prime rate, and monthly principal payments of $4,400 per month and collateralized by a deed of trust. The outstanding balance at December 31, 2001 and 2000 was $1.9 million and $2.0 million, respectively.
Our revenues include net title service revenue (which also includes trustee sale guarantee fees of $1.2 million), escrow fees, ancillary service fees, investment income and other revenues. Our operations generate escrow fees from holding and disbursing funds and documents in connection with the closing of real estate transactions. Escrow fees generally fluctuate in a pattern consistent with the fluctuation in net title service revenue.
Investment income consists of revenues received from our investment portfolio. Other revenue represents income derived from National’s current office operations, which include New York, Tennessee, Florida and independent agents.
The following discussion presents a comparison of 2001, 2000 and 1999.
Total revenue in 2001 increased 64.5% to $136.0 million from $82.7 million in 2000. The increase in total revenues in 2001 is primarily the result of our strength in our title and ancillary services, which were positively impacted by favorable market conditions, especially the favorable real estate market caused in part by reduced interest rates and increased money supply. Total revenue in 2000 decreased 7.4% to $82.7 million from 1999 revenue of $89.3 million. The decrease in total revenues from 1999 to 2000 is due to increased interest rates that resulted in a significant decline in refinancing transactions and residential resale and new home loans.
Net Title Service Revenue - related party. Net title service revenue in 2001 increased $31.9 million, or 73.1% to $75.6 million from $43.6 million in 2000. Net title service revenue decreased $7.7 million or 15.0% to $43.6 million from $51.4 million in 1999. The increase in net title service revenue in 2001 was indicative to the favorable market conditions existing in that period. The decrease in 2000 net title service revenue was consistent with the real estate environment and the decline in closed title orders during 2000. The average fee per file decreased to $848 in 2001 compared with $1,109 in 2000 and $940 in 1999. The fee per file fluctuation is consistent of the 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 $88.4 million, $51.1 million and $58.4 million in 2001, 2000 and 1999, respectively.
refinance activity largely fueled by continued interest rate decreases. The decrease in escrow fees in 2000 was due to interest rate increases beginning in late 1999 and continuing through the beginning of 2000, along with the decline of closed title orders during that period.
Investment Income. Investment income is primarily a function of security markets, interest rates and the amount of cash available for investment. In 2001, investment income increased $1.3 million of 116.6% to $2.3 million, compared with $1.0 million in 2000. Average invested assets increased 61.7% to $30.4 million from $18.8 million in 2000. The tax equivalent yield in 2001, excluding net realized gains and losses, was 4.1% compared to 6.3% in 2000. The increase in investment income in 2001 as compared to 2000 is the result of net realized gains in 2001 of $1.0 million, compared with net realized losses in 2000 of $139,000, partially offset by a decrease in the tax equivalent yield, excluding net realized gains and losses. The tax equivalent yield, excluding gains and losses, decreased primarily as a result of significant additions to our fixed income portfolio in the last quarter of 2001 at prevalent interest rates, which were significantly lower than 2000 due to actions taken by the Federal Reserve Board. During 2000, investment income increased $117,000 or 12.6% to $1.0 million from $930,000 in 1999. Average invested assets decreased 8.7% to $18.8 million from $20.6 million in 1999. The tax equivalent yield in 2000, excluding net realized gains and losses, was 6.3% compared to 4.5% in 1999. Investment income in 2000 increased from 1999 primarily as a result of an increase in the tax equivalent yield, excluding net realized gains and losses, partially offset by net realized losses of $139,000 in 2000 compared to $0 in 1999. Although average invested assets decreased in 2000 compared to 1999, the tax equivalent yield increased primarily due to a shift to strengthen our fixed income portfolio in 2000 as compared to investments in interest bearing accounts and certificates of deposit in 1999. Prior to 1999, we invested in interest bearing accounts and certificates of deposit. During 1999, we strengthened our balance sheet with the acquisition of National and proceeds from the Initial Public Offering.
Other Operating Expenses. Other operating expenses totaled $34.4 million, $22.7 million and $19.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. As a percentage of total revenue, exclusive of investment income, other operating expenses were 25.7% in 2001, 27.9% in 2000, and 21.8% in 1999. Other operating expenses consist of facilities expenses, provision for claim losses, professional services, advertising, postage and courier services, data processing expense, general insurance, trade and notes receivable allowance and depreciation. The decrease in other operating expenses is attributable to our aggressive cost control programs in order to maintain operating expenses consistent with levels of revenues; however, certain fixed costs are incurred regardless of revenue levels, resulting in fluctuations year over year. Other operating expenses increased as a percentage of total revenue in 2000 from 1999 due to expansions and acquisitions, including travel, conventions and other general and administrative costs. Those increases offset much of our cost control efforts in 2000. We continuously 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 $7.9 million, $5.3 million and $6.3 million for the years ending December 31, 2001, 2000 and 1999, respectively. Title plant rent and maintenance expense decreased as a percentage of total revenue, exclusive of investment revenue, to 5.9% in 2001 from 6.5% in 2000 and from 7.1% in 1999. The year over year fluctuations in plant expense is primarily a result of our expansion and 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 resulted in significant cost reductions for us.
Two significant sources of our funds are dividends and distributions from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating
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 we have 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 National’s earned surplus. During 2002, our title insurance subsidiary could pay dividends to its parent of $38,400.
In January 2000, we purchased 100% of the stock 	of Bancserv, Inc., a California corporation located in Yorba 	Linda, California. The purchase 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.
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. We cannot predict whether the usual spring and summer increase in volume will continue to be affected by such factors.
Costs in Excess of Net Assets Acquired (“Goodwill”). 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 were amortized on a straight-line basis over a composite life of 25 years throughout December 31, 2001. Prior to January 1, 2002, goodwill was tested for impairment under FAS 121. Effective January 1, 2002, goodwill will not be amortized, but will be subject to continual recoverability analysis. See recent Accounting Pronouncements for further information.
Reserve for Claim Losses. Our reserve for claim losses includes known claims as well as losses we expect to incur, net of recoupments. Each known claim is reserved for on the basis of a review by us 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 our financial condition and results of operations for such period.
SFAS No. 142 requires intangible assets to be initially recognized and measured based on fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill was amortized through December 31, 2001, after which time amortization will cease. In accordance with SFAS No. 142, we performed a transitional goodwill impairment test and
SFAS No. 142 is effective for periods beginning after December 15, 2001. Goodwill amortization expense for the twelve months ended December 31, 2001 was $551,000 and we believe there will not be a material impact on our financial statements as a result of this analysis.
In October 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS No. 144”) which address financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 44 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” it retains many of the fundamental provisions of that statement. SFAS No. 144 will not have a material impact on our financial statement or results of operations.
In June 2001, we purchased 894,000 shares of our 	common stock from FNF for $4.9 million or $5.45 per share, 	which is FNF’s cost. The fair market value of our common 	stock on the date of transaction was $4.99 per share. After 	this transaction FNF owned approximately 19.5% of our common 	stock.
In February 1999, one of our directors exercised 	options and we received proceeds in the amount of $220,000.
In February 2000, we purchased 100% of the stock 	of Pioneer Land Title Corporation (“Pioneer”), a 	New York corporation. Pioneer provides title and escrow 	services in the state of New York. 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.
In February 2000, we purchased 100% of the 	membership interests of Emerald Mortgagee Assistance Company 	(“EMAC”), a full service provider of release and 	assignment document preparation, document retrieval and special 	title assistance headquartered in Colorado with operations 	nationwide. The purchase price of $1.9 million was paid in 	cash of $1.7 million, subject to certain purchase price 	adjustments based on the combined equity of EMAC and American 	Research Services, its affiliate, and 64,344 shares of our 	common stock. 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.
National did not underwrite any significant title insurance policies through direct operations or agency relationships during 2001, 2000 and 1999. National will allow us to generate additional revenue by writing title insurance policies in those geographic areas which are not covered by ATC’s agency arrangements with CTIC. See Note 12.
Our other subsidiaries include American Title Insurance Agency of Arizona, Inc., American Title Agency of Pima County, Inc., Landmark REO Management Services, Inc.; American Document Services, Inc.; West Point Appraisal, Inc.; West Point Properties, Inc.; West Point Support Services, Inc., Pacific Printers, Pioneer Land Title Corporation, Bancserv, Inc., National Title Insurance of New York, Inc. and American National Exchange Services, Inc. These subsidiaries are wholly-owned by the Company.
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company profits, transactions and balances have been eliminated.
Property and equipment are recorded at cost, less depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets that range from three to thirty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets.
The fixed maturity securities are purchased to support our investment strategies, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support the Company’s investment strategies are carried at fair value and are classified as available for sale. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices.
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 at December 31, 2001. Impairment of intangible assets is assessed based on an analysis of the undiscounted cash flows generated by the underlying assets. No impairment of intangible assets has been recognized.
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.
SFAS No. 142 requires intangible assets to be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill was amortized through December 31, 2001, after which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company has evaluated the impact of the new accounting standards on existing goodwill and other intangible assets and does not anticipate any material impact on the financial statements other than the discontinuance of goodwill amortization, which was $551,000 in 2001.
Net title insurance premiums, escrow fees and other related charges are recognized as revenue at the time of closing of the related real estate transaction. Other service charges are recognized when the service is provided. 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 Earnings.
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 CTIC. Our reserve for ATC claim losses in the amount of $1.2 million and $683,000 on these policies is included in accounts payable and other accrued expenses as of December 31, 2001 and 2000.
Our reserve for National claim losses includes known claims as well as losses we expects to incur, net of recoupments. Each known claim is reserved for on the basis of a review 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 our financial condition and results of operations for such period. See Note 8.
We provide a broad range of real estate services. While our 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 our operations are considered by management to be aggregated in one reportable operating segment.
Options to purchase 350,000 shares, 392,748 shares and 370,265 shares of the Company’s common stock were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the years ended December 31, 2001, 2000 and 1999, respectively.
Certain reclassifications have been made in the 2000 and 1999 Consolidated Financial Statements to conform to the classifications used in 2001.
price adjustment of $118,000. This transaction was accounted for as a purchase. The balance of the promissory note at December 31, 2001 was $497,600.
and a $1.4 million promissory note with interest at 6.6% per annum, to be paid in equal annual installments over a five-year period. The balance of the promissory note at December 31, 2001 and 2000 was $1.1 million and $1.4 million. This transaction was accounted for as a purchase.
Equity securities at December 31, 2001 and 2000 consist of investments as follows:
The carrying value of the Company’s investment in equity securities is fair value. As of December 31, 2001, gross unrealized gains and gross unrealized losses on equity securities were $2.1 million and $0 million, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $414,000 million and $0 million, respectively, as of December 31, 2000.
During the years ended December 31, 2001, 2000 and 1999, gross realized gains on sales of fixed maturity securities considered available for sale were $0, $0 and $0, respectively; and gross realized losses were $24,000, $139,000 and $0, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $1.1 million, $5.1 million and $0 million during the years ended December 31, 2001, 2000 and 1999, respectively.
During the years ended December 31, 2001, 2000 and 1999, gross realized gains on sales of equity securities considered available for sale were $1.0 million, $0 and $0, respectively; and gross realized losses were $0, $0 and $0, respectively. Gross proceeds form the sale of equity securities amounted to $2.0 million, $0 and $0 during the years ended December 31, 2001, 2000 and 1999, respectively.
Income taxes (benefit) for years ended December 31, 2001, 2000 and 1999 consists of the following (amounts in thousands):
The deferred tax assets and liabilities at December 31, 2001 consist of the following:
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, National could pay dividends to its parent of $38,400 as of January 1, 2002.
The statutory capital and surplus of National was $3.7 million, $3.3 million and $2.5 million as of December 31, 2001, 2000 and 1999. The statutory earnings of National was $617,000, $684,000 and $426,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
In February 1999, we completed an Initial Public Offering of 1,925,000 shares at $5.45 per share, resulting in Fidelity National Financial, Inc. then owning 31.5% of the outstanding shares and 37.0% owned by management. We received net proceeds of approximately $8.4 million. In connection with the offering, the underwriters exercised an option for over allotment to purchase an additional 165,000 shares at $5.45 per share on March 31, 1999.
Beginning in September 1999, we issued shares to employees for cash under the Employee Stock Purchase Plan (“ESPP”). Shares issued for the years ended December 31, 2001, 2000 and 1999 were 83,107 shares, 221,041 shares and 33,545 shares, respectively. In 2001, we also purchased 265,615 shares for the ESPP plan. See Note 10.
Beginning in December 2000, and continuing through April 2001, we purchased 378,293 shares 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.
In December 2001, the Board approved the cancellation and retirement of 1,336,637 shares of our common stock previously held in treasury.
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 our subsidiary corporations by assisting them in making
In June 1999, shareholders approved the adoption of the Stock Option Plan (“1999 Option Plan”). Under the terms of the 1999 Option Plan, the Company may grant stock options to certain executives, key employees and branch managers of the Company and its subsidiaries. The purpose of the 1999 Plan is to attract, retain and reward key employees and to provide incentives to those persons to improve operations and increase profits. Individuals to whom options are granted may reduce the exercise price of such options by electing to defer a portion of their annual bonuses which would otherwise be payable in cash. The maximum number of shares for which options may be granted to any one person during any one calendar year under the 1999 Plan is two hundred twenty thousand (220,000) shares. The number of shares reserved for issuance under the 1999 Plan and subsequent amendments is 1,952,500 shares of common stock. The per share option price is determined at the grant date. The option price may be less than the fair market value of the common stock at the date of grant to reflect the application of the optionee’s deferred bonus, if applicable. Options granted under the 1999 Option Plan shall be fully vested after three years and be exercisable in such installments and for such periods as may be fixed at the time of grant, however, in no event should any stock options extend for a period in excess of 10 years from the date of grant.
nonqualified stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1998 Incentive Plan is 715,000 shares at not less than 100% and 85% of fair market value on the date of the grant for incentive options and non-qualified options, plus an additional 220,000 shares of common stock on the date of each annual meeting of shareholders. Officers and other key employees of the Company or of an affiliated company are eligible to receive incentive stock options. Officers and our other key employees or of an affiliated company, members of the Board and other service providers are eligible to receive nonqualified stock options. The term and provision for the termination of each option shall be fixed by the Board of Directors, but no option may be exercisable more than 10 years after the date it is granted. An incentive option granted to a person who is a 10% shareholder on the date of the grant shall not be exercisable more than 5 years after the date it is granted. Each option shall vest and become exercisable in one or more installments at such time or times and subject to such conditions, including within limitation the achievement of specified performance goals or objectives, as shall be determined by the Board of Directors. As of December 31, 1998, no options had been granted under the 1998 Incentive Plan. In connection with the February 1999 Initial Public Offering, 374,044 options were granted under the 1998 Incentive Plan at an exercise price of $5.45 per share.
A summary of the Company’s stock option activity for all stock option plans are as follows:
From time to time, we are 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 we may not have been in compliance with certain State Banking Department Regulations. On September 15, 2000, we received notice from the State Banking Department stating the matters detailed in the Report of Examination were complete and required no further response.
In June 1999, we acquired National from a subsidiary of FNF for $3.3 million. Pursuant to the terms of the stock purchase agreement, effective with the purchase date, National pays FNF specific fees for certain administrative functions performs on behalf of the Company. The fees related to National at December 31, 2001, 2000 and 1999 was $206,500, $108,000 and $64,000, respectively.
We provide underwriting risk in National under this agreement with FNF only for those geographic areas which are not covered by ATC’s agency arrangements.