The Company's revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases. Other factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. 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 and the first six months of 1999. However, mortgage rates began to climb during the last half of 1999 and continued through 2000, virtually eliminating the volume of refinance activity experienced in the prior year and early 1999. It is impossible to predict the direction interest rates and the real estate market may move in the future.
Net title service revenue and escrow fee revenues are recognized as income at the time the underlying real estate transaction closes. Expenses directly related to the title and escrow process are recognized as they are incurred, throughout the duration of the transaction. As a result, the Company's recognition of revenue lags approximately 60-90 days behind the recognition of the corresponding expenses. Other fees and revenue are generally recognized as income at the time the underlying transaction closes; however, certain other fees and revenue are recognized as income over the period during which the service is provided. These factors may result in fluctuations in gross margins.
While the number of orders that are closed affects the Company's revenue, the largest component of the Company's expenses are personnel costs. Since personnel costs are relatively fixed over the short-term, in a rapidly declining market, reductions in the number of orders can adversely affect margins. Gross margins are also affected by the relative numbers of orders that relate to refinancing transactions as compared to those relating to real estate sale transactions.
Escrow Fees. Revenues from escrow fees decreased by $3.2 million or 12.7% to $22.0 million in 2000 from $25.2 million in 1999. In 1999, escrow fees increased $923,000 thousand or 3.8% to $25.2 million compared to $24.3 million in 1998. Escrow fees are primarily related to title insurance activity generated by the Company's direct operations. The decrease is primarily the result of the current market conditions and the decline in the refinance activity due to interest rate increases and the decline in closed orders.
Other Service Charges. Other services charges were $16.0 million for the year ended December 31, 2000 as compared to $11.8 million for the 1999 period, an increase on $4.2 million, or 35.6%. In 1999, other service charges decreased $2.9 million, or 19.6%, to $11.8 million from $14.7 million in 1998. The fluctuation in other service charges is a result of the level and mix of business related to the decrease of closed title orders. In 2000 the Company acquired certain ancillary service companies in various separate transactions. The Company's strategy is to strengthen the ancillary service businesses through acquisitions and continues to evaluate opportunities to expand its ancillary services through its core title and escrow business and its national presence. In 1999 the Company closed a branch operation related to the STAR product which, accounted for a significant portion of the decline in other service charges in that period.
Investment Income. Investment income is primarily a function of securities markets asset base interest rates. Prior to 1999, the Company invested in interest bearing accounts and certificates of deposit. During 1999, the Company strengthened its balance sheet with the acquisition of National and proceeds from the Initial Public Offering, shifting the emphasis to a fixed income portfolio. In 2000, investment income increased $117,000 or 12.6% to $1.0 million compared to $930,000 in 1999. During 1999, investment income increased 152.0% to $930,000 from $369,000 in 1998.
The Company's principal costs include personnel costs, other operating expenses and title plant rent and maintenance. Personnel costs include both base salaries and commission expense paid to employees and are the most significant operating expense incurred by the Company.
Personnel Costs. Personnel costs totaled $51.2 million, $54.3 million and $49.4 million for the years ended December 31, 2000,1999 and 1998. As a percentage of total revenue, personnel costs increased to 61.9% in 2000 from 60.8% in 1999, which had previously decreased from 54.1% in 1998. Personnel costs include base salaries, commissions and bonuses paid to employees and are the most significant operating expense incurred by the Company. These costs fluctuate with the level of orders opened and closed and the mix of revenue. The
Other Operating Expenses. 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. Other operating expense increased as a percentage of total revenue to 27.5% in 2000 from 21.5% in 1999, which previously decreased from 19.1% in 1998. Other operating expenses totaled $22.7 million, $19.2 million and $17.5 million in 2000, 1999 and 1998, respectively. The primary components of the increase in 2000 was the impact of current year expansion and acquisitions, including travel, conventions and other general and administrative costs. These increases have offset much of the Companies cost control efforts in 2000. 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.
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. These reimbursements are executed within the guidelines of various management agreements among the Company and its subsidiaries. The Company's underwritten title company and its ancillary 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.
In January 2000, the Company purchased 100% of the stock of Bancserv, Inc., a California corporation located in Yorba Linda, 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 was $1.3 million, $400,000 paid in cash and a $900,000 promissory note that bears interest at a rate of 7.5%, and is due in full on January 2005. The note requires monthly payments of $15,500 beginning February 14, 2000.
In February 2000, the Company 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 58,495 shares of the common stock of 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
To the extent real estate prices or mortgage interest rates increase due to inflationary factors, the Company's title service revenue generally increases because premiums are determined in part by the value of property or the amount of the mortgage loan. The Company's personnel costs and other operating expenses are also sensitive to inflation.
SFAS 133 was amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 137 and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities -- an amendment of SFAS 133." ("SFAS 138"), is effective for the Company's first quarter in the fiscal year ending December 31, 2001, and did not have a material effect on the Company's financial position or results of operations.
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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
The Company's principal operations are those of ATC. ATC is an underwritten title company ("UTC") in the state of California and is engaged in the business of providing title insurance and other related product services in connection with real estate transactions. The Company operates throughout California and Maricopa, Pinal and Pima counties located in Arizona. ATC functions as an agent of Fidelity National Title Insurance Company ("FNTIC") and Chicago Title Insurance Company ("CTIC"), affiliates and wholly-owned subsidiaries of FNFI. Title insurance policies are underwritten by FNTIC and CTIC for an underwriting fee. The underwriting agreement generally provides that ATC is liable under any single policy for only the first $5,000 of losses. As a result of the July 1997 transaction with the Company, FNFI agreed to make no claim on ATC for claims arising from policies written prior to January 1, 1997.
National did not underwrite any significant title insurance policies through direct operations or agency relationships during 1999 and 2000. National will allow the Company to generate additional revenue by writing title insurance policies in those geographic areas which are not covered by ATC's agency arrangements with FNTIC and CTIC. See Note 12.
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., Pacific Printers, Pioneer Land Title Corporation, Bancserv, Inc., Emerald Mortgagee Assistance Company, National Title Insurance of New York, Inc. and American National Exchange Services, Inc.
The carrying amounts for trade receivables approximate their fair value. Trade receivables are reported net of allowance for doubtful accounts which represents management's estimates of those balances that are uncollectible as of the balance sheet date.
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 and CTIC. The Company's reserve for claim losses in the amount of $683,000 and $821,000 on these policies is included in accounts payable and other accrued expenses as of December 31, 2000 and 1999.
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 recorded in the period enacted.
Certain reclassifications have been made in the 1999 and 1998 Consolidated Financial Statements to conform to the classifications used in 2000.
In May 1999, the Department of Insurance, State of New York, approved the acquisition of National Title Insurance of New York, Inc., a New York domiciled underwriter by ATC a subsidiary of American National Financial Inc., from Fidelity National Financial, Inc. National Title Insurance Company of New York, Inc. is licensed to issue title insurance policies in 34 states, the District of Columbia and the U.S. Virgin Islands. The $3.25 million dollar purchase price was paid in cash and the transaction was completed in June 1999.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the National acquisition were as follows (amounts in thousands):
The results of operations for National are insignificant for 2000 and 1999.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Bancserv acquisition were as follows (amounts in thousands):
The results of operations for Pima County are insignificant for 2000.
Income taxes (benefit) for years ended December 31, 2000, 1999 and 1998 consists of the following (amounts in thousands):
The effective tax rate for the period reported differs from the Federal statutory income tax rate as follows:
The deferred tax assets and liabilities at December 31, 2000 consist of the following:
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 Company is required to make monthly interest payments at prime (9.5%) and principal payments of $4,000. As of December 31, 2000 and 1999, the principal balance was $2.0 million and $2.0 million, respectively. 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 1999 reserve was reduced by $2.0 million.
Underwritten title companies are subject to certain regulations by insurance regulatory or banking authorities, primarily relating to minimum net worth and working capital. Minimum net worth of $400,000 and minimum working capital of $10,000 is required for ATC. The net worth of ATC was $23.0 million and $20.5 million at December 31, 2000 and 1999, respectively. The working capital of ATC was $7.0 million and $3.7 million on December 31, 2000 and 1999, respectively.
In February 1999, the Company completed an Initial Public Offering of 1,750,000 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. 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 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.
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 Loan 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. The Employee Plan and the Director Program funds must be used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans are full recourse and unsecured, and will have a five-year term. Interest will accrue on the loans at a rate of six and one quarter percent (6 1/4%) per annum due at maturity. At December 31, 2000, interest was paid to the Company in the amount of $105,000. Loans may be prepaid any time without penalty. At December 31, 2000 and 1999, loans were made in the amount of $614,000 and $1.3 million totaling $1.9 million, to purchase 152,640 and 316,767 shares for a total of 469,407 shares of the Company's common stock at an average purchase price of $3.97 per share. The fair values of notes receivable are established using current market rates. The fair value calculated at December 31, 2000 and 1999 was $1.5 million and $1.1 million, respectively.
In August 1998, the shareholders approved the adoption of the 1998 Incentive Stock Plan (1998 Incentive Plan). Under the terms of the 1998 Incentive Plan, the Company may grant incentive or nonqualified stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1998 Incentive Plan is 650,000 shares at not less than 100% and 85% of fair market value on the date of the grant for incentive options and nonqualified options, plus an additional 200,000 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 other key employees of the Company or of an affiliated company, members of the Board and other service providers are
discussed below, in management's opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, "Accounting for Stock Based Compensation (Statement 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's stock options exceeds the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
In conducting its operations, ANFI and ATC routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying consolidated balance sheets. The Company has a contingent liability relating to proper disposition of these balances for its customers, which amounted to $91.6 million and $67.5 million at December 31, 2000 and 1999, respectively.
Rent expense incurred under operating leases during the years ended December 31, 2000, 1999 and 1998 was $4.6 million, $4.4 million and $3.5 million respectively, including $216,000, $416,000 and $357,000 paid to an affiliate.
In 1997, ATC entered into a capital lease arrangement with a subsidiary of FNFI, which expired in December 1999, for certain equipment. The capital lease pertaining to the certain equipment was paid in full in March 1999. Accumulated depreciation related to this equipment was $623,000 and $935,000 at December 31, 1999 and 1998, respectively.
Depreciation of the equipment held under capital leases is included in other operating expenses for the years ended December 31, 2000, 1999 and 1998.
In June 1999, the Company acquired National from a subsidiary of FNFI 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, 2000 and 1999 was $108,000 and $64,000.