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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-24961
AMERICAN NATIONAL FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0731548
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1111 E. KATELLA AVENUE, SUITE 220 (714) 289-4300
ORANGE, CALIFORNIA 92867 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP INCLUDING AREA CODE)
CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
As of March 13, 2001, 7,507,507 shares of common stock (no par value) were
outstanding, and the aggregate market value of the shares of the common stock
held by non-affiliates of the registrant was $17,319,894. The aggregate market
value was computed with reference to the closing price on the NASDAQ National
Market on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number 50.
The information in Part III hereof is incorporated herein by reference to
the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended
December 31, 2000, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
PAGE
NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7A. Quantitative and Qualitative Disclosures About the Market
Risk of Financial Instruments............................. 24
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 50
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 50
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PART I
ITEM 1. BUSINESS
American National Financial, Inc., through its subsidiaries (collectively,
the "Company" or "ANFI") provides title insurance services as well as other real
estate related financial and informational services including escrow, real
estate information, trustee sale guarantees, exchange intermediary services,
document signing services, property management and appraisals. In addition, the
Company obtains specialized services for its customers, which include, but are
not limited to tax reporting services and courier services. The company's
business is focused on the residential real estate market. The Company generates
the majority of its revenue from issuing title insurance policies as an
independent agent on behalf of affiliated title underwriters.
The Company was incorporated in November 1996 by its current management,
and in July 1997 acquired 60% of the outstanding stock of American Title Company
("ATC") from Fidelity National Financial, Inc. ("FNFI") for $6.0 million in
cash. The purchase price was funded with debt incurred by the Company, all of
which has been repaid from operations or as a result of the reorganization
described below. (See "Reorganization" below) and Note 12 of Notes to
Consolidated Financial Statements.) In August 1997, ATC purchased all of the
outstanding common stock of Santa Barbara Title Company. In April 1999, Santa
Barbara Title Company was merged with ATC. The Company also formed its other
subsidiaries, American Document Services, Inc., West Point Appraisal Services,
Inc., West Point Support Services, Inc. and West Point Properties, Inc., in
1997. In December 2000, ANFI formed American National Exchange Services, Inc.
ATC, the Company's primary subsidiary, commenced business in 1989, and was
acquired by FNFI in January 1996, at which time ATC's operations had been
conducted solely in Kern County, California. Following the acquisition by FNFI,
ATC pursued an expansion strategy that included acquiring and opening offices in
selected other counties located throughout California. In January 1997, FNFI
contributed to ATC all of the outstanding stock of American Title Insurance of
Arizona, Inc. (formerly known as Nations Title Insurance of Arizona, Inc.),
which is an underwritten title company in Phoenix, Arizona and Landmark REO
Management Services, Inc., a property management company.
In June 1999, the Company acquired National Title Insurance of New York
Inc. ("National"), a New York domiciled underwriter, from a subsidiary of FNFI
for $3.25 million. National is licensed to issue title insurance in 34 states,
the District of Columbia and the U.S. Virgin Islands, however, it did not
underwrite any significant number of title insurance policies through direct
operations or agency relationships during 1999 and 2000. The primary purpose of
the acquisition is to own an underwriter, which will enable the Company to
generate underwriting fees and permit the Company to expand geographically into
counties and states in which National is presently licensed. The Company
believes this expansion can be accomplished more quickly and cost-effectively
through the acquisition than through other means. The Company also believes that
the acquisition will expand the business opportunities for its current and
potential employees and affiliates, which will aid in the Company's recruitment
efforts, and will permit the Company to generate additional revenue by writing
title insurance policies in those geographic areas which are not covered by
ATC's exclusive agency arrangements with FNTIC and Chicago Title Insurance
Company ("CTIC"). See "Relationship with Fidelity National Financial, Inc."
In January 2000, the Company purchased 100% of the stock of Bancserv, Inc.,
a California corporation located in Yorba Linda, California. Bancserv, Inc., a
document company, provides outsource services to the real estate and banking
industry through a national network of qualified notaries public. The purchase
price was $1.3 million, payable $400,000 in cash and a $900,000 promissory note
that bears interest at a rate of 7.5% and is due through January 2005. The note
requires monthly principal and interest payments of $15,500 beginning February
14, 2000. At December 31, 2000 the principal balance is $652,000.
In February 2000, the Company 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, payable $360,000 in cash and a $1.4 million promissory note paid
annually that bears interest at 6.6% per annum from the purchase date through
the February 2004.
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In February 2000, the Company purchased 100% of the membership interests of
Emerald Mortgagee Assistance Company, LLC ("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 58,500 shares of the common stock
of the Company.
In September 2000, the Company purchased the assets of CTIC's Pima County,
Arizona operation. The acquisition adds five offices, four of them located in
Tucson, to the Company's Arizona network. The purchase price was $105,000
payable in cash and the purchase of a title plant in the amount of $322,000 to
be paid over a period of ten years with monthly payments of $4,200, with an
option to purchase the title plant, when paid in full. The agreement includes
monthly access fees of $1,000 per month over the term of the title plant lease.
REORGANIZATION
In November 1998, the Company acquired the remaining 40% of the outstanding
common stock of ATC from FNFI in exchange for 2,099,996 shares of Company common
stock representing approximately 43% of the outstanding shares immediately prior
to the Company's initial public offering. Concurrent with the Reorganization,
$3.5 million of the Company's acquisition debt was repaid. The remaining unpaid
balance of the acquisition debt in the amount of $1.2 million was assumed by the
shareholders of the Company, other than FNFI. (These transactions are
collectively referred to as the "Reorganization"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 12 of
Notes to Consolidated Financial Statements.
INDUSTRY OVERVIEW
The title insurance industry consists of insurers ("underwriters") who
issue policies through direct operations or through agents. The Company's
principal subsidiary, ATC, is an agent, known in California as an "underwritten
title company." ATC has entered into an Issuing Agency Agreement to issue
policies on behalf of Fidelity National Title Insurance Company ("FNTIC") and
CTIC, subsidiaries of FNFI, insurers which are licensed in California and
Arizona, among other states. See "Relationship with Fidelity National Financial,
Inc."
The Company provides title insurance services as well as other real estate
related financial and informational services including escrow, real estate
information, trustee sale guarantees, appraisals and exchange intermediary
services. In addition, the Company obtains specialized services for its
customers, which include, but are not limited to, tax reporting services, and
courier services. The Company's business is focused on the residential real
estate market and in 2000 generated the majority of its revenues from issuing
title insurance policies as an independent agent on behalf of FNTIC and CTIC.
For the years ended December 31, 2000, 1999 and 1998, net title service revenue
represented approximately 52.8%, 57.5% and 57.0% of the Company's revenues,
respectively.
The Company's primary operations are conducted through 18 branches,
consisting of 65 offices, located in major counties throughout California and
Arizona (Maricopa, Pinal and Pima). Each of the Company's branches process real
estate transactions within the geographical area of the branch or region. Each
branch is operated as a separate profit center.
During 1999 and 2000, the Company established offices in Tennessee,
Florida, Colorado and New York to expand its current customer base by developing
agency relationships and its ancillary service companies.
TITLE POLICIES
Title insurance policies insure title to real estate. The beneficiaries of
title insurance policies are generally buyers of real property or mortgage
lenders. The policy protects the insured against title defects, liens and
encumbrances not specifically excepted from its coverage. Most mortgage lenders
require title insurance as a condition to making loans secured by real estate.
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Title insurance is different from other types of insurance because it
relates to past events which affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can reduce
or eliminate future losses by accurately performing searches and examinations.
Title insurance policies are issued on the basis of a preliminary title
report or commitment. These reports are prepared after a search of public
records, maps and other relevant documents to ascertain title ownership and the
existence of easements, restrictions, rights of way, conditions, encumbrances or
other matters affecting the title to, or use of, real property. A visual
inspection or survey of the property may also be made prior to the issuance of
certain title insurance policies. Copies of public records, maps and other
relevant historical documents are compiled and indexed in a "title plant" in
order to facilitate the preparation of preliminary reports without the necessity
of manually searching public records. Each title plant relates to a particular
county and is kept current on a periodic basis by the continual addition of
copies of recorded documents which affect real property in the particular
county. Title companies often subscribe to independent title information
services to assist in the updating of their title plants and the maintenance of
title records.
The major expense of a title company is the cost of the search and
examination function performed in preparing preliminary title reports,
commitments and title policies, rather than the claim losses associated with the
issuance of these policies. The premium for title insurance is due in full at
the closing of the real estate transaction and is based upon the purchase price
of the property insured or the amount of the mortgage loan and upon the type of
coverage. Coverage under the policy generally terminates upon resale or
refinance of the property. The terms of coverage have become relatively
standardized in accordance with forms approved by state or national trade
associations, such as the American Land Title Association, the California Land
Title Association, New York Land Title Association and the Land Title
Association of Arizona. Among the most commonly issued title insurance policies
are standard or extended coverage policies for owners and lenders and trustee
sale guarantees, which provide assurances to trustees concerning certain
information in connection with nonjudicial foreclosures.
THE TITLE POLICY AND UNDERWRITING PROCESS
A brief description of the process of issuing a title insurance policy,
which usually occurs over a thirty to ninety day period, is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) After the relevant historical data on the property is compiled,
the title officer prepares a preliminary title report which documents (a)
the current status of title and conditions affecting the property, (b) any
exclusions, exceptions and/or limitations which the title underwriter might
include in the policy and (c) specific issues which need to be addressed
and resolved by the parties to the transaction before the title policy will
be issued. The preliminary report is circulated to all the parties for
consideration of any specific issues.
(iii) After the specific issues identified in the preliminary report
are resolved, an escrow agent closes the transaction in accordance with the
instructions of the parties and the title underwriter's conditions.
(iv) Once the transaction is closed and all monies have been released,
the title underwriter or agent issues the policies (a) to the owner and the
lender on a new home sale or resale transaction or (b) to the lender only,
on a refinance transaction.
The terms and conditions upon which title to real property will be insured
are determined in accordance with the standards, policies and procedures of the
title underwriter. The underwriter may have a relationship with a third party
agent, under which the agent issues the title insurance policy on behalf of the
underwriter. The agent performs the search and examination function and retains
a majority of the title premium as a commission. The underwriter receives the
remainder of the premium collected by the agent in exchange for assuming the
risk on the policy.
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Underwriting practices in California, Arizona and New York are generally
dictated by the California, Arizona and New York Land Title Associations,
although the underwriter's personnel interpret the application of these rules to
specific circumstances. Underwriters, such as FNTIC and CTIC, also maintain and
distribute current information on title practices and procedures to its issuing
agents. The acquisition of National, which closed in June 1999, positively
impacted the Company's balance sheet and significantly expanded the states in
which the Company is licensed to do business.
The maximum amount of liability for an insurer, under a title insurance
policy is usually the face amount of the policy plus the cost of defending the
insured's title against an adverse claim. The reserve for claim losses is based
upon known claims, as well as losses the insurer expects to incur based on
historical experience and other factors, including industry averages, claim loss
history, legal environment, geographic considerations, expected recoupments and
the types of policies written. The title underwriter establishes a reserve for
each known claim based on a review and evaluation of potential liability.
A third party agent that issues title insurance on behalf of an insurer is
not subject to the same liability that the insurer faces under the policy. The
agent is not assuming risk on the title policy and its liability with respect to
the issuance of the policy is typically limited to a specific amount, pursuant
to an agreement with the insurer.
ECONOMIC FACTORS AFFECTING THE INDUSTRY
Title insurance 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 early
1990's, decreases in mortgage interest rates since late 1995 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 real estate market, especially in California, contributed to
very positive conditions for the industry throughout 1997, 1998 and the first
quarter 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. The interest rate
volatility during 2000 created some operational challenges for the industry and
it is impossible to predict the future direction interest rates and the real
estate market may move or fluctuate.
COMPETITIVE FACTORS
A key competitive factor in the title insurance business is the ability to
develop and maintain a qualified and experienced group of professionals through
which services are delivered to customers. Title insurance business is typically
generated through relationships with persons in the real estate industry such as
independent escrow companies, real estate brokers and agents, developers,
mortgage brokers, mortgage bankers, financial institutions and attorneys. Thus,
the relationships and contacts maintained by sales personnel are critical to
generating such business. In addition, the quality of a title company's service,
its responsiveness and its ability to adapt to customer's needs are important in
attracting and maintaining customers. Other competitive factors include the
financial strength and reputation of the insurer.
The Company believes that the price of title insurance is typically not an
important competitive factor. In both California and Arizona, where the
Company's primary operations are currently conducted, the minimum price of title
insurance is filed by the title underwriter and is regulated by the Department
of Insurance in California and by the State Banking Commission in Arizona. In
the event the Company expands its operations into states where regulatory
authorities do not control prices, the price of title insurance may also become
an important competitive factor.
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TITLE INSURANCE OPERATIONS
The Company's primary subsidiary, ATC, is an underwritten title company
licensed by the Department of Insurance of the State of California. ATC is not a
title underwriter, but rather its current business is limited to issuing
policies as an agent on behalf of FNTIC and CTIC, subsidiaries of FNFI. ATC acts
exclusively as an agent for FNTIC and CTIC with respect to the procurement of
title insurance policies in 15 selected counties in California and three
counties in Arizona, subject to certain exceptions. These exclusive arrangements
with FNTIC and CTIC do not apply to other counties into which the Company may
expand in the future due to the National acquisition. ATC's net title service
revenue consists of 88% of the gross title insurance premiums collected on
policies issued pursuant to its agreement with FNTIC and CTIC. The remaining 12%
is comprised of an 11% underwriting fee paid to the underwriter and a 1%
administrative service fee, paid to FNTIC. As an agent, ATC is not subject to
the loss and reserve requirements applicable to insurers, and pursuant to its
agreements with FNTIC and CTIC, ATC's liability is limited to the first $5,000
of loss under any policy issued by it on behalf of FNTIC and CTIC, except in the
case of negligence, or willful or reckless conduct. To date, the amounts paid by
the Company to FNTIC in reimbursement of FNTIC's claims losses under this
arrangement have not been material. See "Relationship with Fidelity National
Financial, Inc."
The Company maintains 18 primary branches consisting of 65 offices located
in California and Arizona. Each of the Company's branches process real estate
transactions within the geographical area of the branch or region. Each branch
is operated as a separate profit center. In the years ended December 31, 2000,
1999, and 1998, the following branch operations of the Company accounted for the
indicated percentages of total gross title insurance premium revenues:
DECEMBER 31
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2000 1999 1998
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(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
-------- ------- -------- ------- -------- -------
Alameda, CA.............................. $ 5,173 10.4% $ 3,693 6.3% $ 4,642 7.8%
Contra Costa, CA......................... 2,672 5.4 2,775 4.8 3,257 5.5
Inland Empire, CA (Riverside and San
Bernardino)............................ 2,666 5.4 2,646 4.5 2,842 4.8
Kern, CA................................. 2,776 5.6 3,096 5.3 3,003 5.1
Los Angeles, CA.......................... 8,931 18.0 10,013 17.2 8,491 14.3
Orange, CA............................... 11,536 23.2 15,909 27.2 15,766 26.6
Maricopa, AZ............................. 3,105 6.3 4,045 6.8 3,912 6.6
Pima, AZ................................. 537 1.1
Sacramento, CA........................... 397 0.8 1,257 2.2 682 1.2
San Diego, CA............................ 3,340 6.7 3,831 6.6 4,615 7.8
San Mateo, CA............................ 1,188 2.4 1,263 2.2 937 1.6
Santa Barbara, CA........................ 556 1.1 684 1.2 518 0.9
Santa Clara, CA.......................... 2,110 4.2 4,028 6.9 5,551 9.4
Ventura, CA.............................. 4,718 9.5 5,130 8.8 4,990 8.4
------- ----- ------- ----- ------- -----
$49,705 100.0% $58,370 100.0% $59,206 100.0%
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TITLE PLANTS
To facilitate the preparation of title reports without the necessity of
manually searching official public records, copies of public records, maps and
other relevant historical documents are sometimes compiled and indexed in a
"title plant." Each title plant relates to a particular county and is kept
current on a frequent basis by the addition of copies of recorded documents
which affect real property. Title companies often subscribe to independent title
information services to assist in the updating of their title plants and the
maintenance of title records.
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The Company leases title plants from FNTIC in Kern, San Mateo and Santa
Clara counties and CTIC in Tucson, AZ for an aggregate payment of $14,700 per
month. At the expiration of the lease, the Company will have an option to
acquire these title plants for nominal consideration. See "Relationship with
Fidelity National Financial, Inc." The Company has also entered into a capital
lease with Title Records, Inc. for the use of a title plant in Los Angeles
County, and has the right to acquire a copy of the public records, maps and
other relevant historical documents at that plant. The Company accesses title
plants in the other counties in which it operates through joint plant user
agreements with Smart Title Solutions and Security Union Title Insurance
Company, a subsidiary of FNFI. See "Relationship with Fidelity National
Financial, Inc."
Maintenance activities related to title plants constitute a significant
item of expense, since each document must be reviewed and indexed. These costs
plus the costs of subscribing to various title information services and other
plant expenses range from approximately $2,000 to $25,000 per month, per county.
ESCROW SERVICES
The escrow services provided by the Company include all of those typically
required in connection with residential and commercial real estate purchase and
finance activities. Fees from escrow services represented approximately 26.6%,
28.2% and 26.5% of the Company's revenues in 2000, 1999 and 1998, respectively.
The fluctuation in revenues in 2000 and 1999 compared to 1998 is primarily
attributable to the opening of 10 new escrow offices by the Company in
California during 1999 and 1998, and the operational challenges the industry
faced due to interest rate volatility and the decline in the refinance activity
during the current year.
Escrow operations are regulated by state insurance authorities; the Company
has the flexibility to establish different fee schedules in different counties.
The Company believes that the acquisition of National will enable the Company to
expand its escrow operations into counties in which it does not presently hold
the necessary licenses. The Company intends to evaluate these expansion
opportunities on a county by county basis.
OTHER REAL ESTATE RELATED SERVICES
In addition to issuing title insurance policies and providing escrow
services, the Company provides other real estate related services, including
those described below. Such services accounted for approximately 19.4% in 2000,
13.2% in 1999 and 16.1% in 1998, respectively.
Document Preparation Services. The Company's subsidiary, American Document
Services, Inc. offers a variety of services relating to the documentation of
real estate transactions. Such services include (i) the preparation of
reconveyance and assignment documents, (ii) file research and document retrieval
services, and (iii) recording services, including retrieval of recorded
documents. The Company is capable of providing these services in every county
and township in the United States. The Company's ability to provide these
services is facilitated by independent abstract companies, title companies and
law firms.
Appraisal Services. The Company's subsidiary, West Point Appraisal
Services, Inc., is an appraisal management company offering a variety of
residential appraisal services to meet the varying needs of its customers. The
appraisal services are also provided through independent approved fee
appraisers.
Inspection Services. The Company's subsidiary, West Point Properties, Inc,
is an inspection company providing inspection services to its customers. These
services are provided through independently contracted inspectors.
Shortened Title Assurance Reports ("STAR" Product). The Company's STAR
Product serves as a low-cost, limited form of title protection for the benefit
of lenders in subordinate loan transactions where the primary lending criteria
is the borrower's creditworthiness rather than the security interest in the real
property.
National Title Services. The Company's central order processing unit
("NTS") provides customers with a centralized location through which they can
order title and escrow services. The services offered through the NTS Unit can
be provided on a nationwide basis.
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Trustee Sale Guarantee. The Company's National Default Services ("NDS")
division provides a central location for all trustee sale guarantee requests
throughout California. The Company's services include providing ten-day letter
information, customized accounting and reporting documents, fast track messenger
services and electronic file transfers. NDS services provide assurances to
trustees concerning certain information in connection with nonjudicial
foreclosures of property secured by a deed of trust. Because the number of
foreclosures tends to increase as the real estate market and the economy
decline, the Company's NDS division tends to be countercyclical to its title
insurance business.
Property Management Services. ATC's subsidiary, Landmark REO Management
Services, Inc., provides property management and disposition services for
foreclosure properties throughout the United States. These services include the
initial property inspection, eviction coordination, property maintenance, the
retention of a local broker, and the supervision of escrow for the sale of the
property. The Company's property management services are provided in connection
with foreclosures and therefore tend to be countercyclical to its title
insurance business.
Document Signing Services. ANFI's subsidiary, Bancserv, Inc. provides
outsource services to the real estate and banking industry through a national
network of qualified notaries public.
Exchange Services. ANFI's subsidiary, American National Exchange Services,
Inc. provides full service, Section 1031 under the Internal Revenue Code
exchange intermediary services, which can facilitate safe, effective and
creative solutions for a range of exchange transactions involving single units
to large commercial and/or industrial properties.
TITLE LOSSES AND RESERVES
As an agent, ATC is not subject to the loss and reserve requirements
applicable to insurers, and pursuant to its agreements with FNTIC and CTIC,
ATC's liability is limited to the first $5,000 of loss under any policy issued
by it on behalf of FNTIC and CTIC, except in the case of negligence, or willful
or reckless conduct. To date, the amounts paid by the Company to FNTIC and CTIC
in reimbursement of FNTIC's and CTIC's claims losses under these arrangements
have not been material.
UNDERWRITING, LOSSES AND RESERVES
The Company believes that the level of risk undertaken pursuant to its
underwriting standards is consistent with that of the industry. The maximum
amount of liability under a title insurance policy is usually the face amount of
the policy plus the cost of defending the insured's title against an adverse
claim. The reserve for claim losses includes known claims as well as losses
National 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, legal environment, geographic considerations and types of policies
written. The occurrence of a significant major claim (those greater than
$500,000) in any given period could have a material adverse effect on National's
financial condition and results of operations for such period.
If a loss is related to a policy issued by an independent agent, National
may proceed against the independent agent pursuant to the terms of the agency
agreement. In any event, National may proceed against third parties who are
responsible for any loss sustained under the title insurance policy under rights
of subrogation.
The Company believes that its quality controls and underwriting standards
will help minimize its net title claims paid. The Company will further reduce
its losses by following aggressive recoupment procedures under rights of
subrogation or warranties and by carefully reviewing all claims.
Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
National
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has not experienced damage awards materially in excess of policy limits, the
possibility of such bad faith damage awards may cause increased costs and
difficulty in settling title claims.
National generally pays losses in cash. In some instances claims are
settled by purchasing the interest of the insured in the real property or the
interest of the adverse claimant. Such interests are generally recorded as an
asset on National's books at the lower of cost or fair value less selling costs
and any related indebtedness is carried as a liability.
National also accrues reserves related for losses arising from the escrow,
closing and disbursement functions due to fraud or operational error based on
historical experience.
REINSURANCE
In the ordinary course of business, National reinsures certain risks with
other title insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other title insurers for the
purpose of earning additional income. National cedes or assumes a portion of
certain policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that the reinsurer is
liable for loss and loss adjustment expense payments exceeding the amount
retained by the ceding company. However, the ceding company remains primarily
liable in the event the reinsurer does not meet its contractual obligations.
National did not assume or cede any significant policy liabilities during 2000
and 1999, respectively
COMPETITION
The title insurance industry is highly competitive in the attraction and
retention of customers and independent agents. The number of competing companies
and the size of such companies varies in the different geographic areas in which
the Company conducts its business. Generally, the Company is in competition with
many other title insurers and agents, with the most effective competition coming
from companies which possess greater capital resources. Approximately 1,700
title companies, less than 75 of which are underwriters, are members of the
American Land Title Association, the title insurance industry's national trade
association.
The title insurance industry, however, is heavily concentrated; for
example, it is estimated that the five largest title insurance underwriters,
either directly or through their agents, accounted for approximately 81% of the
policy premium revenue in the United States in 2000 and 90% in 1999. In the
Company's principal markets, competitors currently include direct operations and
agents of the title insurance subsidiaries of FNFI, Chicago Title Corporation
(which was acquired by FNFI on March 20, 2000), First American Financial
Corporation, LandAmerica Financial Group, Inc., Old Republic International
Corporation and Stewart Information Services Corporation, as well as numerous
independent agency operations at the local level. The Company may also face
competition from entrants into the industry and the geographic markets it plans
to service.
The industry for escrow and other real estate related services provided by
the Company is also highly competitive and extremely fragmented. The Company's
competition with respect to such services includes not only other title
underwriters and title agents in the insurance industry, but also companies,
both local and national, that specialize in providing a particular service.
Because the parties to a real estate transaction are usually concerned with
time schedules and costs associated with delays in closing the transaction,
competition is based primarily on the quality and timeliness of service. The
Company believes that its competitive position is enhanced by its quality
customer service. The Company believes that the price of title insurance is
typically not an important competitive factor.
MARKETING
The Company attempts to increase the volume of its title insurance and real
estate related services business primarily through customer solicitation by
sales personnel. The primary source of this business is from independent escrow
companies, real estate brokers and agents, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. The Company believes
that the personal contacts maintained by
8
11
its sales personnel with these customers are critical to generating title
insurance business. The Company therefore actively encourages its branch
personnel to continually develop new business relationships with persons in the
real estate business community. In addition to generating business through
direct solicitation and general advertising, the Company believes that excellent
service is an important competitive factor in attracting and retaining
customers, and measures customer service in terms of quality and timeliness in
the delivery of services.
REGULATION
Title insurance companies, including underwriters, underwritten title
companies and independent agents, are subject to extensive regulation under
applicable state laws. As an agent, the Company is subject to regulation in
California and Arizona. In California, the Company is regulated by the
Department of Insurance, and Arizona is regulated by the State Banking
Department, State of Arizona. See Note 9 to Notes to the Consolidated Financial
Statements. Such regulations include licensing requirements for the counties in
which the Company operates, and regulations relating to minimum levels of net
worth and working capital.
Current regulations require that ATC maintain a minimum net worth of
$400,000. The net worth of ATC was $23.0 million as of December 31, 2000 and
$20.4 million as of December 31, 1999. See Note 9 of Notes to Consolidated
Financial Statements.
Insurance underwriters are usually subject to a holding company act in
their state of domicile which regulates, among other matters, the ability to pay
dividends and investment policies. The laws of most states in which National
transacts business establish supervisory agencies with broad administrative
powers relating to issuing and revoking licenses to transact business,
regulating trade practices, licensing agents, approving policy forms, accounting
principles, financial practices, establishing reserve and capital and surplus
requirements, defining suitable investments for reserves, capital and surplus
and approving rate schedules. In 1998, the National Association of Insurance
Commissioners approved codified accounting practices that changed the definition
of what constitutes prescribed statutory accounting practices and will result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements commencing in 2001. The change in statutory
accounting practice did not significantly effect the Company.
Pursuant to statutory accounting requirements of the various states in
which National is licensed, it must defer a portion of premiums earned as an
unearned premium reserve for the protection of policyholders and must maintain
qualified assets in an amount equal to the statutory requirements. The level of
unearned premium reserve required to be maintained at any time is determined on
a quarterly basis by statutory formula based upon either the age, number of
policies and dollar amount of policy liabilities underwritten or the age and
dollar amount of statutory premiums written. The statutory unearned premium
reserve required and reported for National was $3.2 million and $3.7 million as
of December 31, 2000 and 1999, respectively.
National is regulated by the Insurance Commissioner of the State of New
York. Regulatory examinations usually occur at three year intervals and
examination was in progress for National (1998). In December 2000, the New York
Department of Insurance issued its draft report of the December 31, 1998
examination. In February 2001, the Company accepted the report as issued by the
State of New York Insurance Department for the 1998 examination. National was
then notified that the report was adopted and filed by the Department.
The Auditor Division of the Controller of the State of California is
currently conducting an examination of the funds due the State of California
under various escheatment regulations for the years ended December 31, 1998 and
prior. The Company has not yet received a preliminary report as the audit is
ongoing. The Company does not believe that either the examinations performed by
the insurance regulators or the Controller of the State of California will have
a material impact on its financial position, its results of operations or its
statutory capital and surplus.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 2001, National's
self-imposed single policy maximum insurable amount, which complies with
statutory limitations, was $6.0 million.
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12
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 National 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 National's earned surplus. Based on this formula, National could not
pay dividends or make distributions as of January 1, 2001.
Pursuant to statutory requirements of the State of New York, National must
maintain certain levels of minimum capital and surplus. The statutory capital
and surplus of National subsidiary was $3.3 million and $2.5 million as of
December 31, 2000 and 1999, respectively. The statutory earnings of National
were $684,000 and $426,000, for the years ended December 31, 2000 and 1999,
respectively. National is compliant with the minimum statutory requirements as
of December 31, 2000.
RATINGS
National is regularly assigned ratings by independent agencies designed to
indicate their financial condition and/or claims paying ability. Financial data
and other information are supplied to the rating agencies and subjected to
quantitative and qualitative analyses from which the ratings are derived.
National's rating, as assigned during 2000 and 1999, is listed below:
DEMOTECH, INC.
(FINANCIAL STABILITY RATING)
----------------------------
National Title Insurance of New York, Inc..... A
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
The Company's and National's investment policy is designed to maintain a
high quality portfolio, maximize income, minimize interest rate risk and match
the duration of the portfolio to the Company's liabilities. It is the practice
of the Company to purchase investment grade fixed maturity securities. The
Company's portfolio is subject to economic conditions and normal market risks
and uncertainties.
All of National's investment assets qualify as "admitted assets" and for
purposes of capital and surplus and unearned premium reserves as prescribed by
various state insurance regulations. These investments are restricted by the
state insurance regulations of its domiciliary state and are limited primarily
to cash and cash equivalents, federal and municipal governmental securities and
other corporate investments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The carrying amount of all of the Company's investments, which approximates
the fair value of total investments, was $10.5 and $14.0 million at December 31,
2000 and 1999, respectively.
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13
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 2000 and 1999:
DECEMBER 31
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
AMORTIZED % OF FAIR % OF AMORTIZED % OF FAIR % OF
RATINGS(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
---------- --------- ----- ------- ----- --------- ----- ------- -----
(AMOUNTS IN THOUSANDS)
AAA...................... $ 1,777 16.5% $ 1,780 16.9% $ 4,002 27.9% $ 3,989 28.4%
AA....................... 628 5.8 627 6.0 1,830 12.8 1,788 12.8
A........................ 5,196 48.1 5,230 49.7 6,895 48.1 6,750 48.1
Other.................... 3,195 29.6 2,896 27.5 1,600 11.2 1,495 10.7
------- ----- ------- ----- ------- ----- ------- -----
$10,796 100.0% $10,533 100.0% $14,327 100.0% $14,022 100.0%
======= ===== ======= ===== ======= ===== ======= =====
---------------
(1) Ratings as assigned by Standard & Poor's Corporation
The following table sets forth certain information regarding the Company's
fixed maturity securities at December 31, 2000 and 1999. Expected maturities may
differ from contractual maturities because certain borrowers have the right to
call or prepay obligations with or without call or prepayment penalties. Fixed
maturity securities with an amortized cost of $9.0 million and $2.9 million, and
a fair value of $8.5 million and $2.8 million were callable at December 31, 2000
and 1999:
DECEMBER 31
-------------------------------------------------------------------------------
2000 1999
------------------------------------- --------------------------------------
AMORTIZED % OF FAIR % OF AMORTIZED % OF FAIR % OF
MATURITY COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
-------- --------- ----- ------ ----- --------- ----- ------- -----
(AMOUNTS IN THOUSANDS)
One year or less.......... $ -- --% $ -- --% $ 100 .7% $ 100 .7%
After one year through
five years.............. 7,573 83.8 7,610 89.9 12,766 89.1 12,500 89.2
After five years through
ten years............... 1,466 16.2 852 10.1 1,461 10.2 1,422 10.1
------ ----- ------ ----- ------- ----- ------- -----
$9,039 100.0% $8,462 100.0% $14,327 100.0% $14,022 100.0%
====== ===== ====== ===== ======= ===== ======= =====
Equity securities at December 31, 2000 and 1999 consist of investments as
follows:
DECEMBER 31
---------------------------------
2000 1999
---------------- -------------
FAIR FAIR
COST VALUE COST VALUE
------ ------ ---- -----
(AMOUNTS IN THOUSANDS)
Industrial, miscellaneous and all other.................... $1,757 $2,071 $100 $100
====== ====== ==== ====
The Company's investment results for the years ended December 31, 2000,
1999 and 1998 were as follows:
DECEMBER 31
----------------------------
2000 1999 1998
------- ------- ------
(AMOUNTS IN THOUSANDS)
Net investment loss(1)(2).............................. $ (139) $ -- $ --
Average invested assets(1)............................. 10,533 14,022 --
Effective loss on average invested assets(1)........... 1.3% -- --
---------------
(1) Excludes investments in real estate.
(2) Net investment income as reported in the Condensed Consolidated Statements
of Earnings has been adjusted in the presentation above to provide the tax
equivalent yield on tax exempt investments and to exclude net realized
capital gains on the sale of investments and other assets. Net realized
capital loss totalled ($139,000), $0 and $0 in 2000, 1999 and 1998,
respectively.
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RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL, INC.
The Company has a relationship with FNFI, and a common director, resulting
from FNFI's involvement in the organization and growth of the Company, FNFI's
equity ownership position in the Company and existing business and contractual
relationships between the two companies. The Company's principal subsidiary,
ATC, was a wholly owned subsidiary of FNFI until July 1, 1997, when the Company
acquired 60% of ATC's outstanding common stock for $6.0 million in cash. As a
result of the Reorganization and following the Company's initial public
offering, FNFI currently owns approximately 28.2% of the outstanding common
stock of the Company. See "Reorganization", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments" and Note 12 of Notes to Consolidated Financial Statements.
Operationally, the Company and FNTIC continue to have a close working
relationship. FNTIC and CTIC entered into an Issuing Agency Agreement with ATC
whereas ATC agreed that until June 30, 2007 it will act as an agent for FNTIC
and CTIC with respect to the procurement of title insurance policies in 15
counties in California and Arizona, subject to certain exceptions. This
exclusive arrangement with FNTIC and CTIC does not apply to other counties into
which the Company may expand in the future. Under the Issuing Agency Agreement,
in addition to furnishing title insurance products and services, FNTIC provides
a wide variety of administrative services for ATC, including accounting, legal
and human resources services. ATC pays FNTIC a management fee of 1% of gross
premiums for these services. This administrative services arrangement is
terminable by ATC upon 90 days notice to FNTIC.
EMPLOYEES
As of December 31, 2000, the Company had 790 full time employees. The
Company believes its success depends significantly on attracting and retaining
talented and experienced personnel. The Company locates and recruits its
personnel primarily through personal contacts in the industry. The Company's
executive officers are actively involved in the recruitment process. The Company
offers competitive packages of base and incentive compensation and benefits in
order to attract and motivate its employees. The Company believes that its
relations with employees are good.
RISK FACTORS
The Company's securities are speculative in nature and an investment in
such securities involves a high degree of risk. Prospective investors should
consider, along with the other information contained in this Annual Report, the
following considerations and risks in evaluating an investment in the Company.
Cyclical Nature of Real Estate Market
The title insurance industry is dependent on the volume of real estate
transactions that occur. Substantially all of the Company's title insurance,
escrow and other real estate service business result from sales and refinancings
of real estate, primarily residential properties, and from the construction and
sale of new properties. Real estate activity is cyclical in nature and is highly
sensitive to the cost and availability of long-term mortgage funds and general
economic conditions. Real estate activity and, in turn, the Company's revenue
base, can be adversely affected during periods of high interest rates and/or
limited money supply. During 1998 and first half of 1999, low mortgage interest
rates and a strong California real estate market contributed to increased
residential transaction activity. However, mortgage rates began to climb during
the last half of 1999 and 2000, virtually eliminating the volume of refinance
activity experienced in the prior year and early 1999. It is impossible to
predict the future direction interest rates and the real estate market may move
or fluctuate. No assurance can be given that historical levels of premiums and
fees received by the Company will be available to the Company in the future.
Geographic Concentration
The Company derived substantially all of its revenues from real estate
transactions occurring in California. Due to the relatively high cost of real
estate in California, the real estate market may be more
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sensitive to fluctuations in interest rates and general economic conditions than
other regions of the United States. Adverse economic conditions affecting the
California real estate market could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with the Relationship with FNFI
The Company maintains a close relationship with FNFI and its subsidiaries
and relies upon them for a number of services in connection with its operations.
The Company has agreed that until June 30, 2007 it will act exclusively as an
agent for FNTIC and CTIC with respect to the procurement of title insurance
policies in 13 selected counties in California and three counties in Arizona,
subject to certain exceptions. In exchange for a management fee, FNTIC provides
a variety of administrative services for ATC, including accounting, legal and
human resources services. The unexpected loss of FNTIC or CTIC underwriting or
administrative services, for any reason, could result in an interruption in the
Company's operations until such services are secured elsewhere, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Certain of FNFI's subsidiaries are competitors of the Company in several of
the markets in which the Company operates. A director and certain officers of
the Company are also directors or officers of FNFI. Accordingly, there is a
possibility that the interests of the Company and FNFI might conflict. There can
be no assurance that the directors or officers of the Company, in satisfying
their fiduciary duties and the requirements of applicable statutory laws to
ensure such conflicts are properly resolved, can or will act in the best
interests of the Company.
Risks Associated with National
In June 1999, ATC acquired all of the outstanding capital stock of
National. Due to the affiliated nature of the parties this should not be
considered an arm's length transaction. National, a New York domiciled insurance
underwriter, is currently licensed to issue title insurance policies in 34
states, the District of Columbia and the U.S. Virgin Islands. An element of the
Company's business strategy is to utilize National not only as a means to
generate underwriting premiums but to expand geographically into states where
the Company does not currently operate. This is the primary purpose of the
National acquisition. In addition, National does not currently underwrite a
significant amount of title insurance policies through direct operations or
agency relationships and the Company will be required to commit resources to
establish direct operations and agency relationships in order to realize the
benefits of this acquisition. Cash resources for the development of National is
expected to be provided by current cash balances and internally generated funds.
National's principal value lies in the licenses it holds to operate as an
underwriter in 34 states, the District of Columbia and U.S. Virgin Islands, and
the strategic options the Company pursues in utilizing the licenses. There can
be no assurance that the Company will be able to develop any significant
business or generate title insurance premiums through National, or that it will
realize any of the benefits anticipated from the acquisition of National.
Competition
The title insurance business is very competitive, primarily in the areas of
service and expertise. The size and financial strength of the title insurer who
underwrites the policies are also important factors in decisions relating to the
purchase of title insurance. Many of the Company's competitors have greater
financial, personnel, marketing and other resources than the Company, and some
are underwritten by larger title insurance companies. Also, the removal of
regulatory barriers in the future might result in new competitors, including
financial institutions, entering the title insurance business. Intense
competition among the more established title insurance companies and any such
new entrants could have a material adverse effect on the business, financial
condition and results of operations of the Company.
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Risks Related to Possible Acquisitions
An element of the Company's business strategy is to expand its operations
through the acquisition of complementary businesses. The Company has no
agreements, understandings or commitments and is not currently engaged in
negotiations with respect to any additional acquisition. There can be no
assurance that the Company will be able to identify, acquire, profitably manage
or successfully integrate any businesses into the Company without incurring
substantial expenses, delays or other operational or financial problems.
Moreover, competition for acquisition candidates is intense, which could both
increase the price of any acquisition targets and decrease the number of
attractive companies available for acquisition. Furthermore, acquisitions
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, increased costs to improve
managerial, operational, financial and administrative systems, legal
liabilities, and amortization of acquired intangible assets, some or all of
which could materially and adversely affect the Company's business, operating
results and financial condition. The Company may have to issue additional equity
securities or incur indebtedness in order to finance the acquisition of other
businesses. In addition, there can be no assurance that acquired businesses, if
any, will achieve anticipated revenues and earnings or performance at levels
historically enjoyed by the Company. The failure of the Company to manage its
acquisition strategy successfully could materially and adversely affect the
Company's business, operating results and financial condition.
Management of Growth
The Company is currently experiencing significant growth and intends to
pursue further growth as part of its business strategy. The Company's ability to
effectively manage the growth of its operations will require it to continue to
improve its operational, financial and other internal systems and to attract,
develop, motivate and retain its employees. The Company's rapid growth has
presented and will continue to present numerous operational challenges, such as
the assimilation of financial reporting systems, and will increase the demands
on the Company's senior management and the Company's systems and internal
controls. In addition, the Company's success depends in large part upon its
ability to attract, develop, motivate and retain talented employees with
significant industry experience and contacts. Such employees are currently in
great demand and there is significant competition for employees with the
requisite skills and experience from other national and regional title
companies. There can be no assurance that the Company will be able to attract
and retain the qualified personnel necessary to pursue its growth strategy.
There can be no assurance that the Company will be able to maintain or
accelerate its current growth, effectively manage its expanding operations or
achieve planned growth on a timely or profitable basis. To the extent the
Company is unable to manage its growth effectively and efficiently, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations", "Item
7A. Quantitative and Qualitative Market Risk Disclosures" and elsewhere in this
Form 10-K involve known and unknown risks and uncertainties which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by any forward-looking statements made by or on behalf of the Company.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is filing the following cautionary
statements identifying important factors that in some cases have affected, and
in the future could cause the Company's actual results to differ materially from
those expressed in any such forward-looking statements.
The factors that could cause the Company's results to differ materially
include, but are not limited to, general economic and business conditions,
including interest rate fluctuations; the impact of competitive products and
pricing; success of operating initiatives; adverse publicity; changes in
business strategy or development plans; quality of management; availability,
terms, and deployment of capital; the results of
14
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financing efforts; business abilities and judgment of personnel; Year 2000
issues, availability of qualified personnel; employee benefit costs and changes
in, or the failure to comply with government regulations.
ITEM 2. PROPERTIES
The Company's corporate offices are currently located in Orange,
California. Most of the Company's offices are leased, with the exception of a
branch office building in Phoenix, Arizona, which the Company owns, and the
corporate office building purchased in April, 1999.
The corporate office building located at 1111 E. Katella Avenue, Orange, CA
was acquired with the proceeds of a $2.1 million dollar original note that bears
interest at the lending institutions prime rate, and monthly principal payments
of $4,400 per month and is collateralized by a deed of trust. The outstanding
balance at December 31, 2000 is $2.0 million dollars.
ITEM 3. LEGAL PROCEEDINGS
The Company in the ordinary course of business is subject to claims made
under, and from time to time is named as defendants in legal proceedings
relating to, policies of insurance it has issued or other services performed on
behalf of insured policyholders and other customers. The Company also is
involved from time to time in routine litigation incidental to the conduct of
its business, apart from claims made under title insurance policies. There are
currently no material pending litigation proceedings to which the Company is a
party or to which any of its property is subject. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Industry
Overview Recent Developments" and Note 11 of Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company completed its initial public offering on February 12, 1999.
Prior to that time there was no market for the Company's common stock. The
following table sets forth the range of high and low closing prices for the
common stock on the NASDAQ stock exchange.
DIVIDENDS
HIGH LOW DECLARED
----- ----- ---------
Year ended December 31, 2000:
First quarter........................................... $3.94 $3.00 $0.10
Second quarter.......................................... 3.75 2.75 .10
Third quarter........................................... 3.13 2.68 .10
Fourth quarter.......................................... 3.20 3.12 .10
Year ended December 31, 1999:
First quarter........................................... $7.25 $5.00 $0.10
Second quarter.......................................... 6.06 4.50 .10
Third quarter........................................... 5.25 3.38 .10
Fourth quarter.......................................... 4.06 3.12 .10
DIVIDEND POLICY AND RESTRICTION ON DIVIDEND PAYMENTS
Since the first quarter of 1999, the Company has paid cash dividends on a
quarterly basis, which payments have been made at the discretion of the
Company's Board of Directors. The continued payment of dividends will depend
upon operating results, business requirements, regulatory considerations and
other factors. As of March 27, 2001, the Company had less than 800 shareholders
of record.
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ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
COMPANY PREDECESSOR COMBINED
--------------------------------------------------------- ----------- ------------
YEAR YEAR YEAR SIX MONTHS SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
2000 1999 1998 1997 1997 1997
------------ ------------ ------------ ------------ ----------- ------------
(AMOUNTS IN THOUSANDS OTHER THAN ORDER AND FEE PER FILE DATA)
BALANCE SHEET DATA:
Cash and short-term
investments................... $ 9,865 $ 4,875 $ 10,495 $ 7,224 N/A N/A
Investments..................... 10,533 14,022 N/A N/A N/A N/A
Working capital................. 4,116 3,667 8,776 5,047 N/A N/A
Total assets.................... 53,341 47,324 37,376 22,365 N/A N/A
Due to affiliate................ 2,294 1,642 1,893 1,411 N/A N/A
Shareholders' equity............ 31,977 32,031 19,898 1,123 N/A N/A
STATEMENT OF OPERATIONS DATA:
Net title service
revenue -- related party...... $ 43,641 $ 51,366 $ 52,092 $18,026 $14,768 $32,795
Escrow fees..................... 21,969 25,190 24,267 7,353 5,581 12,933
Other fees and income........... 16,011 11,814 14,697 5,428 3,100 8,528
Investment and interest
income........................ 1,047 930 369 104 62 166
-------- -------- -------- ------- ------- -------
Total revenue................. $ 82,668 $ 89,300 $ 91,425 $30,911 $23,511 $54,422
======== ======== ======== ======= ======= =======
Personnel costs................. $ 51,189 $ 54,277 $ 49,435 $16,599 $13,953 $30,552
Other operating expenses........ 22,742 19,226 17,477 8,084 6,521 14,605
Title plant rent and
maintenance................... 5,322 6,264 7,156 2,664 2,009 4,673
Earnings before minority
interest...................... 3,415 9,533 17,357 1,790 592 2,382
Net earnings.................... $ 2,015 $ 5,625 $ 6,865 $ 709 $ 592 $ 1,301
PER SHARE DATA:
Earnings per share:
Basic......................... $ .28 $ .82 $ 2.13 $ 0.24 N/A N/A
Diluted....................... .28 .81 1.96 0.23 N/A N/A
Weighted average common shares
outstanding:
Basic......................... 7,073 6,869 3,223 2,972 N/A N/A
Diluted....................... 7,073 6,902 3,500 3,107 N/A N/A
OTHER OPERATING DATA:
Gross title insurance
premiums...................... $ 49,705 $ 58,370 $ 59,206 $20,641 $16,773 $37,414
Orders opened(1)................ 111,000 119,034 146,932 46,800 40,700 87,500
Orders closed(1)................ 73,200 88,899 98,319 32,600 28,200 60,800
Average fee per file(1)......... $ 1,109 $ 940 $ 825 $ 886 $ 835 $ 863
---------------
(1) Average fee per file information consists of gross title insurance premiums,
escrow fees and other title-related fees divided by the number of closed
files (not including revenue generated by, or closed files relating to, the
Company's STAR Product, which are excluded due to the abbreviated
characteristics of the policy). In addition, non title-related revenues and
investment income are excluded as there are no associated closed files. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
N/A -- Not applicable
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QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Revenue...................................... $17,689 $20,916 $21,562 $22,501
Earnings (loss) before income taxes.......... (563) 1,089 1,384 1,505
Net earnings (loss), basic and diluted
basis...................................... (332) 643 817 887
Basic earnings (loss) per share.............. (.05) .09 .11 .12
Diluted earnings (loss) per share............ (.05) .09 .11 .12
Dividends paid per share..................... .10 .10 .10 .10
1999
Revenue...................................... $24,411 $25,367 $21,470 $18,052
Earnings (loss) before income taxes.......... 4,822 4,563 1,260 (1,112)
Net earnings (loss), basic and diluted
basis...................................... 2,796 2,646 743 (560)
Basic earnings (loss) per share.............. .47 .37 .10 (.08)
Diluted earnings (loss) per share............ .46 .37 .10 (.08)
Dividends paid per share..................... .10 .10 .10 .10
1998
Revenue...................................... $18,243 $23,732 $23,748 $25,702
Earnings before income taxes................. 3,009 5,654 3,988 4,706
Net earnings (loss), basic and diluted
basis...................................... 1,132 1,954 1,390 2,389
Basic earnings per share..................... .39 .68 .49 .57
Diluted earnings per share................... .36 .62 .49 .53
Dividends paid per share..................... N/A N/A N/A N/A
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere herein.
OVERVIEW
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.
The Company's revenues include net title service revenue (which also
includes trustee sale guarantee fees), escrow fees, and other fees and revenues.
The Company's 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. Other fees and revenue primarily consist of real estate
information fees, reconveyance fees, recording fees and appraisal fees, and
include fees related to the Company's STAR product. Other fees and revenue trend
closely with the level of title and escrow business.
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.
Net title service revenues consist of gross title insurance premiums less
fees paid to underwriters. Fees to underwriters represent the portion of gross
title insurance premiums paid by the Company's underwritten title companies to
FNTIC and CTIC, pursuant to the terms of the Issuing Agency Agreement, and
similar fees paid by the Company's other underwritten title company
subsidiaries.
Beginning in January 1997, ATC entered into an Issuing Agency Agreement
with FNTIC under which ATC pays FNTIC an underwriting fee equal to 11% of the
gross title insurance premiums received. In addition, ATC pays FNTIC a fee equal
to 1% of gross title insurance premiums for certain accounting, human resources
and legal services provided by FNFI. Although the fee for these management
services was not negotiated in an arm's length transaction, the Company believes
that the amount of these fees is reasonable in light of the level of services
received and the estimated costs of performing these services internally.
Beginning in October 2000, ATC entered into an Issuing Agency Agreement
with CTIC under which ATC pays CTIC an underwriting fee equal to 11% of gross
title premiums received.
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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.
The average fee per file and corresponding gross margins are higher for
real estate sale and resale transactions than refinance transactions for three
principal reasons: (i) a larger percentage of sale and resale orders close as
compared to refinance orders, (ii) typically two policies are issued in a resale
transaction (one each to the buyer and lender) whereas only one is issued in a
refinance transaction and (iii) the base rate charged on sale and resale
transactions is typically higher than that charged on refinance transactions.
Because title insurance premiums are calculated with regard to the purchase
price of the property or the amount of the related mortgage, average fees per
file will also increase during periods in which real estate prices, and
corresponding mortgage loans, are increasing.
RESULTS OF OPERATIONS
The following discussion presents a comparison of the Company for 2000,
1999 and 1998.
REVENUE
The following table presents information regarding the components of the
Company's revenue:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
(AMOUNTS IN THOUSANDS OTHER THAN ORDERS
AND FEE PER FILE)
Net title service revenue-related party....... $43,641 $51,366 $52,092
Escrow fees................................... 21,969 25,190 24,267
Other services charges........................ 16,011 11,814 14,697
Investment income............................. 1,047 930 369
------- ------- -------
Total revenue....................... $82,668 $89,300 $91,425
======= ======= =======
Orders closed................................. 73,200 88,900 98,000
Average fee per file.......................... $ 1,109 $ 940 $ 825
Favorable interest rates in 1997, 1998 and through early 1999 triggered
refinancing activity at then record levels. The overall economic environment,
stable mortgage interest rates and strength in real estate market, especially
California, the Company's primary market were positive factors. However, 30-year
fixed mortgage rates began to climb during the last half of 1999 and continued
into 2000, eliminating the volume of refinance activity experienced in the 1998.
The premium increases from 1998 through the first half of 1999 were
indicative of the favorable market conditions existing during that period. In
1999 and continuing through the year 2000, refinancing transactions declined
from the 1998 record levels. As the refinance transactions decreased our fee per
file increased due to the shift from a refinance market to a market driven by
new home purchases and resales.
Total revenues in 2000 decreased $6.6 million or 7.4% to $82.7 million from
$89.3 million in 1999. Revenues in 1999 of $89.3 million reflect a 2.3% decrease
in 1998 revenues of $91.4 million. Beginning in mid-1999 interest rate increase
caused by actions taken by the Federal Reserve Board resulted in a significant
decline in refinancing transactions and residential resales and new home sales.
Net Title Service Revenue. Net title service revenue decreased $7.8 million
or 15.2% to $43.6 million from $51.4 million in 1999. In 1999, net title service
revenue decreased by 1.4% to $51.4 million from $52.1 million in 1998. The
decrease in 2000 net title service revenue is consistent with the current real
estate environment and the decline in closed title orders during 2000. The
average fee per file increased to $1,109 in
20
23
2000 compared to $940 in 1999 and $825 in 1998. The fee per file increase is
indicative of a change in the percentage mix of title orders closing in a
refinance market to the resale higher fee per file business. Gross title
premiums were $50.0 million, $58.4 million and $59.2 million in 2000, 1999 and
1998, respectively.
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.
EXPENSES
The following table presents the components of the Company's expenses:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
Personnel costs............................... $51,189 $54,277 $49,435
Other operating expenses...................... 22,742 19,226 17,477
Title plant rent and maintenance.............. 5,322 6,264 7,156
------- ------- -------
Total expenses...................... $79,253 $79,767 $74,068
======= ======= =======
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.
Other operating expenses consist of facilities expenses, postage and
courier services, computer services, professional services, advertising expense,
general insurance, trade and note receivable allowances, depreciation and
amortization expense and interest expense.
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.
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
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fluctuation in the Company's personnel expenses is due to the expansion of its
direct operation business, in addition to acquiring other operations and hiring
additional personnel to expand its national market. The Company has taken
significant measures to maintain appropriate personnel levels and costs relative
to the volume and mix of business and revenues. The Company continues to monitor
the prevailing market conditions and will attempt to respond as necessary.
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.
Title Plant Rent and Maintenance Expense. Title plant rent and maintenance
expense totaled $5.3 million, $6.3 million and $7.2 million for the years ending
December 31, 2000, 1999 and 1998, respectively. Title plant rent and maintenance
expense decreased as a percentage of total revenue to 6.4% in 2000 from 7.0% in
1999, which had previously increased to 7.8% in 1998. The year over year
fluctuations in plant expense is primarily a result of various contract
negotiations within several counties in California and Arizona combined with a
reduction of the volume of business during 2000 compared to 1999. The agreements
negotiated during 2000 and 1999 resulted in significant cost reductions for the
Company.
Income Tax Expense. Income tax expense for 2000, 1999 and 1998 as a
percentage of earnings before income taxes was 41.0%, 41.0% and 41.8%,
respectively. The fluctuations in income tax expense as a percentage of earnings
before income taxes are attributable to the effect of state income taxes on the
Company's wholly-owned underwritten title company and the ancillary service
companies; a change in the amount and the characteristics of net income,
operating income versus investment income; and the tax treatment of certain
items.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash requirements include debt service, debt relating
to capital leases, personnel and other operating expenses, taxes and dividends
on its common stock. The Company believes that all anticipated cash requirements
for current operations will be met from internally generated funds and through
cash received from its subsidiaries. In the future, the Company's cash
requirements will include those relating to the development and expansion of
National's business. While the Company presently has in place much of the
infrastructure (principally consisting of personnel) that will be used for this
development, management believes that additional cash resources will be
required. The development of direct sales operations for the expansion of
National would require more cash resources than developing these operations
using agency relationships. Cash requirements for the development of National
are expected to be met from current cash balances and internally generated
funds.
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.
22
25
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 January 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 proceeds of approximately $8.4 million were received by the Company in
connection with its initial public offering on February 12, 1999. The
underwriters exercised an option for over allotment to purchase an additional
150,000 shares at $6 per share on March 31, 1999, which resulted in net proceeds
in the amount of $804,000.
In February 1999, a director of the Company exercised options resulting in
the Company receiving proceeds in the amount of $220,000.
On April 14, 1999 the Company purchased a home office building located in
Orange, CA for $2.6 million. The Company borrowed $2.1 million, secured by a
first trust deed. The terms of the note payable require monthly interest
payments at prime and monthly principal payments of $4,000. The note matures on
April 1, 2004. The costs associated with the relocation to the executive offices
were minimal.
In May 1999, the Department of Insurance, State of New York approved the
acquisition of National Title Insurance Company of New York, Inc. by the ATC.
The $3.25 million transaction was paid in cash in June 1999.
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 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, 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.
These transactions were accounted for under the purchase accounting method.
The results of operations were included in earnings from the date of the
acquisitions through December 31, 2000.
RECENT DEVELOPMENTS
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
23
26
compliance with certain State Banking Department Regulations. The State Banking
Department provided the Company with an opportunity to present additional
information prior to making their final determination as to compliance. The
Company subsequently provided additional information to the State Banking
Department for review.
On September 15, 2000, the Company received notice from the State Banking
Department stating the matters detailed in the Report of Examination were
complete and required no further response.
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.
SEASONALITY
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.
INFLATION
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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, contracts and 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT THE MARKET RISK OF
FINANCIAL INSTRUMENTS
The Company's Consolidated Balance Sheets includes a substantial amount of
assets and liabilities whose fair values are subject to market risks. The
following sections address the significant market risks associated with the
Company's financial activities as of years ended 2000 and 1999.
Interest Rate Risk
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.
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27
Equity Price Risk
The carrying values of investments subject to equity price risks are based
on quoted market prices or management's estimates of fair value as of the
balance sheet date. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
Caution should be used in evaluating the Company's overall market risk from
the information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because the Company's reserve for claim losses (representing 11.4% of total
liabilities) is not included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would have been as follows as of December 31,
2000:
a. An approximate $1.0 million net increase (decrease) in the fair
value of fixed maturity securities would have occurred if interest rates
had (decreased) increased by 100 basis points. The change in fair values
was determined by estimating the present value of future cash flows using
various models, primarily duration modeling.
b. It is not anticipated that there would be a significant change in
the fair value of other long-term investments or short-term investments if
there was a change in market conditions, based on the nature and duration
of the financial instruments involved.
c. Interest expense on outstanding debt would have increased
(decreased) approximately $19,000, if interest rates increased (decreased)
100 basis points.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL INFORMATION
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
PAGE
NO.
----
Independent Auditors' Report................................ 27
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 28
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998.......................... 29
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2000, 1999 and 1998.............. 30
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 32
Notes to Consolidated Financial Statements.................. 33
26
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American National Financial, Inc.:
We have audited the accompanying Consolidated Balance Sheets of American
National Financial, Inc. and subsidiaries as of December 31, 2000 and 1999 and
the related Consolidated Statements of Earnings, Comprehensive Earnings,
Shareholders' Equity and Cash Flows for each of the years in the three-year
period ended December 31, 2000. These Consolidated Financial Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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.
KPMG LLP
Los Angeles, California
February 22, 2001
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30
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31
------------------
2000 1999
------- -------
Current assets:
Cash and cash equivalents................................. $ 9,450 $ 3,361
Short-term investments, at cost, which approximates fair
market value........................................... 415 1,514
Accrued investment interest............................... 145 245
Trade receivables, net of allowance for doubtful accounts
of $2,118 in 2000 and $2,097 in 1999................... 3,925 4,526
Notes receivables, net.................................... 2,141 1,329
Deferred tax asset........................................ 3,182 2,082
Income tax receivable..................................... -- 1,128
Prepaid expenses and other current assets................. 819 995
------- -------
Total current assets.............................. 20,077 15,180
Investment securities available for sale, at fair market
value..................................................... 10,533 14,022
Property and equipment, net................................. 7,502 7,633
Title plants................................................ 2,699 2,377
Deposits with the Insurance Commissioner.................... 133 113
Intangibles, net of accumulated amortization of $1,471 in
2000 and $959 in 1999..................................... 12,397 7,999
------- -------
Total assets...................................... $53,341 $47,324
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses............... $ 5,998 $ 5,506
Customer advances......................................... 3,087 1,779
Current portion of long-term debt......................... 555 53
Current portion of obligations under capital leases with
affiliates............................................. 113 67
Current portion of obligations under capital leases with
non-affiliates......................................... 135 125
Reserve for claim losses.................................. 2,431 2,341
Income tax payable........................................ 1,348 --
Due to affiliate.......................................... 2,294 1,642
------- -------
Total current liabilities......................... 15,961 11,513
Long-term debt.............................................. 3,528 1,991
Obligations under capital leases with affiliates............ 823 602
Obligations under capital leases with non-affiliates........ 1,052 1,187
------- -------
Total liabilities................................. 21,364 15,293
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000
shares; issued and outstanding, none................... -- --
Common stock, no par value; authorized, 50,000,000 shares;
issued and outstanding, 7,439,941 in 2000 and 7,180,495
in 1999................................................ -- --
Additional paid in capital.................................. 22,744 21,884
Retained earnings........................................... 9,409 10,336
Accumulated other comprehensive loss........................ (136) (189)
Less treasury stock, 13,870 shares in 2000 and 0 shares in
1999, at cost............................................. (40) --
------- -------
Total shareholders' equity........................ 31,977 32,031
------- -------
Total liabilities and shareholders' equity........ $53,341 $47,324
======= =======
See accompanying notes to consolidated financial statements
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31
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
------- ------- -------
Revenues:
Net title service revenue -- related party................ $43,641 $51,366 $52,092
Escrow fees............................................... 21,969 25,190 24,267
Other service charges..................................... 16,011 11,814 14,697
Investment income......................................... 1,047 930 369
------- ------- -------
Total revenues.................................... 82,668 89,300 91,425
------- ------- -------
Expenses:
Personnel costs........................................... 51,189 54,277 49,435
Other operating expenses includes $3,801, $3,789 and
$4,198 with affiliate for the twelve-month period ended
December 31, 2000, 1999 and 1998, respectively......... 22,742 19,226 17,477
Title plant rent and maintenance.......................... 5,322 6,264 7,156
------- ------- -------
Total expenses.................................... 79,253 79,767 74,068
------- ------- -------
Earnings before income taxes and minority interest in net
earnings of consolidated subsidiary....................... 3,415 9,533 17,357
Income taxes................................................ 1,400 3,908 7,257
------- ------- -------
Earnings before minority interest in net earnings of
consolidated subsidiary................................... 2,015 5,625 10,100
Minority interest in net earnings of consolidated
subsidiary................................................ -- -- (3,235)
------- ------- -------
Net earnings................................................ $ 2,015 $ 5,625 $ 6,865
======= ======= =======
Basic earnings per share.................................... $ .28 $ .82 $ 2.13
======= ======= =======
Weighted average shares outstanding, basic basis............ 7,335 6,869 3,223
======= ======= =======
Diluted earnings per share.................................. $ .28 $ .81 $ 1.96
======= ======= =======
Weighted average shares outstanding, diluted basis.......... 7,335 6,902 3,500
======= ======= =======
Cash dividends per share.................................... $ .40 $ .40 $ --
======= ======= =======
See accompanying notes to consolidated financial statements
29
32
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
--------------------------
2000 1999 1998
------ ------ ------
Net earnings................................................ $2,015 $5,625 $6,865
Other comprehensive gain (loss) -- unrealized gain (loss) on
investment, securities available for sale(1).............. 53 (189) --
------ ------ ------
Comprehensive earnings...................................... $2,068 $5,436 $6,865
====== ====== ======
---------------
(1) Net of income tax expense (benefit) of $31, ($116) and $0, for the years
ended December 31, 2000, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements
30
33
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
TREASURY OTHER
COMMON STOCK STOCK ADDITIONAL COMPREHENSIVE TOTAL
------------------ ---------------- PAID IN RETAINED (LOSS) SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EARNINGS EQUITY
--------- ------ ------- ------ ---------- -------- ------------- -------------
BALANCE, DECEMBER 31, 1997........ 2,910,416 $-- -- $ -- $ 414 $ 709 $ -- $ 1,123
Forfeiture of common stock
issued........................ (93,316) -- -- -- -- -- -- --
Capital contribution............ -- -- -- -- 1,200 -- -- 1,200
Issuance of shares.............. 2,099,996 -- -- -- 10,710 -- -- 10,710
Net earnings.................... -- -- -- -- -- 6,865 -- 6,865
--------- --- ------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1998........ 4,917,096 $-- -- $ -- $12,324 $ 7,574 $ -- $19,898
--------- --- ------- ---- ------- ------- ----- -------
Unrealized loss on investment
securities available for
sale.......................... -- -- -- -- -- -- (189) (189)
Stock options exercised......... 332,904 -- -- -- 220 -- -- 220
Cash dividends ($0.40 per
share)........................ -- -- -- -- -- (2,863) -- (2,863)
Issuance of shares.............. 1,930,495 -- -- -- 9,340 -- -- 9,340
Net earnings.................... -- -- -- -- -- 5,625 -- 5,625
--------- --- ------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1999........ 7,180,495 $-- -- $ -- $21,884 $10,336 $(189) $32,031
--------- --- ------- ---- ------- ------- ----- -------
Unrealized gain on investment
securities available for
sale.......................... -- -- -- -- -- -- 53 53
Cash dividends ($0.40 per
share)........................ -- -- -- -- -- (2,942) -- (2,942)
Issuance of shares.............. 259,446 -- -- -- 860 -- -- 860
Purchase of treasury shares..... -- -- (13,870) (40) -- -- -- (40)
Net earnings.................... -- -- -- -- -- 2,015 -- 2,015
--------- --- ------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 2000........ 7,439,941 $-- (13,870) $(40) $22,744 $ 9,409 $(136) $31,977
========= === ======= ==== ======= ======= ===== =======
See accompanying notes to consolidated financial statements
31
34
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 2,015 $ 5,625 $ 6,865
Adjustments to reconcile net earnings to cash provided by
(used in) operating activities:
Depreciation and amortization............................. 2,514 2,415 1,477
Loss on sale of investments............................... 139 -- 30
Minority interest in net earnings of consolidated
subsidiary.............................................. -- -- 3,235
Gain (loss) of sale of property and equipment............. (190) 18 (14)
Changes in:
Accounts receivables, net............................... 939 4,053 (1,767)
Interest receivable..................................... 100 (245) --
Prepaid expenses and other assets....................... 316 503 (344)
Income taxes receivable (payable) and deferred income
taxes.................................................. 1,376 (3,876) 992
Accounts payable and other accrued expenses............. (616) (1,016) 956
Reserve for claim loss.................................. 90 (1,970) --
Due to (from) affiliates................................ 652 (251) 482
Customer advances....................................... 1,308 (411) 1,035
------- -------- -------
Total cash provided by operating activities......... 8,643 4,845 12,947
------- -------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (1,549) (6,011) (2,481)
Additions to notes receivable............................... (1,078) (1,401)
Collections on notes receivable............................. 266 72 11
Proceeds from sale of investment securities................. 3,403 -- 70
Purchase of investment securities........................... -- (9,690) (250)
Proceeds from short term investments........................ 1,079 -- --
Proceeds from sale of property and equipment................ 220 395 25
Advance to related party.................................... -- -- (1,561)
Purchase of title plant..................................... -- (75) --
Acquisition of subsidiaries, net of cash received........... (2,542) (2,550) (149)
------- -------- -------
Total cash used in investing activities............. (201) (19,260) (4,335)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.................................................. -- 1,601 (4,830)
Repayment of long-term debt................................. (570) --
Proceeds from stock options exercised....................... -- 220 --
Proceeds from issuance of common stock...................... 660 9,340 --
Payments of capital lease obligations....................... (205) (867) (661)
Dividends paid.............................................. (2,198) (2,863) --
Repurchase of treasury stock................................ (40) -- --
------- -------- -------
Total cash provided by (used in) financing
activities.......................................... (2,006) 7,431 (5,491)
------- -------- -------
Increase (decrease) in cash and cash equivalents............ 6,089 (6,984) 3,121
Cash and cash equivalents at the beginning of year.......... 3,361 10,345 7,224
------- -------- -------
Cash and cash equivalents at end of year.................... $ 9,450 $ 3,361 $10,345
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest................................................ $ 475 $ 174 $ 589
Income taxes............................................ 1,741 7,441 5,212
Non-cash investing activities:
Dividend declared and unpaid............................ 744 -- --
Non-cash financing activities:
Assumption of debt by shareholders...................... -- -- 1,200
Title plant acquired under non-affiliated capital lease... -- -- 1,437
PURCHASE OF SUBSIDIARIES:
Assets acquired........................................... $ 1,152 $ 5,524 $ 160
Cost in excess of net assets acquired..................... 4,910 1,505 --
Liabilities assumed and debt issued....................... (3,520) (4,479) (11)
------- -------- -------
Net cash used to acquire business......................... $ 2,542 $ 2,550 $ 149
======= ======== =======
See accompanying notes to consolidated financial statements
32
35
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. DESCRIPTION OF BUSINESS
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.
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.
In May 1999, the Department of Insurance, State of New York, approved the
acquisition of National Title Insurance of New York, Inc., a New York domiciled
underwriter, by American Title Company, a subsidiary of American National
Financial Inc. from FNFI. National is licensed to issue title insurance policies
in 34 states, the District of Columbia and the U.S. Virgin Islands. The $3.25
million dollar purchase price was paid in cash and the transaction was completed
in June 1999.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
profits, transactions and balances have been eliminated.
33
36
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
Cash and Cash Equivalents
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturities of three months or less are considered cash
equivalents. The carrying amounts reported in the Condensed Consolidated Balance
Sheets for these instruments approximate their fair value.
Trade Receivables
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.
Property and Equipment
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 which range from three to 30
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.
Title Plants
Title plants are historical title information organized and maintained for
use in performing title searches. The December 31, 2000 and 1999 title plant
balances are comprised of the Company's capital leases. See Note 11. Costs
incurred to maintain, update and operate title plants are expensed as incurred.
Sales of title plants are reported at the amount received net of the adjusted
costs of the title plant sold. Sales of title plant copies are reported at the
amount received. No cost is allocated to the sale of copies of a title plant
unless the carrying value of the plant is diminished or impaired. Title plants
are not amortized as they are considered to have an indefinite life if
maintained.
Investments
Fixed maturity securities are purchased to support the investment
strategies of the Company, 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.
Equity securities are considered to be available for sale and carried at
fair value. Fair values are based on quoted market prices.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains or losses on fixed maturity
and equity securities which are classified as available for sale, net of
applicable deferred income taxes (benefits), are excluded from income and
credited or charged directly to a separate component of stockholders' equity. If
any unrealized losses on fixed maturity or equity securities are deemed other
than temporary, such unrealized losses are recognized as realized losses.
34
37
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
Intangible Assets
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
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.
Revenue Recognition
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.
Title and Claim Losses
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.
Reserve for Claim Losses
The Company's reserve for claim losses includes known claims as well as
losses the Company expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review by the Company as to the estimated amount
of the claim and the costs required to settle the claim. Reserves for claims
which are incurred but not reported are provided for at the time premium revenue
is recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. The occurrence of a significant major
claim in any given period could have a material adverse effect on the Company's
financial condition and results of operations for such period. See Note 8.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks
with other insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other insurers for the purpose of
earning additional revenue. The Company cedes or assumes a portion of certain
policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that in the event of a
loss (including costs, attorneys' fees and expenses) exceeding the retained
amounts, the reinsurer is liable for the excess amount assumed. However, the
ceding company remains primarily liable in
35
38
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
the event the reinsurer does not meet its contractual obligations. Reinsurance
activity is not considered significant.
Income Taxes
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.
Segment Reporting
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.
Earnings per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Dilutive
earnings per share is calculated by dividing net earnings by the weighted
average number of common shares outstanding plus the assumed conversions of
dilutive potential securities. The Company has granted certain options which
have been treated as common share equivalents for purposes of calculating
diluted earnings per share.
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net earnings............................................. $2,015 $5,625 $6,865
====== ====== ======
Weighted average basic shares.......................... 7,335 6,869 3,223
====== ====== ======
Basic earnings per share................................. $ .28 $ .82 $ 2.13
====== ====== ======
Weighted average basic shares.......................... 7,335 6,869 3,223
Effect of dilutive options............................. -- 33 277
------ ------ ------
Weighted average dilutive shares....................... 7,335 6,902 3,500
====== ====== ======
Diluted earnings per share............................... $ .28 $ .81 $ 1.96
====== ====== ======
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
36
39
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
Certain Reclassifications
Certain reclassifications have been made in the 1999 and 1998 Consolidated
Financial Statements to conform to the classifications used in 2000.
3. ACQUISITIONS
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):
Tangible assets acquired at fair value excluding cash
received................................................. $ 6,224
Cost in excess of net assets acquired...................... 1,505
Liabilities assumed at fair value.......................... (4,479)
-------
Total purchase price............................. $ 3,250
=======
The results of operations for National are insignificant for 2000 and 1999.
In January 2000, the Company completed the acquisition of Bancserv, Inc. a
California corporation located in the county of Orange, California. Bancserv,
Inc. a document company, provides outsource services to the real estate and
banking industry through a network of qualified notaries public. The purchase
price paid by the company for the acquisition was $1.3 million, payable $400,000
in cash and a $900,000 promissory note subject to certain purchase price
adjustments based on the audited closing date balance sheet. The effects of the
audit resulted in a purchase price adjustment of $118,000. This transaction was
accounted for as a purchase. The balance of the promissory note at December 31,
2000 was $652,000.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Bancserv acquisition were as follows (amounts in
thousands):
Tangible assets acquired at fair value excluding cash
received.................................................. $ 172
Cost in excess of net assets acquired....................... 1,100
Liabilities assumed at fair value........................... (90)
------
Total purchase price.............................. $1,182
======
The results of operations for Bancserv are insignificant for 2000.
In February 2000, the purchased 100% of the stock of Pioneer, a New York
corporation providing title and escrow services in the state of New York. The
purchase price was $1.8 million, payable $360,000 in cash and a $1.4 million
promissory note with interest at 6.6% per annum, to be paid in equal annually
installments over a five-year period. The balance of the promissory note at
December 31, 2000 was $1.4 million. This transaction has been accounted for as a
purchase.
37
40
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Pioneer acquisition were as follows (amounts in
thousands):
Tangible assets acquired at fair value excluding cash
received.................................................. $ 165
Cost in excess of net assets acquired....................... 1,725
Liabilities assumed at fair value........................... (90)
------
Total purchase price.............................. $1,800
======
The results of operations for Pioneer are insignificant for 2000.
In February 2000, the Company purchased 100% of the membership interests of
EMAC, a full service provider of release and assignment document preparation,
document retrieval and special title assistance located in Colorado. The
purchase price was $1.9 million, $1.7 million was paid in cash, subject to
certain purchase price adjustments based on the combined equity of EMAC and
American Research Services, its affiliate, and 58,500 shares of the Company
common stock. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the EMAC acquisition were as follows (amounts in
thousands):
Tangible assets acquired at fair value excluding cash
received.................................................. $ 392
Cost in excess of net assets acquired....................... 2,080
Liabilities assumed at fair value........................... (570)
------
Total purchase price.............................. $1,902
======
The results of operations for EMAC are insignificant for 2000.
In September 2000, the Company purchased 100% of the assets of CTIC's Pima
County, Arizona operations. The purchase price was $105,000 and paid in cash.
This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed, which represents the fair market value of a title plant
located in Tucson, in the Pima acquisition were as follows (amounts in
thousands):
Tangible assets acquired at fair value excluding cash
received.................................................. $ 427
Cost in excess of net assets acquired....................... --
Liabilities assumed at fair value........................... (322)
-----
Total purchase price.............................. $ 105
=====
The results of operations for Pima County are insignificant for 2000.
38
41
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(AMOUNTS IN THOUSANDS)
Furniture, fixtures and equipment........................ $ 6,720 $ 5,436
Leasehold improvements................................... 1,722 1,153
Office building.......................................... 3,275 3,275
------- -------
11,717 9,864
Accumulated depreciation and amortization................ (4,215) (2,231)
------- -------
$ 7,502 $ 7,633
======= =======
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
It is the practice of the Company to purchase investment grade fixed
maturity securities. The securities in the Company's portfolio are subject to
economic conditions and normal market risks and uncertainties.
The carrying amount, which approximates the fair value, of total
investments was $10.5 million and $14.0 million at December 31, 2000 and 1999,
respectively.
DECEMBER 31, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(AMOUNTS IN THOUSANDS)
Fixed maturity investments (available for sale):
U.S. government and agencies................... $ 1,478 $ 23 $ -- $ 1,501
States and political subdivisions.............. 7,561 27 (626) 6,961
Corporate securities........................... 1,757 414 (100) 2,071
------- ---- ----- -------
$10,796 $464 $(726) $10,533
======= ==== ===== =======
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(AMOUNTS IN THOUSANDS)
Fixed maturity investments (available for sale):
U.S. government and agencies................... $ 1,477 $ 7 $ (10) $ 1,474
States and political subdivisions.............. 2,552 6 (17) 2,541
Corporate securities........................... 10,298 -- (291) 10,007
------- ---- ----- -------
$14,327 $ 13 $(318) $14,022
======= ==== ===== =======
39
42
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
The following tables sets forth certain information regarding the Company's
investment securities at December 31, 2000. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Investment
securities with an amortized cost of $1.7 million and $2.9 million and a fair
value of $1.2 million and $2.8 million were callable at December 31, 2000 and
1999, respectively:
DECEMBER 31, 2000
----------------------
AMORTIZED FAIR
MATURITY COST VALUE
-------- ---------- --------
(AMOUNTS IN THOUSANDS)
One year or less........................................ $ 1,756 $ 2,071
After one year through five years....................... 7,574 7,610
After five years through ten years...................... 1,466 852
------- -------
$10,796 $10,533
======= =======
Interest and investment income, including realized gains (losses), consist
of the following:
DECEMBER 31,
---------------
2000 1999
------ ----
(AMOUNTS IN
THOUSANDS)
Cash and cash equivalents.................................. $ 222 $291
Fixed maturity securities.................................. 645 427
Short term investments..................................... 72 193
Notes receivable........................................... 107 19
------ ----
$1,047 $930
====== ====
During the years ended December 31, 2000 and 1999, gross realized losses on
sales of fixed maturity securities considered available for sale were $134,000
and $0, respectively. Gross realized gains were zero for the years ended
December 31, 2000 and 1999.
6. INCOME TAXES
Income taxes (benefit) for years ended December 31, 2000, 1999 and 1998
consists of the following (amounts in thousands):
2000
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal................................................. $2,022 $ (895) $1,127
State and local......................................... 478 (205) 273
------ ------- ------
$2,500 $(1,100) $1,400
====== ======= ======
40
43
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
1999
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal................................................. $4,024 $ (783) $3,241
State and local......................................... 854 (187) 667
------ ------- ------
$4,878 $ (970) $3,908
====== ======= ======
1998
-----------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
Federal................................................. $7,528 $(1,334) $6,194
State and local......................................... 1,292 (229) 1,063
------ ------- ------
$8,820 $(1,563) $7,257
====== ======= ======
The effective tax rate for the period reported differs from the Federal
statutory income tax rate as follows:
2000 1999 1998
---- ---- ----
Statutory Federal income tax rate........................... 34.0% 34.0% 34.0%
Non-deductible expenses..................................... 6.9 1.9 2.4
Amortization of intangibles................................. 4.8 1.1 0.4
State taxes, net of Federal benefit......................... 5.7 4.3 5.3
Change in valuation allowance............................... (9.2) -- --
Other....................................................... (1.2) (.3) (.3)
---- ---- ----
41.0% 41.0% 41.8%
==== ==== ====
The deferred tax assets and liabilities at December 31, 2000 consist of the
following:
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(AMOUNTS IN THOUSANDS)
Excess state income tax............................ $ 124 $ --
Provision for claim losses in excess of statutory
amounts.......................................... 263 --
Excess book over tax provision for bad debts....... 851 --
Employee benefit and vacation accruals............. 558 --
Accrued liabilities................................ 1,098 --
Other.............................................. 171 --
Excess tax depreciation over book.................. 402 --
Net operating loss available for carryover......... 996 --
Investment securities.............................. 121 --
Statutory unearned premium reserve................. -- (873)
------ -----
4,584 (873)
Less: valuation allowance.......................... (529) --
------ -----
Total deferred taxes..................... $4,055 $(873)
====== =====
41
44
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
The deferred tax assets and liabilities at December 31, 1999 consist of the
following:
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(AMOUNTS IN THOUSANDS)
Excess state income tax............................ $ 259 $ --
Provision for claim losses in excess of statutory
amounts.......................................... 217 --
Excess book over tax provision for bad debts....... 892 --
Employee benefit and vacation accruals............. 212 --
Other.............................................. 172 --
Accrued liabilities................................ 803 --
Excess tax depreciation over book.................. 262 --
Net operating loss available for carryover......... 998 --
Investment securities.............................. 116 --
Statutory unearned premium reserve................. -- (1,004)
------ -------
3,931 (1,004)
Less: valuation allowance.......................... (845) --
------ -------
Total deferred taxes..................... $3,086 $(1,004)
====== =======
Based upon the Company's current and historical pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of its existing net deferred tax assets. Management believes the
existing net deductible temporary differences after considering the valuation
allowance will reverse during periods in which the Company generates net taxable
income. However, there can be no assurance that the Company will generate any
earnings or any specific level of continuing earnings in future years. Certain
tax planning or other strategies could be implemented, if necessary, to
supplement income from operations to fully realize recorded tax benefits. The
valuation allowance in 2000 and 1999 relates to National whose net operating
losses are restricted as to their availability.
7. LONG TERM DEBT
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.
42
45
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
Long term debt consists of the following:
DECEMBER 31,
----------------------
2000 1999
-------- --------
(AMOUNTS IN THOUSANDS)
Bank promissory note secured by real estate, with monthly
principal payments of $4,000 and interest due at prime,
due April 2004......................................... $1,991 $2,044
Promissory note secured by cash surrender value of life
insurance policies, with principal and interest due
annually at 6.56%, due February 2004................... 1,440 --
Promissory note, unsecured, with principal and interest
due monthly at 7.5%, due January 2005.................. 652 --
------ ------
4,083 2,044
Less current portion of long term debt................... (555) (53)
------ ------
Ending balance........................................... $3,528 $1,991
====== ======
Principal maturities are as follows (amounts in thousands):
DECEMBER 31,
2000
------------
(AMOUNTS IN
THOUSANDS)
2001.................................................... $ 555
2002.................................................... 566
2003.................................................... 578
2004.................................................... 2,369
2005.................................................... 15
------
$4,083
======
8. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
DECEMBER 31,
-----------------------
2000 1999
-------- ---------
(AMOUNTS IN THOUSANDS)
Beginning balance....................................... $2,341 $ --
Acquisition of National............................... -- 4,311
Change in provision for claim loss.................... 164 (1,979)
Claims paid, net of recoupments....................... (74) 9
------ -------
Ending balance.......................................... $2,431 $ 2,341
====== =======
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.
43
46
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
9. SHAREHOLDERS' EQUITY
Capital restrictions
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.
National is subject to regulations that restrict its ability to pay
dividends or make other distributions of cash or property to its parent company
without prior approval from the Department of Insurance of the State of New
York. The maximum amount of dividends which can be paid by National to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions. No dividends, including all dividends paid in the preceding twelve
months, which exceed 10% of the outstanding capital shares can be paid without
prior approval unless after deducting dividends the Company has surplus to
policyholders at least equal to the greater of 50% of its reinsurance reserves
or 50% of the minimum capital required. Additionally, dividends are further
limited to the Company's earned surplus. Based on this formula, the Company
could not pay dividends or make distributions as of January 1, 2001.
The statutory capital and surplus of National was $3.3 million and $2.5
million as of December 31, 2000 and 1999. The statutory earnings of the National
was $684,000 and $426,000 for the year ended December 31, 2000 and 1999.
Stock Issuance
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.
10. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
In September 1999, shareholders approved the adoption of an Employee Stock
Purchase Plan ("ESPP"). Under the terms of the ESPP the plan encourages a sense
of proprietorship on the part of the employees of American National Financial,
Inc. and its subsidiary corporations by assisting them in making regular
purchases of shares of stock of the Company. Company employees may contribute an
amount between 5% and 15% of their base salary and certain commissions. The
Company contributes varying amounts as specified in the ESPP. During the years
ended December 31, 2000 and 1999, 200,946 shares and 30,495 shares were issued
and allocated to the employees based on their contributions, at an average price
of $3.10 and $4.17 per share, respectively. The Company contributed $41,000 or
the equivalent of 13,523 shares for the year ended December 31, 2000 and zero
shares in 1999 and in accordance with the employee's matching contribution. A
total of 231,452 shares have been issued by the ESPP since the adoption of the
plan.
44
47
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
401(k) Plan
The Company offers the American National Financial, Inc. 401(k) Profit
Sharing Plan, a qualified voluntary contributory savings plan, available to
substantially all employees. Eligible employees may contribute up to 15% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company may elect to make matching contributions. The
Company has not made any matching contributions.
Employee and Non-Employee Director Stock Purchase Loan Program
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.
Stock Option Plan
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 thousand (200,000) shares.
The number of shares reserved for issuance under the 1999 Plan and subsequent
amendments is 1,775,000 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.
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
45
48
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
eligible to receive nonqualified stock options. The term and provision for the
termination of each option shall be fixed by the Board of Directors, but no
option may be exercisable more than 10 years after the date it is granted. An
incentive option granted to a person who is a 10% shareholder on the date of the
grant shall not be exercisable more than 5 years after the date it is granted.
Each option shall vest and become exercisable in one or more installments at
such time or times and subject to such conditions, including within limitation
the achievement of specified performance goals or objectives, as shall be
determined by the Board of Directors. As of December 31, 1998 no options had
been granted under the 1998 Incentive Plan. In connection with the February 1999
Initial Public Offering, 340,040 options were granted under the 1998 Incentive
Plan at an exercise price of $6.00 per share.
Concurrent with the acquisition of ATC, the Chairman of the Board of FNFI
was granted fully vested options for 332,904 shares of the Company's common
stock at an exercise price of $0.66 per share. The options expire in 10 years
from the grant date. The Company recognized $414,000 in compensation expense to
reflect the excess of fair market value over the exercise price of the options
in 1997. Subsequent to the initial public offering these options were exercised.
A summary of the Company's stock option activity, and related information
for the year ended December 31, 2000 and 1999:
2000 1999
--------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- -------------- --------- --------------
Stock options outstanding, beginning of
year..................................... 335,276 $6.00 332,904 $0.66
Stock options granted...................... 1,590,578 2.60 376,540 6.00
Stock options exercised.................... -- -- (332,904) 0.66
Stock options cancelled.................... (107,922) 4.61 (41,264) 6.00
--------- ----- -------- -----
Stock options outstanding, end of year..... 1,817,932 $3.08 335,276 $6.00
Exercisable at end of year................. 641,711 -- 112,753 --
Weighted-average fair value of options
granted during the year.................. -- $3.03 -- $1.39
The weighted average remaining contractual life of the options outstanding
at December 31, 2000 is 9.27 years.
The following table sets forth options outstanding and exercisable by price
range as of December 31, 2000:
DECEMBER 31, 2000
------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/21/00 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/00 EXERCISE PRICE
--------------- -------------- ---------------- -------------- -------------- --------------
$1.500 - 1.500 347,828 9.20 $1.50 347,828 $1.50
2.688 - 2.688 731,750 9.76 2.69 16,667 2.69
3.000 - 3.000 381,000 9.20 3.00 75,000 3.00
3.688 - 3.688 80,000 9.16 3.69 26,668 3.69
6.000 - 6.000 277,354 8.17 6.00 175,548 6.00
-------------- --------- ---- ----- ------- -----
$1.500 - 6.000 1,817,932 9.27 $3.08 641,711 $3.03
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (Opinion 25) and related
Interpretations in accounting for its 1997 Incentive Plan. As
46
49
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
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.
Pro forma information regarding net earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the minimum fair value method of that Statement.
The minimum fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions. There were no options granted in 1998. The risk free interest rate
used for options granted during 2000 and 1999 was 6.28% and 5.19%. The expected
dividend yield used for 2000 and 1999 was 10%. The weighted average expected
life of 7 years was used for 2000 and 1999. The volatility factor for 2000 and
1999 was 48% and 80%, respectively.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information for the years ended December 31, 2000, 1999 and
1998 follows (amounts in thousands, except per share data):
2000 1999 1998
------ ------ ------
Pro forma basic and diluted net earnings................. $1,516 $5,509 $6,865
Pro forma basic and diluted earnings per share........... $ 0.20 $ 0.80 $ 2.13
Pro forma basic diluted earnings per share............... $ 0.20 $ 0.80 $ 1.96
11. COMMITMENTS AND CONTINGENCIES
Litigation
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.
Trust Deposits
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.
Compliance Reporting
The State Banking Department, State of Arizona ("State Banking Department")
delivered their report of Examination of American Title Insurance of Arizona,
Inc. (formerly known as Nations Title Insurance of Arizona, Inc.) as of and for
the three-year period ending October 31, 1998, on March 4, 1999. The report as
forwarded to the Company by State Banking Department indicated that the Company
may not have been in compliance with certain State Banking Department
Regulations. The State Banking Department provided the Company with an
opportunity to present additional information prior to making their final
determination as to compliance. The Company subsequently provided additional
information to the State Banking Department for review.
47
50
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
On September 15, 2000, the Company received notice from the State Banking
Department stating the matters detailed in the Report of Examination were
complete and required no further response.
Deposits with Insurance Commissioner
ATC is required to maintain certain amounts on deposit with the California
Insurance Commissioner in order to operate in certain counties. The amount
required by the Department of Insurance, State of California and the Department
of Insurance, State of New York is $112,500 and $20,000 at December 31, 2000,
and $112,500 and $0 at December 31, 1999. Additionally, National is required to
maintain certain amounts on deposit for compliance requirements. The amount at
December 31, 2000 and 1999 is $1.3 million and $515,000, respectively.
Operating Leases
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 during 2000.
Future minimum operating lease payments are as follows:
DECEMBER 31,
2000
------------
(AMOUNTS IN
THOUSANDS)
2001.................................................... $ 4,670
2002.................................................... 3,660
2003.................................................... 2,850
2004.................................................... 1,450
2005.................................................... 980
Thereafter.............................................. 230
-------
Total future minimum operating lease
payments.................................... $13,840
=======
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.
Capital Leases
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.
In 1997, ATC entered into a capital lease agreement with FNTIC, which
expires in June 2007, for three title plants. The gross amount of title plant
recorded under affiliated capital lease is $815,000 at December 31, 2000 and
1999, respectively.
In a separate, non-affiliated transaction, ATC entered into a capital lease
agreement during 1998 to purchase a copy of a title plant. The gross amount of
the title plant, recorded under the capital lease is $1.4 million at December
31, 2000 and 1999. The capital lease agreement expires in August 2007.
48
51
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
Future minimum capital lease payments are as follows:
TO-NON TO
AFFILIATE AFFILIATE TOTAL
--------- --------- ------
(AMOUNTS IN THOUSANDS)
2001..................................................... 222 189 411
2002..................................................... 222 170 392
2003..................................................... 222 170 392
2004..................................................... 222 170 392
2005..................................................... 222 170 392
Thereafter............................................... 426 413 839
------ ------ ------
Total future minimum capital lease payments.... 1,536 1,282 2,818
Portion relating to interest............................. (349) (346) (695)
------ ------ ------
Present value of minimum capital lease payments.......... $1,187 $ 936 $2,123
====== ====== ======
Depreciation of the equipment held under capital leases is included in
other operating expenses for the years ended December 31, 2000, 1999 and 1998.
12. RELATED PARTY TRANSACTIONS
The Company pays fees to affiliated underwriters for underwriting services
and management services under the exclusive agency agreements with FNTIC and
CTIC. Underwriting services are provided for five years commencing July 1997,
and subject to a mutually agreed five year extension to the original term
expiring in 2007, for a fee of 11% of gross title insurance premiums. Management
services payable to FNTIC are cancelable with 90 days notice and costs 1% of
gross title insurance premiums.
ATC leases a title plant from a subsidiary of FNFI. See Note 11.
Additionally, the Company reimburses subsidiaries of FNFI for expenses incurred
on its behalf. Such reimbursements aggregated $3.8 million, $3.8 million and
$4.2 million for years ended December 31, 2000, 1999 and 1998, respectively.
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.
49
52
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. THROUGH 13.
Within 120 days after the close of its fiscal year, the Company intends to
file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended,
which will include the election of directors, the report of compensation
committee on annual compensation, certain relationships and related transactions
and other business.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following is a list of the Consolidated
Financial Statements of American National Financial, Inc. and its subsidiaries
included in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Earnings for the years ended December 31, 2000,
1999 and 1998.
Consolidated Statements of Comprehensive Earnings for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K.
Schedule V:Valuation and Qualifying Accounts.
Investments In and Advances to Affiliates and Income Thereon.
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements of notes thereto.
(a)(3) The following exhibits are filed herewith or are incorporated by
reference.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Stock Purchase Agreement dated January 1, 1997 by and among
the Registrant, Fidelity National Financial, Inc. and
American Title Company, together with amendment,
incorporated by reference from Form S-1, Registration No.
333-62353
2.2 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Fidelity National Asset
Recovery Services, Inc. and Fidelity National Financial,
Inc., incorporated by reference from Form S-1, Registration
No. 333-62353
2.3 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Nations Title Insurance of
Arizona, Inc. and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353
50
53
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.4 Stock Purchase Agreement dated March 16, 1998 by and among
Fidelity National Title Insurance Company of New York,
National Title Insurance of New York, Inc. and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
2.5 Stock Purchase Agreement dated August 9, 1997 by and between
Pacific Coast Title of Santa Barbara County and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
2.6 Stock Exchange Agreement dated August 21, 1998 between the
Registrant and Fidelity National Financial, Inc,
incorporated by reference from Form S-1, Registration No.
333-62353
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from Form S-1, Registration No. 333-62353
3.2 Bylaws of the Registrant, as amended, incorporated by
reference from Form S-1, Registration No. 333-62353
4.1 Form of Common Stock Certificate, incorporated by reference
from Form S-1, Registration No. 333-62353, incorporated by
reference from Form S-1, Registration No. 333-62353
10.1 1998 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive
Stock Option Agreement, incorporated by reference from Form
S-1, Registration No. 333-62353
10.2 Employment Agreement between the Registrant and Michael C.
Lowther, incorporated by reference from Form S-1,
Registration No. 333-62353
10.3 Employment Agreement between the Registrant and Wayne D.
Diaz, incorporated by reference from Form S-1, Registration
No. 333-62353
10.4 Employment Agreement between the Registrant and Dennis R.
Duffy, incorporated by reference from Form S-1, Registration
No. 333-62353
10.5 Employment Agreement between the Registrant and Barbara
Ferguson, incorporated by reference from Form S-1,
Registration No. 333-62353
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity
National Title Insurance Company and American Title Company,
incorporated by reference from Form S-1, Registration No.
333-62353
10.7 Issuing Agency Agreement dated August 25, 1997 between
Fidelity National Title Insurance Company and Santa Barbara
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
10.8 Credit Agreement dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
10.9 Note dated August 7, 1997 of the Registrant in favor of
Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
10.10 Addendum to Note dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
10.11 Standard Sublease dated January 28, 1998 between American
Title Company and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353
10.12 Form of Indemnification Agreement, incorporated by reference
from Form S-1, Registration No. 333-62353
10.13 Title Plant Lease Agreement dated July 1, 1997 between
Fidelity National Title Insurance Company and American Title
Company, incorporated by reference from Form S-1,
Registration No. 333-62353
10.14 Letter of Grant dated July 1, 1997 granting William P.
Foley, II options to purchase 55,000 shares of common stock
of the Registrant, incorporated by reference from Form S-1,
Registration No. 333-62353
51
54
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15 Stock Purchase Agreement dated January 14, 2000 by and
between Bancserv, Inc. and American National Financial,
Inc., Incorporated by reference from Form 10-K filed on
March 27, 2000
10.16 Stock Purchase Agreement dated February 29, 2000 by and
among American National Financial, Inc. and Vincent L.
Prandi and Daniel A. Ferrara, incorporated by reference from
10-Q filed on May 15, 2000
10.17 Membership Interest Purchase Agreement dated February 29,
2000 by and among American National Financial, Inc. and
Angela Muirhead and Lawrence E. Castle, incorporated by
reference from the 10-Q filed on May 15, 2000
10.18 Charter of the Audit Committee of the American National
Financial, Inc. Board of Directors, incorporated by
reference from the 10-Q filed on August 14, 2000
10.19 Asset Purchase Agreement dated July 25, 2000 by and among
American National Financial, Inc. and Chicago Title
Insurance Company, incorporated by reference from the 10-Q
filed on November 13, 2000
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353
23.1 Independent Auditors' Consent
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
the fourth quarter ending December 31, 2000.
52
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN NATIONAL FINANCIAL, INC.
By: /s/ MICHAEL C. LOWTHER
------------------------------------
Michael C. Lowther
Chairman of the Board and
Chief Executive Officer
Date: March 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL C. LOWTHER Chief Executive Officer March 27, 2001
----------------------------------------------------- and Director
Michael C. Lowther
/s/ WAYNE D. DIAZ President and Director March 27, 2001
-----------------------------------------------------
Wayne D. Diaz
/s/ CARL A. STRUNK Executive Vice President, March 27, 2001
----------------------------------------------------- Chief Financial Officer
Carl A. Strunk (Principal Financial and
Accounting Officer)
and Director
/s/ DENNIS R. DUFFY Executive Vice President March 27, 2001
----------------------------------------------------- and Director
Dennis R. Duffy
/s/ BARBARA A. FERGUSON Executive Vice President March 27, 2001
----------------------------------------------------- and Director
Barbara A. Ferguson
/s/ WILLIAM P. FOLEY, II Director March 27, 2001
-----------------------------------------------------
William P. Foley, II
/s/ BRUCE ELIEFF Director March 27, 2001
-----------------------------------------------------
Bruce Elieff
/s/ MATTHEW K. FONG Director March 27, 2001
-----------------------------------------------------
Matthew K. Fong
/s/ BRUCE L. NELSON Director March 27, 2001
-----------------------------------------------------
Bruce L. Nelson
53
56
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American National Financial, Inc.:
Under date of February 22 2001, we reported on the Consolidated Balance
Sheets of American National Financial, Inc. and subsidiaries as of December 31,
2000 and 1999, and the related Consolidated Statements of Earnings,
Comprehensive Earnings, Shareholders' Equity and Cash Flows for each of the
years in the three-year period ended December 31, 2000, which are included in
the Annual Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule in the Annual Report on Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
February 28, 2001
54
57
SCHEDULE V
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------------------------- ------ ------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
YEAR ENDED DECEMBER 31, 2000:
Reserve for claim losses........ $2,341 $ 164 $ (74)(5) $ -- $2,431
Reserve for title and escrow
losses....................... 821 10 5(5) -- 836
Allowance on:
Trade receivables............ 2,097 642 35(3) 656(1) 2,118
Amortization of cost in excess
of net assets acquired and
other intangible assets...... 959 512 -- -- 1,471
YEAR ENDED DECEMBER 31, 1999:
Reserve for claim losses........ $ -- $(1,979) $4,320(4) $ -- $2,341
Reserve for title and escrow
losses....................... 991 10 5(5) 185(1) 821
Allowance on:
Trade receivables............ 1,896 1,385 252(4) 1,436(1) 2,097
Amortization of cost in excess
of net assets acquired and
other intangible assets...... 609 350 -- -- 959
YEAR ENDED DECEMBER 31, 1998:
Reserve for title losses........ $ 465 $ 526 $ -- $ -- $ 991
Allowance on:
Trade receivables............ 1,100 341 1,241(2) 786(1) 1,896
Amortization of cost in excess
of net assets acquired and
other intangible assets...... 257 352 -- -- 609
---------------
(1) Represents uncollectible accounts written off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(2) Represents balance sheet reclassification entries.
(3) Recovery on previous accounts written off.
(4) Reserves assumed from National acquisition in June 1999.
(5) Represents payments.
55
58
SCHEDULE V
(CONTINUED)
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INVESTMENTS IN AND ADVANCES TO AFFILIATES AND INCOME THEREON
YEAR ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ---------- ------ -------- ------------------
AMOUNT OF INTEREST
PRINCIPAL ------------------
AMOUNT OF CARRYING CREDITED
DESCRIPTION INVESTMENT COST VALUE TO INCOME OTHER
----------- ---------- ------ -------- --------- -----
Year ended December 31, 2000:
CKE Restaurants(1)........................ $1,500 $1,433 $825(2) $137 $ --
---------------
(1) Bond purchase.
(2) The basis for fixed maturity securities is the fair value.
56
59
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Stock Purchase Agreement dated January 1, 1997 by and among
the Registrant, Fidelity National Financial, Inc. and
American Title Company, together with amendment,
incorporated by reference from Form S-1, Registration No.
333-62353
2.2 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Fidelity National Asset
Recovery Services, Inc. and Fidelity National Financial,
Inc., incorporated by reference from Form S-1, Registration
No. 333-62353
2.3 Stock Purchase Agreement dated December 31, 1996 by and
among American Title Company, Nations Title Insurance of
Arizona, Inc. and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353
2.4 Stock Purchase Agreement dated March 16, 1998 by and among
Fidelity National Title Insurance Company of New York,
National Title Insurance of New York, Inc. and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
2.5 Stock Purchase Agreement dated August 9, 1997 by and between
Pacific Coast Title of Santa Barbara County and American
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
2.6 Stock Exchange Agreement dated August 21, 1998 between the
Registrant and Fidelity National Financial, Inc,
incorporated by reference from Form S-1, Registration No.
333-62353
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from Form S-1, Registration No. 333-62353
3.2 Bylaws of the Registrant, as amended, incorporated by
reference from Form S-1, Registration No. 333-62353
4.1 Form of Common Stock Certificate, incorporated by reference
from Form S-1, Registration No. 333-62353, incorporated by
reference from Form S-1, Registration No. 333-62353
10.1 1998 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive
Stock Option Agreement, incorporated by reference from Form
S-1, Registration No. 333-62353
10.2 Employment Agreement between the Registrant and Michael C.
Lowther, incorporated by reference from Form S-1,
Registration No. 333-62353
10.3 Employment Agreement between the Registrant and Wayne D.
Diaz, incorporated by reference from Form S-1, Registration
No. 333-62353
10.4 Employment Agreement between the Registrant and Dennis R.
Duffy, incorporated by reference from Form S-1, Registration
No. 333-62353
10.5 Employment Agreement between the Registrant and Barbara
Ferguson, incorporated by reference from Form S-1,
Registration No. 333-62353
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity
National Title Insurance Company and American Title Company,
incorporated by reference from Form S-1, Registration No.
333-62353
10.7 Issuing Agency Agreement dated August 25, 1997 between
Fidelity National Title Insurance Company and Santa Barbara
Title Company, incorporated by reference from Form S-1,
Registration No. 333-62353
10.8 Credit Agreement dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
10.9 Note dated August 7, 1997 of the Registrant in favor of
Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
10.10 Addendum to Note dated August 7, 1997 between the Registrant
and Imperial Bank, incorporated by reference from Form S-1,
Registration No. 333-62353
60
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.11 Standard Sublease dated January 28, 1998 between American
Title Company and Fidelity National Financial, Inc.,
incorporated by reference from Form S-1, Registration No.
333-62353
10.12 Form of Indemnification Agreement, incorporated by reference
from Form S-1, Registration No. 333-62353
10.13 Title Plant Lease Agreement dated July 1, 1997 between
Fidelity National Title Insurance Company and American Title
Company, incorporated by reference from Form S-1,
Registration No. 333-62353
10.14 Letter of Grant dated July 1, 1997 granting William P.
Foley, II options to purchase 55,000 shares of common stock
of the Registrant, incorporated by reference from Form S-1,
Registration No. 333-62353
10.15 Stock Purchase Agreement dated January 14, 2000 by and
between Bancserv, Inc. and American National Financial,
Inc., Incorporated by reference from Form 10-K filed on
March 27, 2000
10.16 Stock Purchase Agreement dated February 29, 2000 by and
among American National Financial, Inc. and Vincent L.
Prandi and Daniel A. Ferrara, incorporated by reference from
10-Q filed on May 15, 2000
10.17 Membership Interest Purchase Agreement dated February 29,
2000 by and among American National Financial, Inc. and
Angela Muirhead and Lawrence E. Castle, incorporated by
reference from the 10-Q filed on May 15, 2000
10.18 Charter of the Audit Committee of the American National
Financial, Inc. Board of Directors, incorporated by
reference from the 10-Q filed on August 14, 2000
10.19 Asset Purchase Agreement dated July 25, 2000 by and among
American National Financial, Inc. and Chicago Title
Insurance Company, incorporated by reference from the 10-Q
filed on November 13, 2000
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353
23.1 Independent Auditors' Consent