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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1998
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)
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CALIFORNIA 33-0731548
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE, SUITE 240 (949) 622-4700
IRVINE, CALIFORNIA 92614 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
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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. [ ]
As of March 29, 1999, 7,000,000 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 $12,607,235. 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, 1998, 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
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PAGE NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 13
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 7a. Quantitative and Qualitative Market Risk Disclosures........ 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 45
Item 13. Certain Relationships and Related Transactions.............. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 45
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PART I
ITEM 1. BUSINESS
American National Financial, Inc., through its subsidiaries (collectively,
the "Company" or "ANFI") provide title insurance services as well as other real
estate related financial and informational services including escrow, real
estate information, trustee sale guarantees and appraisals. In addition, the
Company obtains specialized services for its customers, which include, but are
not limited to, tax reporting services, exchange intermediary services and
courier services. The company's business is focused on the residential real
estate market, and it generates the majority of its revenue from issuing title
insurance policies as an independent agent on behalf of an affiliated title
underwriter.
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 11 of Notes to
Consolidated Financial Statements.) In August 1997, under the control of the
Company, ATC agreed to purchase all of the outstanding common stock of Santa
Barbara Title Company. 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 November 1998, the
Company filed an application with the California Department of Insurance to
merge Santa Barbara Title Company with and into ATC. The merger, if consummated,
will not have a material effect on the business or results of operations of the
Company.
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 July 1997, FNFI
contributed to ATC all of the outstanding stock of 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 March 1998, the Company agreed to acquire National Title Insurance of
New York Inc. ("National"), a New York domiciled underwriter, from a subsidiary
of FNFI for $3.25 million. This acquisition is intended to enable the Company to
generate underwriting fees and to expand geographically into counties and states
in which the Company does not presently operate. National is licensed to issue
title insurance in 35 states and the U.S. Virgin Islands. The completion of this
transaction is subject to certain conditions, including receipt of approval from
the New York Department of Insurance.
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 11 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
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behalf of Fidelity National Title Insurance Company, ("FNTIC") a subsidiary of
FNFI, an insurer which is licensed in California and Arizona, among other
states. The Company has agreed to acquire National, a New York domiciled
underwriter licensed in 35 states and the U.S. Virgin Islands. The Company's
planned acquisition of National is intended to facilitate the Company's
expansion into new markets and permit the Company to directly underwrite the
title insurance policies that it issues in geographic areas not covered by the
Company's exclusive relationship with FNTIC.
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, and appraisals. In addition, the Company
obtains specialized services for its customers, which include, but are not
limited to, tax reporting services, exchange intermediary services and courier
services. The Company's business is focused on the residential real estate
market and it generates the majority of its revenues from issuing title
insurance policies as an independent agent on behalf of FNTIC. For the years
ended December 31, 1998, 1997(Combined) and 1996 (Predecessor), net title
service revenue represented approximately 57.0%, 60.3% and 67.1% of the
Company's revenues, respectively. See selected financial data.
The Company's operations are conducted through 14 branches, consisting of
62 offices, located in major counties throughout California and in Maricopa
County, Arizona (Phoenix and surrounding areas).
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.
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 daily or other 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 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.
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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.
Underwriting practices in California and Arizona are generally dictated by
the California and Arizona Land Title Associations, although the underwriter's
personnel interpret the application of these rules to specific circumstances. An
underwriter, such as FNTIC, also maintains and distributes current information
on title practices and procedures to its issuing agents.
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
purchase, financing 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 1996, 1997
and 1998. It is impossible to predict the future direction interest rates and
the real estate market may move or fluctuate.
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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 operations are currently conducted, the minimum price of title
insurance is posted 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.
TITLE INSURANCE OPERATIONS
The Company's largest 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, a subsidiary of FNFI. ATC acts
exclusively as an agent for FNTIC with respect to the procurement of title
insurance policies in 13 selected counties in California and one county in
Arizona, subject to certain exceptions. At the present time ATC does not conduct
operations in any other counties in California. This exclusive arrangement with
FNTIC does not apply to other counties into which the Company may expand in the
future. 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. The remaining 12% is comprised of an 11% underwriting fee and a 1%
administrative service fee, both paid to FNTIC. As an agent, ATC is not subject
to the loss and reserve requirements applicable to insurers, and pursuant to its
agreement with FNTIC, ATC's liability is limited to the first $5,000 of loss
under any policy issued by it on behalf of FNTIC, 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 "Business Title
Policies" -- "Relationship With Fidelity National Financial, Inc.".
ATC has agreed to purchase National, which is a licensed title underwriter.
Although it has not recently written any significant amount of business,
National is licensed to issue title insurance in 35 states. The acquisition,
when completed, is expected to provide the Company with an opportunity to
underwrite title insurance policies and expand its operations through both
direct and agency relationships. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 12 of Notes to
Consolidated Financial Statements.
The Company, through its subsidiaries, maintains 14 branches consisting of
62 offices located in major counties throughout California and in Maricopa
County, Arizona (Phoenix and surrounding areas). Each of the Company's branches
processes real estate transactions within the geographical area of the branch,
usually a county boundary. Each branch is operated as a separate profit center.
In the years ended December 31, 1998,
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1997 and 1996, the following branch operations of the Company accounted for the
indicated percentages of total gross title insurance premium revenues:
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YEAR ENDED DECEMBER 31
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1998 1997(1) 1996(2)
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PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
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Alameda, CA.................... $ 4,642,287 7.8% $ 2,340,155 6.3% $ 2,801,290 7.7%
Contra Costa, CA............... 3,257,257 5.5 1,422,190 3.8 878,216 2.4
Fresno, CA..................... -- -- -- -- 494,605 1.4
Inland Empire, CA
(Riverside and San Bernardino)... 2,842,390 4.8 3,239,259 8.7 2,887,014 7.9
Kern, CA....................... 3,001,883 5.1 2,569,164 6.9 2,593,224 7.1
Los Angeles, CA................ 8,491,268 14.3 6,622,961 17.6 5,909,103 16.1
Orange, CA..................... 15,766,033 26.6 9,310,389 24.8 10,606,365 29.1
Phoenix, AZ.................... 3,911,995 6.6 2,680,274 7.2 1,912,400 5.2
Sacramento, CA................. 681,610 1.2 348,751 0.9 764,427 2.1
San Diego, CA.................. 4,615,215 7.8 2,279,367 6.1 2,946,284 8.0
San Mateo, CA.................. 936,976 1.6 899,866 2.4 1,005,697 2.7
Santa Barbara, CA.............. 517,649 0.9 -- -- -- --
Santa Clara, CA................ 5,550,679 9.4 2,863,894 7.7 3,529,743 9.6
Ventura, CA.................... 4,990,356 8.4 2,837,472 7.6 271,626 0.7
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$59,205,598 100.0% $37,413,742 100.0% $36,599,994 100.0%
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(1) Gross premium amounts include premiums generated by the predecessor company
for the period January 1, through June 30, 1997 combined with premiums
generated by the Company for the period July 1, through December 31, 1997.
(2) Gross premium amounts generated by the predecessor.
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 daily or other 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.
The Company leases title plants from FNTIC in Kern, San Mateo and Santa
Clara counties for an aggregate payment of $10,000 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 Experian Group and Security
Union Title Insurance Company.
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.
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
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bankers, financial institutions and attorneys. The Company believes that the
personal contacts maintained by 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.
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 26.5%,
23.8% and 20.3% of the Company's revenues in 1998, 1997 (Combined) and 1996
(Predecessor), respectively. The higher growth rate in 1998 compared to 1997 is
primarily attributable to the opening of 10 new escrow offices by the Company in
California during 1998. See selected financial data.
Escrow operations are regulated by state insurance authorities, and the
Company has the flexibility to establish different fee schedules in different
counties. The Company believes that the acquisition of National, if completed,
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 16.5%, in 1998,
16.0% in 1997 (Combined) and 12.6% in 1996 (Predecessor), respectively. See
selected financial data.
Document Preparation Services. The Company 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 independent 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.
Central Order Processing Unit. The Company's Central Order Processing Unit
("COP Unit") provides customers with a centralized location through which they
can order title and escrow services. The services offered through the COP Unit
can be provided on a nationwide basis.
Trustee Sales Guarantee. The Company's trustee sale guarantee ("TSG")
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. TSG services provide assurances to
trustees concerning certain information in connection with nonjudicial
foreclosures of property secured by a deed of trust. Because the
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number of foreclosures tends to increase as the real estate market and the
economy decline, the Company's TSG division tends to be countercyclical to its
title insurance business.
Property Management Services. ATC's subsidiary, Landmark REO Management
Services, Inc., provides quality 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.
TITLE LOSSES AND RESERVES
As an agent, ATC is not subject to the loss and reserve requirements
applicable to insurers, and pursuant to its agreement with FNTIC, ATC's
liability is limited to the first $5,000 of loss under any policy issued by it
on behalf of FNTIC, 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.
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 2,400
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 six largest title insurance underwriters, either
directly or through their agents, accounted for approximately 89% of the policy
premium revenue in the United States in 1998. In the Company's principal
markets, competitors currently include direct operations and agents of the title
insurance subsidiaries of FNFI, Chicago Title Corporation, 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 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.
GOVERNMENT REGULATION
Title companies, including underwriters, underwritten title companies and
independent agents, are subject to 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, Arizona is
regulated by the State Banking Department, State of Arizona. See Notes 11 and 12
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. Upon
acquiring National, the Company will become subject to regulation by the New
York Department of
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Insurance and the regulatory requirements of those states in which National is
licensed to do business. Such regulatory requirements include maximum insurable
amounts under any single title insurance policy, regulations which restrict the
payment of dividends or distributions, and statutory unearned premium
requirements.
The laws of most states in which the Company presently transacts or will
transact business establish supervisory agencies with broad administrative
powers relating to issuing and revoking licenses to transact business, licensing
agents, approving policy forms, regulatory accounting principles, financial
practices, establishing reserve and capital and surplus requirements, defining
suitable investments for reserves, capital and surplus and approving rate
schedules.
Current regulations require that ATC maintain a minimum net worth of
$400,000 and that Santa Barbara Title Company maintain a minimum net worth of
$120,000. The net worth of ATC was $15.3 million as of December 31, 1998 and
$8.6 million as of December 31, 1997. The net worth of Santa Barbara Title
Company was $136,000 as of December 31, 1998 and $380,000 as of December 31,
1997. See Note 12 of Notes to Consolidated Financial Statements.
As a condition to continued authority to issue policies in the states in
which ATC conducts its business, ATC is required to pay certain fees and file
information regarding its officers, directors and financial condition.
The State Banking Department, State of Arizona ("State Banking Department")
delivered their report of Examination of Nations Title Insurance of Arizona,
Inc. ("Nations") as of and for the three-year period ending October 31, 1998, on
March 4, 1999. The report as forwarded to the Company by State Banking
Department indicates that the Company may not be in compliance with certain
State Banking Department regulations. The State Banking Department is providing
the Company with an opportunity to present additional information prior to
making their final determination as to compliance. The Company does not believe
this will have a material impact upon the financial statements of the Company.
On March 18, 1999, ANFI announced that its Board of Directors declared an
initial quarterly cash dividend in the amount of $.10 per share. The dividend
will be payable on May 27, 1999 to stockholders of record as of April 8, 1999.
RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL, INC.
The Company has a relationship with FNFI, 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 31.5% 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 Notes
10 and 11 of Notes to Consolidated Financial Statements.
Operationally, the Company and FNTIC continue to have a close working
relationship. FNTIC and ATC have entered into an Issuing Agency Agreement
pursuant to which ATC has agreed that until June 30, 2002 it will act
exclusively as an agent for FNTIC with respect to the procurement of title
insurance policies in 14 selected counties in California and Arizona, subject to
certain exceptions and subject to a mutually agreed 5 year extension to the
original term. This exclusive arrangement 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.
8
<PAGE> 11
YEAR 2000 ISSUES
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of potential Y2K issues. Included within the scope of this
program are systems used in title plants, title policy processing, escrow
production, claims processing, real estate related services, financial
management, human resources, payroll and infrastructure. In addition to a review
of internal systems, the Company has initiated formal communications with third
parties with which it does business in order to determine whether or not they
are Y2K compliant and the extent to which the Company may be vulnerable to third
parties' failure to become Y2K compliant. The Company is in the process of
identifying Y2K compliant issues in its systems, equipment and processes. The
Company is making changes to such systems, updating or replacing such equipment,
and modifying such processes to make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant.
Phase I is, "Plan Preparation and Identification of the Problem." This is an
ongoing phase that will continue beyond the year 2000 itself. Phase II is, "Plan
Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining
Y2K Compliance." The Company anticipates that its systems processes will be
substantially Y2K compliant by July 1999. The status of the Y2K compliance
program is monitored by senior management of the Company and by the Audit
Committee of the Company's Board of Directors. The costs of the Y2K related
efforts incurred to date have not been material, and the estimate of remaining
costs to be incurred is not considered to be material. Due to the complexities
of estimating the cost of modifying applications to become Y2K compliant and the
difficulties in assessing third parties', including various local governments
upon which the Company relies upon to provide title-related data, ability to
become Y2K compliant, estimates may be subject to change.
Management of the Company believes that its electronic data processing and
information systems will be Y2K compliant; however, there can be no assurance
that all of the Company's systems will be Y2K compliant, that the costs to be
Y2K compliant will not exceed management's current expectations, or that the
failure of such systems to be Y2K compliant will not have a material adverse
effect on the Company's business. The Company believes that functions currently
performed with the assistance of electronic data processing equipment could be
performed manually or outsourced if certain systems were determined not to be
Y2K compliant on or after January 1, 2000.
The Company has not yet completed a contingency plan in the event that any
systems are not Y2K compliant, but will do so once the Phase III process of its
compliance program is begun. We expect this contingency plan to be complete by
July 1999.
This entire section "Year 2000 Issues" is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
EMPLOYEES
As of March 15, 1999, the Company, including its subsidiaries, had 874 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,
and 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.
9
<PAGE> 12
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, low mortgage interest rates and a strong
California real estate market contributed to increased residential transaction
activity. 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 derives 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 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 Fidelity National Financial,
Inc.
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, 2002 it will act exclusively as an
agent for FNTIC with respect to the procurement of title insurance policies in
13 selected counties in California and one county in Arizona, subject to certain
exceptions and subject to a mutually agreed 5 year extension to the original
term. 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's 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 the Acquisition of National
On March 16, 1998, ATC entered into a Stock Purchase Agreement with a
subsidiary of FNFI to acquire 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 35 states and the
U.S. Virgin Islands. ATC has requested regulatory approval of this transaction
from the Department of Insurance of the State of New York. 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
acquisition of National. There can be no assurance, however, that the required
regulatory approval will be obtained for the acquisition of National or that the
acquisition will be completed. In addition,
10
<PAGE> 13
National does not currently underwrite 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. The amount of such resources will
depend on the Company's resource allocation plan for the development of
National, which has not been completed. Cash resources for the development of
National are 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 35 states, and the resource allocation plan will
depend on which strategic options the Company pursues in utilizing the licenses.
There can be no assurance that the Company will be able to develop any 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.
Risks Related to Possible Acquisitions
An element of the Company's business strategy is to expand its operations
through the acquisition of complementary businesses. Except for the acquisition
of National, 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
11
<PAGE> 14
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 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 executive offices are located in Irvine, California. All
offices of the Company are leased, except for an approximately 11,000 square
foot branch office in Phoenix, Arizona, which the Company owns. This property
was acquired with the proceeds of a $472,500 note that bears interest at the
lending institution's prime lending rate and is due in full in December 1999.
The principal balance of this note is $442,500 at December 31, 1998. The note is
collateralized by a deed of trust on the Phoenix, Arizona property. The Company
believes that its facilities are adequate for its current level of operations.
In March 1999, the Company paid the remaining principal balance of this note in
full.
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 9 of Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION 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 of 1998.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company completed an 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
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
February 12, 1999 through March 29, 1999:............ $7.25 $5.25
</TABLE>
On March 29, 1999, the last reported sale price of the common stock on the
NASDAQ Stock Exchange was $5.25 per share. As of March 29, 1999, the Company had
less than 800 shareholders of record.
On March 18, 1999, ANFI's Board of Directors declared an initial quarterly
cash dividend in the amount of $.10 per share. The dividend will be payable on
May 27, 1999 to stockholders of record as of April 8, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The Predecessor financial information included in the selected financial
data below includes the historical financial information of the operations
previously owned by FNFI and acquired by the Company on July 1, 1997. The
Company's financial information included herein includes only the historical
financial information of the Company since its formation in 1996. Although
incorporated in 1996, the Company had no operations until it acquired 60% of the
outstanding common stock of ATC in July 1997. All Predecessor information
excludes the impact of the goodwill and minority interest associated with the
Company's acquisition of 60% of the common stock of ATC from FNFI on July 1,
1997.
The Company balance sheet data as of December 31, 1998 and 1997 and the
statement of operations data for the year ended December 31, 1998 and for the
six months ended December 31, 1997 have been derived from the Company's
consolidated financial statements and notes thereto, which statements have been
audited by KPMG LLP, independent auditors, and are included elsewhere herein.
The Predecessor balance sheet data at December 31, 1996 and the Predecessor
statement of operations data for the six months ended June 30, 1997 and for the
year ending December 31, 1996 have been derived from the Predecessor's financial
statements and notes thereto, which statements have been audited by KPMG LLP,
independent auditors, and are included elsewhere herein. The following
information should be read in conjunction with the financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this 10K.
13
<PAGE> 16
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------- ----------------------------------------
SIX MONTHS SIX MONTHS COMBINED
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1997 1996
------------ ------------ ---------- ------------ ------------
(AMOUNTS IN THOUSANDS OTHER THAN EARNINGS PER SHARE,
ORDER AND FEE PER FILE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments...... $ 10,495 $ 7,224 N/A N/A $ 420
Working capital...................... 8,776 5,047 N/A N/A 4,035
Total assets........................... 37,376 22,365 N/A N/A 10,661
Due to affiliate..................... 1,893 1,411 N/A N/A 722
Shareholders' equity................. 19,898 1,123 N/A N/A 6,372
STATEMENT OF OPERATIONS DATA:
Net title service revenue-related
party.............................. $ 52,092 $18,027 $14,768 $32,795 $32,703
Escrow fees.......................... 24,267 7,352 5,581 12,933 9,872
Other fees and income................ 15,066 5,532 3,162 8,694 6,127
-------- ------- ------- ------- -------
Total revenue................. 91,425 30,911 23,511 54,422 48,702
-------- ------- ------- ------- -------
Personnel costs...................... 49,435 16,599 13,953 30,552 28,966
Other operating expenses............. 17,477 8,084 6,521 14,605 15,925
Title plant rent and maintenance..... 7,156 2,664 2,009 4,673 4,306
Income (loss) before minority
Interest........................... 10,100 1,789 592 2,382 (342)
Net income (loss).................... $ 6,865 $ 709 $ 592 $ 1,301 $ (342)
PER SHARE DATA:
Earnings per share:
Basic................................ $ 2.13 $ 0.24 N/A N/A N/A
Diluted.............................. 1.96 0.23 N/A N/A N/A
Weighted average common shares
outstanding:
Basic.............................. 3,223 2,972 N/A N/A N/A
Diluted............................ 3,500 3,107 N/A N/A N/A
OTHER OPERATING DATA:
Gross title insurance premiums....... $ 59,206 $20,641 $16,773 $37,414 $36,600
Orders opened(1)..................... 146,932 46,800 40,700 87,500 94,900
Orders closed(1)..................... 98,319 32,600 28,200 60,800 63,700
Average fee per file(1).............. $ 825 $ 886 $ 835 $ 863 $ 773
</TABLE>
- ---------------
(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
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
14
<PAGE> 17
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, reductions in mortgage interest rates beginning in
the latter part of 1991 triggered an increase in refinancing activity, which
continued at then record levels through 1993 and into the first quarter of 1994.
During 1994 and early 1995, steady interest rate increases caused by actions
taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Since late 1995, decreases in mortgage interest rates and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales. The overall economic environment, stable mortgage interest rates and
strength in the California and West Coast real estate market contributed to very
positive conditions for the industry throughout all of 1996, 1997 and 1998. It
is impossible to predict the direction interest rates and the real estate market
may move in the future.
The Company's revenues include net title service revenues (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 title
insurance premiums. Other fees and revenue primarily consist of real estate
information fees, reconveyance fees, recording fees and appraisal fees, in
connection with real estate transactions, and include fees related to the
Company's STAR product. Other fees and revenue trend closely with the level of
title insurance 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 escrow. As a result, the Company's recognition of
revenue relating to a given escrow lags approximately 60-90 days behind the
opening of that escrow and 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 from quarter to quarter.
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, pursuant to the terms of an 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.
While the number of orders that close 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 lender's mortgage, average fees per
file will also increase during periods in which real estate prices, and
corresponding mortgage loans, are increasing.
15
<PAGE> 18
The Company was incorporated in November 1996, but had no operations until
it acquired 60% of the outstanding common stock of ATC in July 1997. For the
year 1997, the Company's revenue and expenses included only six months of ATC's
operations compared to a full year of ATC-related operations included in the
year ended December 31, 1998. Therefore, revenue and expenses related to the
historical operations of the Company since its inception are not comparable from
year to year.
RESULTS OF OPERATIONS
The following discussion presents a comparison of (1) the Company for 1998
with (2) the Company and Predecessor combined for 1997 and (3) the Predecessor
for 1996. Information provided for the six months ended June 30, 1997 and for
the year ended December 31, 1996 is that of the Company's Predecessor, and
should not be considered an indicative measure or comparison of the Company's
current financial position or results of operations.
REVENUE
The following table presents information regarding the components of the
Company's revenue:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------- -----------------------------------------
SIX MONTHS SIX MONTHS COMBINED
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1997 1996
------------ ------------ ---------- ------------ -------------
(AMOUNTS IN THOUSANDS OTHER THAN ORDERS AND FEE PER FILE)
<S> <C> <C> <C> <C> <C>
Net title service revenue-related
party................................. $52,092 $18,027 $14,768 $32,795 $32,703
Escrow fees............................. 24,267 7,352 5,581 12,933 9,872
Other fees and revenue.................. 15,066 5,532 3,162 8,694 6,127
------- ------- ------- ------- -------
Total revenue....................... $91,425 $30,911 $23,511 $54,422 $48,702
======= ======= ======= ======= =======
Orders closed........................... 98,319 32,600 28,200 60,800 63,700
Average fee per file.................... $ 825 $ 886 $ 835 $ 863 $ 773
</TABLE>
Total revenues were $91.4 million and $54.4 million for the years ended
December 31, 1998 and 1997, respectively. Since commencing operations in July
1997, the Company expanded its services and acquired other operations. The
Company's revenues have been increasing as a result of such expansion and due to
an increase in real estate activity and home prices, as well as an increase in
the number of real estate transactions handled by the Company. Total revenues
increased to $54.4 million in 1997 from $48.7 million in 1996, primarily as a
result of improving market conditions and an improved contribution from escrow
fees and other fees and revenue.
Net Title Service Revenue. Net title service revenue was $52.1 million for
1998, as compared to $32.8 million for 1997, an increase of $19.3 million or
58.8%. This fluctuation is primarily attributable to increases in both
refinancing and real estate sale transactions during 1998, which largely
resulted from stable mortgage interest rates and improvements in the overall
economic environment in the California real estate market, offset in part by a
reduction in revenues related to the countercyclical trustee sale guarantee and
foreclosure business. Net title service revenue was essentially flat in 1997
compared to 1996. The Company's average fee per file for orders closed in 1998
was $825 compared to $886 in 1997 and $773 in 1996. The decrease in fee per file
in 1998 compared to 1997 is a result of escrow orders closing without the title
order and an increase in the number of refinancing transactions, which result in
a lower fee per file than resale transactions. Fee per file increased in 1997
over 1996 primarily as a function of rising home prices, which results in an
increase in fee per file. Gross title insurance premiums were $59.2 million,
$37.4 million and $36.6 million in 1998, 1997, and 1996, respectively.
Escrow Fees. Revenues from escrow fees were $24.3 million for 1998, as
compared to $12.9 million for 1997, an increase of $11.3 million or 87.6%. This
increase is consistent with the trend in title premiums but is also due to the
Company's focused efforts to expand its escrow market presence in certain areas,
such as southern California. Escrow fees increased to $12.9 million in 1997, an
increase of $3.0 million, or 31%, from $9.9 million in 1996, primarily as a
result of market conditions.
16
<PAGE> 19
Other Fees and Revenue. Other fees and revenue were $15.1 million for 1998
as compared to $8.7 million for 1997, an increase of $6.4 million or 73.3%.
Other fees and revenue increased $2.6 million, or 41.9% to $8.7 million in 1997
from $6.1 million in 1996. This increase is primarily a result of the additional
services offered by the Company from its support services, appraisal, asset
management and property inspection divisions.
EXPENSES
The following table presents the components of the Company's expenses:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------- -----------------------------------------
SIX MONTHS SIX MONTHS COMBINED
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1997 1996
------------ ------------ ---------- ------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel costs......................... $49,435 $16,599 $13,953 $30,552 $28,966
Other operating expenses................ 17,477 8,084 6,521 14,605 15,925
Title plant rent and maintenance........ 7,156 2,664 2,009 4,673 4,306
------- ------- ------- ------- -------
Total expenses.......................... $74,068 $27,347 $22,483 $49,830 $49,197
======= ======= ======= ======= =======
</TABLE>
The Company's principal costs include personnel costs, title plant rent and
maintenance costs, and other operating expenses. Personnel costs include both
base salaries and commissions 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
expenses, general insurance, trade and notes receivable allowances, depreciation
and amortization and interest expense.
Title plant rent and maintenance costs consist of payments for access to
title plants, and costs of updating these title plants. Title plant rent and
maintenance costs includes daily update expenses that are dependent on the
volume of real estate transaction activity in the market generally and a rental
charge that is based on actual utilization.
Personnel Costs. Personnel costs were $49.4 million for 1998, as compared
to $30.6 million for 1997. As a percentage of total revenue, personnel costs
decreased to 54.1% in 1998 from 56.1% in 1997. In 1996, personnel costs as a
percentage of total revenue were 59.5%. Personnel costs totaled $29.0 million in
1996. These costs generally fluctuate with the level of orders opened and closed
and with the mix of revenue. The Company's personnel expenses have decreased as
a percentage of total revenue, but increased in absolute dollar amount since its
inception as the Company has acquired other operations, hired additional
personnel expanded its business and handles more real estate transaction. The
Company has taken significant measures to maintain appropriate personnel levels
and costs relative to the volume and mix of business and revenues. The Company
will not, however, compromise its customer service standards or quality controls
in responding to market conditions. The Company continues to monitor the
prevailing conditions and will respond as necessary.
Other Operating Expenses. Other operating expenses were $17.5 million in
1998 as compared to $14.6 million in 1997, an increase of $2.9 million or 19.7%.
As a percentage of total revenue, other operating expenses decreased to 19.1% in
1998 from 26.8% in 1997. In 1996, other operating costs totaled $15.9 million,
or 32.7%, of total revenue. In response to market conditions, the Company
implemented aggressive cost control programs in order to maintain operating
expenses at levels consistent with the levels of revenue; however, certain fixed
costs are incurred regardless of revenue levels, resulting in the year over year
percentage fluctuations.
The repayment of debt pursuant to the terms of the Reorganization will
result in a material decrease in future interest expense. Interest expense
incurred during 1998 and 1997, related to the debt repaid in the Reorganization,
was $391,469 and $413,000 respectively.
17
<PAGE> 20
The period over period of fluctuations in personnel costs and other
operating expenses are primarily the result of the fluctuations in total revenue
and the impact of continued implementation of title and escrow related
technology on productivity and efficiency.
Title Plant Rent and Maintenance Expenses. Title plant rent and maintenance
expenses were $7.2 million, $4.7 million and $4.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively. This increase is primarily due
to the variable component relating to the volume of orders As a percentage of
title revenue, title plant rent and maintenance expenses totaled 7.8%, 8.6% and
8.8% for the years ended December 31, 1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash requirements include debt service, debt relating
to capital leases, personnel, 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. In the future,
the Company's cash requirements will include those relating to the development
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 amount of such resources will be dependent on the Company's
resource allocation plan for National, which has not been completed. 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. National is
presently owned by a subsidiary of FNFI, and therefore its acquisition by the
Company should not be considered an arm's length transaction.
Two significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The Company's
underwritten title companies collect premiums and fees and pay underwriting fees
and operating expenses. These companies are restricted only to the extent of
maintaining minimum levels of working capital and net worth, but are not
restricted by state regulations or banking authorities in their ability to pay
dividends and make distributions. The Company's other subsidiary operations
collect revenue and pay operating expenses; however, they are not regulated by
insurance regulatory or banking authorities. Positive cash flow from the
underwritten title companies and other subsidiary operations is invested
primarily in cash and cash equivalents.
Current regulations require that ATC maintain a minimum net worth of
$400,000 and that Santa Barbara Title Company maintain a minimum net worth of
$120,000. The net worth of ATC was $15.3 million as of December 31, 1998 and
$8.6 million as of December 31, 1997. The net worth of Santa Barbara Title
Company was $136,000 as of December 31, 1998 and $380,000 as of December 31,
1997.
In December 1998, the Company entered into an agreement to purchase a home
office building in Orange, California for $2,600,000. The Company has deposited
$100,000 in an escrow account. This transaction is subject to certain conditions
prior to closing.
Net proceeds of approximately $9.7 million were received by the Company in
connection with its Initial Public Offering. The underwriters exercised an
option for over allotment to purchase an additional 150,000 shares at $6 per
share on March 31, 1999.
RECENT DEVELOPMENTS
On January 4, 1999, the Company agreed to purchase 100% of the assets of
Pacific Printers, a printing company providing affiliated and non-affiliated
reproduction of forms and printing material. The purchase price of this
acquisition was $125,000, paid in cash.
On February 12, 1999, the Company completed an Initial Public Offering of
1,750,000 million shares at $6 per share, resulting in Fidelity National
Financial, Inc. owning 31.5% of the outstanding shares and 36.7% owned by
management. Net proceeds of approximately $9.7 million were received by the
Company. In
18
<PAGE> 21
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.
The State Banking Department, State of Arizona ("State Banking Department")
delivered their Report of Examination of Nations Title Insurance of Arizona,
Inc. ("Nations") as of and for the three-year period ending October 31, 1998 on
March 4, 1999. The report as forwarded to the Company by State Banking
Department indicates that the Company may not be in compliance with certain
State Banking Department regulations. The State Banking Department is providing
the Company with an opportunity to present additional information prior to
making their final determination as to compliance. The Company does not believe
this will have a material impact upon the financial statements of the Company.
On March 18, 1999, ANFI announced that its Board of Directors declared an
initial quarterly cash dividend in the amount of $.10 per share. The dividend
will be payable on May 27, 1999 to stockholders of record as of April 8, 1999.
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 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130 requires
all items that are necessary to be recognized under accounting standards as
components of comprehensive earnings to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement, but
requires that an enterprise display an amount representing total comprehensive
income for the period covered by that financial statement. SFAS 130 requires an
enterprise to (a) classify items of other comprehensive earnings by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive earnings separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130
became effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 has not had an impact on the Company's financial reporting.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific
19
<PAGE> 22
revenue and expense items, segment assets, information about the revenues
derived from the enterprise's products or services and major customers. SFAS 131
also requires that the enterprise report descriptive information about the way
that the operating segments were determined and the products and services
provided by the operating segments. SFAS 131 became effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. SFAS
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. The adoption of SFAS 131 has not had
an impact on the Company's financial reporting as they operate in only one
industry segment.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively, "derivatives") and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. It requires changes in the
fair value of a derivative instrument and the changes in fair value of assets or
liabilities hedged by that instrument to be included in earnings. To the extent
that the hedge transaction is effective, earnings are equally offset by both
investments. Currently the changes in fair value of derivative instruments and
hedged items are reported in net unrealized gain (loss) on securities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of SFAS 133 is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. The Company does not believe the
adoption of SFAS 133 will have a material impact on its financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company has no significant interest rate risk exposure as the only
obligation outstanding at year end matured and was paid in full on March 19,
1999. The Company's interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. The Company does not enter into derivative or interest
rate transactions for speculative purposes.
20
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL INFORMATION
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report................................ 22
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 23
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997................................ 24
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998 and 1997.................... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997................................ 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>
AMERICAN NATIONAL FINANCIAL, INC. PREDECESSOR
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report................................ 37
Statements of Combined Operations for the six months ended
June 30, 1997 and for the year ended December 31, 1996.... 38
Statements of Shareholder's Equity for the six months ended
June 30, 1997 and for the year ended December 31, 1996.... 39
Statements of Cash Flows for the six months ended June 30,
1997 and for the year ended December 31, 1996............. 40
Notes to Financial Statements............................... 41
</TABLE>
21
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American National Financial, Inc.:
We have audited the consolidated balance sheets of American National
Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
March 29, 1999
22
<PAGE> 25
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $10,344,987 $ 7,223,635
Short-term investments, at cost, which approximates fair
market value........................................... 150,000 --
Accounts receivable, net of allowance for doubtful
accounts of $1,895,684 in 1998 and $1,100,449 in
1997................................................... 8,575,808 6,809,177
Deferred income taxes..................................... 2,395,298 832,732
Prepaid expenses and other current assets................. 2,796,888 903,002
----------- -----------
Total current assets.............................. 24,262,981 15,768,546
Property and equipment, net................................. 4,010,187 2,723,670
Title plants................................................ 2,252,023 815,310
Deposits with Insurance Commissioner........................ 112,500 105,000
Intangibles, net of accumulated amortization of $609,103 in
1998 and 257,349 in 1997.................................. 6,738,350 2,952,417
----------- -----------
Total assets...................................... $37,376,041 $22,364,943
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,159,588 $ 1,958,813
Other accrued expenses, including $123,630 to affiliate in
1998 and 587,750 in 1997............................... 5,194,767 3,403,219
Customer advances......................................... 2,190,364 1,155,536
Current portion of long-term debt......................... 442,500 936,672
Current portion of obligations under capital leases with
affiliates............................................. 741,561 660,176
Current portion of obligations under capital leases with
non-affiliates......................................... 115,643 --
Income taxes payable...................................... 3,750,029 1,195,581
Due to affiliate.......................................... 1,892,910 1,411,170
----------- -----------
Total current liabilities......................... 15,487,362 10,721,167
Long-term debt............................................ -- 5,535,828
Obligations under capital leases with affiliates.......... 669,435 1,411,001
Obligations under capital leases with non-affiliates...... 1,321,070 --
----------- -----------
Total liabilities................................. 17,477,867 17,667,996
Minority interest in consolidated subsidiary................ -- 3,574,100
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, 4,917,096 in 1998 and 2,910,416
in 1997................................................ -- --
Additional paid in capital................................ 12,324,264 414,284
Retained earnings......................................... 7,573,910 708,563
----------- -----------
Total shareholders' equity........................ 19,898,174 1,122,847
----------- -----------
Total liabilities and shareholders' equity........ $37,376,041 $22,364,943
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 26
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Net title service revenue -- related party................ $52,091,599 $18,026,297
Escrow fees............................................... 24,266,852 7,352,399
Other service charges..................................... 15,066,468 5,532,203
----------- -----------
Total revenues.................................... 91,424,919 30,910,899
----------- -----------
EXPENSES:
Personnel costs........................................... 49,435,428 16,599,428
Other operating expenses, includes $4,198,188 with
affiliate in 1998 and $1,184,136 in 1997............... 17,476,815 8,083,626
Title plant rent and maintenance.......................... 7,155,728 2,664,201
----------- -----------
Total expenses.................................... 74,067,971 27,347,255
----------- -----------
Earnings before income taxes and minority interest in net
earnings of consolidated subsidiary....................... 17,356,948 3,563,644
Provision for income taxes.................................. 7,256,883 1,774,417
----------- -----------
Earnings before minority interest in net earnings of
consolidated subsidiary................................... 10,100,065 1,789,227
Minority interest in net earnings of consolidated
subsidiary................................................ (3,234,718) (1,080,664)
----------- -----------
Net earnings................................................ $ 6,865,347 $ 708,563
=========== ===========
Basic earnings per share.................................... $ 2.13 $ 0.24
Diluted earnings per share.................................. 1.96 0.23
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 27
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996............. -- $ -- $ -- $ -- $ --
Issuance of common stock............. 3,026,400 -- -- -- --
Forfeiture of common stock issued.... (115,984) -- -- -- --
Stock options granted................ -- -- 414,284 -- 414,284
Net earnings......................... -- -- -- 708,563 708,563
--------- ---- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997............. 2,910,416 $ -- $ 414,284 $ 708,563 $ 1,122,847
--------- ---- ----------- ---------- -----------
Forfeiture of common stock issued.... (93,316) -- -- -- --
Capital contribution................. -- -- 1,200,000 -- 1,200,000
Issuance of shares................... 2,099,996 -- 10,709,980 -- 10,709,980
Net earnings......................... -- -- -- 6,865,347 6,865,347
--------- ---- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1998............. 4,917,096 $ -- $12,324,264 $7,573,910 $19,898,174
========= ==== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE> 28
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 6,865,347 $ 708,563
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization.......................... 1,477,085 644,720
Minority interest in net income of consolidated
subsidiary............................................ 3,234,718 1,080,664
Compensation expense -- stock options.................. -- 414,284
Loss on sales of investments........................... 30,287 --
Gain on sale of property and equipment................. (13,967) --
Changes in:
Accounts receivable, net............................. (1,766,631) (2,493,048)
Prepaid expenses and other assets.................... (344,223) 94,379
Income taxes payable and deferred income taxes....... 991,882 341,909
Accounts payable and other accrued expenses.......... 955,763 2,156,510
Due to affiliate..................................... 481,740 233,544
Customer advances.................................... 1,034,828 (340,140)
----------- -----------
Total cash provided by operating activities....... 12,946,829 2,841,385
----------- -----------
Cash flow from investing activities:
Advance to related party.................................. (1,561,169) --
Collection of notes receivable............................ 11,506 27,844
Purchase of property and equipment........................ (2,480,766) (999,087)
Proceeds from sale of property and equipment.............. 24,753 --
Purchase of investments................................... (250,000) --
Proceeds from sale of investment.......................... 69,715 --
Acquisition of consolidated subsidiary, net of cash
acquired............................................... -- (816,584)
Acquisition of subsidiary................................. (149,335) --
----------- -----------
Total cash used in investing activities........... (4,335,296) (1,787,827)
----------- -----------
Cash flows from financing activities:
Borrowings (repayment).................................... (4,830,000) 6,472,500
Payments under capital lease obligations.................. (660,181) (302,423)
----------- -----------
Total cash used in financing activities........... (5,490,181) 6,170,077
----------- -----------
Increase in cash and cash equivalents............. 3,121,352 7,223,635
Cash and cash equivalents at the beginning of year........ 7,223,635 --
----------- -----------
Cash and cash equivalents at end of year.................. $10,344,987 $ 7,223,635
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest............................................... $ 588,777 $ 473,285
Income taxes........................................... 5,211,836 1,885,105
Non-cash investing activities:
Title plant acquired under capital lease............... $ 1,436,713 $ 815,310
Property and equipment acquired under capital leases... -- 1,588,290
Non-cash financing activities:
Assumption of debt by shareholders..................... $ 1,200,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 29
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
$6,000,000 in proceeds from the issuance of short-term notes payable, of which
$870,000 was due to certain members of management and the remainder was due 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
$6,000,000 for 60% interest in ATC. In August 1997, the Company refinanced all
debt issued in April 1997. In November 1998, the Company acquired the remaining
40% interest in ATC in connection with the Reorganization. See Note 11.
The Company's principal operations are those of ATC. ATC is an underwritten
title company in the state of California and is engaged in the business of
providing title insurance services and other related services in connection with
real estate transactions. The Company operates throughout California and in
Maricopa County, Arizona. ATC functions as an exclusive agent of Fidelity
National Title Insurance Company ("FNTIC"), an affiliate and a wholly owned
subsidiary of FNFI. Title insurance policies are underwritten by FNTIC for an
underwriting fee. The underwriting agreement generally provides that ATC is
liable under any single policy for only the first $5,000 of losses. As a result
of the July 1997 transaction with the Company, FNFI agreed to make no claim on
ATC for claims arising from policies written prior to January 1, 1997.
The Company's other subsidiaries include Nations Title Insurance of
Arizona, Inc.; Landmark REO Management Services, Inc.; American Document
Services, Inc.; West Point Appraisal, Inc.; West Point Properties, Inc. and West
Point Support 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 and majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated.
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 consolidated balance sheet for
these instruments approximate their fair value.
Short-Term Investments
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money markets investments,
which have an original maturity of one year or less, are carried at amortized
cost, which approximates market value.
Accounts Receivable
The carrying amounts reported in the consolidated balance sheet for
accounts receivable approximate their fair value. Accounts receivable is
reported net of allowance for doubtful accounts which represents management's
estimates of those balances that are uncollectible as of the balance sheet date.
27
<PAGE> 30
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Plant
Title plant is historical title information organized and maintained for
use in performing title searches. The December 31, 1998 and 1997 title plant
balances relate to capital leases. See note 9. Costs incurred to maintain,
update and operate title plants are expensed as incurred. Title plants are not
amortized as it is considered to have an indefinite life if maintained.
Intangibles
Intangible assets include acquired licenses to operate within various
counties and the cost in excess of net assets acquired in connection with the
ATC acquisition. 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 with affiliates and capital lease obligations for
title plants are recorded at the present value of the minimum lease payments at
the beginning of the lease terms. The monthly payments under the leases are
allocated between a reduction of the obligation and interest expense so as to
produce a constant periodic rate of interest on the remaining balance of the
obligation.
Revenue Recognition
Net title insurance premiums, escrow fees and other service charges are
recognized as revenue at the time of closing of the related real estate
transaction. Premiums from title policies written are presented net of the
underwriting fee to affiliated underwriters on the accompanying consolidated
statements of operations.
Expenses 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. The Company's reserve for claim losses on the
policies is immaterial as of December 31, 1998 and 1997.
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 reflected in the consolidated financial statements in the period
enacted.
28
<PAGE> 31
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment Reporting
The Company adopted, Statement of Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
establishes standards for reporting financial and descriptive information about
a company's operating segments in its annual financial statements and selected
information in interim financial reports. The Company operates in one industry
segment: diversified real estate services.
Earnings per Share
Basic earnings per share is computed by dividing net earnings available to
common shareholder by the weighted average number of common shares outstanding
during the period. Dilutive earnings per share is calculated by dividing net
earnings available to common shareholders by the weighted average number of
common shares outstanding plus the assumed conversions by 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net earnings........................................... $6,865 $ 709
====== ======
Weighted average basic shares........................ 3,223 2,972
====== ======
Basic earnings per share............................... $ 2.13 $ .24
====== ======
Weighted average basic shares........................ 3,223 2,972
Effect of dilutive options........................... 277 135
------ ------
Weighted average dilutive shares..................... 3,500 3,107
====== ======
Diluted earnings per share............................. $ 1.96 $ .23
====== ======
</TABLE>
Management Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
(3) ACQUISITION
On July 1, 1997, the Company acquired 60% of the outstanding stock of ATC
for a purchase price of $6 million. The $6 million purchase price was paid in
cash and financed by a bank loan in the same amount. This transaction has been
accounted for as a purchase. Accordingly, assets and liabilities of ATC have
been reflected at their fair values at the date of acquisition for the 60% of
outstanding stock acquired and at historical cost for the 40% minority interest.
The earnings of ATC have been included in the accompanying consolidated
statement of operations since July 1, 1997, for the Company's 60% ownership
interest.
29
<PAGE> 32
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets and liabilities of ATC at acquisition were as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $5,288,000
Accounts receivable......................................... 4,316,129
Other assets................................................ $1,583,107
==========
Amounts due to affiliates................................... $1,178,000
Payables and accrued expenses assumed at fair value......... $4,100,000
==========
</TABLE>
Intangibles resulting from the 60% acquisition amounted to $2,460,000 and
are being amortized over a composite life of 25 years.
Selected unaudited pro forma combined results of operations for the year
ended December 31, 1997, assuming that the acquisition of 60% of ATC occurred on
January 1, 1997 is presented as follows:
<TABLE>
<S> <C>
Total revenue........................................... $54,422,344
Net earnings............................................ 972,000
Basic earnings per share................................ .33
Diluted earnings per share.............................. .31
</TABLE>
These amounts are computed based upon the historical financial statements
of the Company and ANFI predecessor. The total revenues consist of the Company's
1997 revenues of $30.9 million plus the revenues of the ANFI Predecessor for the
six months ended June 30, 1997 of $23.5 million. The pro forma net earnings
includes the 1997 net earnings of the Company of $708,563 plus 60% of the net
income of ANFI Predecessor for the six months ended June 30, 1997 of $591,870
and has been adjusted to reflect an increase in goodwill amortization of $27,000
and an increase in interest expense of $110,000, less income taxes of $44,000.
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. Such indemnification is not expected to have a material effect on the
financial results of the Company.
In November 1998, the Company acquired the remaining 40% interest in ATC in
connection with the Reorganization. See Note 11.
On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast
Title of Santa Barbara County for the purchase of 100% of the issued and
outstanding stock of Santa Barbara Title Company. On January 9, 1998, the
Insurance Commissioner of the State of California approved the transaction and
the sale was consummated. The purchase price of $160,000 was paid in cash. The
impact of the Santa Barbara Title Company acquisition has not been material to
the financial position or result of operations of the Company.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Furniture, fixtures and equipment.................. $ 4,451,911 $2,044,598
Leasehold improvements............................. 802,369 429,406
Office building.................................... 667,888 667,888
----------- ----------
5,922,168 3,141,892
Accumulated depreciation and amortization.......... (1,911,981) (418,222)
----------- ----------
$ 4,010,187 $2,723,670
=========== ==========
</TABLE>
30
<PAGE> 33
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense (benefit) for years ended December 31, 1998 and December
31, 1997 consists of the following:
<TABLE>
<CAPTION>
1998
---------------------------------------
CURRENT DEFERRED TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Federal............................... $7,527,696 $(1,333,703) $6,193,994
State and local....................... 1,291,753 (228,863) 1,062,889
---------- ----------- ----------
$8,819,449 $(1,562,566) $7,256,883
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
CURRENT DEFERRED TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Federal............................... $1,608,578 $ (240,469) $1,368,109
State and local....................... 476,756 (70,448) 406,308
---------- ----------- ----------
$2,085,334 $ (310,917) $1,774,417
========== =========== ==========
</TABLE>
The effective tax rate for the period reported differs from the Federal
statutory income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory Federal income tax rate........................... 34.0% 35.0%
Non-deductible expenses................................... 2.4 7.0
Amortization of intangibles............................... 0.4 1.6
State taxes, net of Federal benefit....................... 5.3 6.6
Other..................................................... (.3) (.4)
---- ----
41.8% 49.8%
==== ====
</TABLE>
The deferred tax assets and liabilities at December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
<S> <C> <C>
Excess state income tax............................ $ 590,123 $ --
Excess book over tax provision for bad debts....... 880,737 --
Employee benefit and vacation accruals............. 532,498 --
Accrued liabilities................................ 394,787 --
Other.............................................. 3,948 --
Excess tax depreciation over book.................. -- (6,795)
---------- -------
Total deferred taxes..................... $2,402,093 $(6,795)
========== =======
</TABLE>
The deferred tax assets and liabilities at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
<S> <C> <C>
Excess state income tax............................ $ 44,302 $ --
Excess book over tax provision for bad debts....... 440,178 --
Employee benefit and vacation accruals............. 701,925 --
Excess tax depreciation over book.................. -- (24,239)
Other.............................................. -- (329,434)
---------- ---------
Total deferred taxes..................... $1,186,405 $(353,673)
========== =========
</TABLE>
31
<PAGE> 34
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 deferred tax assets. Management believes the existing
net deductible temporary differences 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.
(6) NOTES PAYABLE
The Company had a $6,000,000 note payable to a financial institution that
bears interest at the institutions' prime lending rate due in November 2002. The
note required monthly payments in the amount of $33,334 beginning in May 1998.
Interest was payable monthly. Additionally, the Company was required to pay 75%
of the excess cash flow of ATC (as defined) as supplemental principal payments.
This amount must be paid prior to the end of the first quarter following the end
of each fiscal year. The additional cash payment under this provision as of
December 31, 1997 was $670,000, which had been classified as a current
liability. The note was collateralized by a first priority lien on all the
Company's assets and all of its outstanding common stock. In conjunction with
the Reorganization, the Company voluntarily prepaid $3,500,000 on the note. The
assets and outstanding common stock collateralized by the debt was released. The
remaining $1,200,000 debt was assumed by the remaining shareholders.
The Company also has a $472,500 note payable to the same financial
institution that bears interest at the institution's prime lending rate (7.758%
at December 31, 1998) due in full in December 1999 with interest payable
monthly. The note is collateralized by a deed of trust on the office building.
At December 31, 1998, the principal balance is $442,500. In March 1999, the
Company paid the remaining principal balance of this note in full. The carrying
value of the Company's notes payable approximate fair value.
(7) SHAREHOLDERS' EQUITY
Stock Split
In August 1998, the Company declared a 6.0528 for 1 stock split. All share
and per share information has been retroactively adjusted to reflect this stock
split.
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.
Stock Issuance
The Company issued 3,026,400 shares to several key executives in March,
1997. The shares were deemed to have no value as of this date of issuance.
Subsequently, certain of these executives surrendered a total of 93,316 shares
and 115,984 in 1998 and 1997, respectively.
(8) EMPLOYEE BENEFIT PLANS
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 historically not made matching contributions.
32
<PAGE> 35
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plan
In August 1998, the stockholders approved the adoption of the 1998 Stock
Incentive 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, respectively. An additional 200,000 shares of common stock
may be authorized 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 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 have 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 per share.
Concurrent with the acquisition of ATC, the chief executive officer 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.
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.
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 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. The risk free interest rate used for options granted during 1997
was 6.45%. The expected dividend yield use for 1997 was 0%. A weighted average
expected life of 10 years was used. There were no options granted in 1998.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information for the year ended December 31, 1998 and
December 31, 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Pro forma basic net earnings................................ $6,865,347 $606,786
Pro forma basic earnings per share.......................... 2.13 .20
</TABLE>
33
<PAGE> 36
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) 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, 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. ATC has a contingent liability
relating to proper disposition of these balances for its customers, which
amounted to $104,687,729 at December 31, 1998.
Deposits with Insurance Commissioner
ATC is required to maintain certain amounts on deposit with the Insurance
commissioner in order to operate in certain counties.
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. Certain of those leases are with subsidiaries of FNFI.
Future minimum operating lease payments are as follows:
<TABLE>
<CAPTION>
TO TO
TOTAL AFFILIATE NON-AFFILIATE
----------- --------- -------------
<S> <C> <C> <C>
1999...................................... $ 3,597,408 $401,933 $ 3,195,475
2000...................................... 3,311,908 217,714 3,094,194
2001...................................... 2,587,011 -- 2,587,011
2002...................................... 1,571,010 -- 1,571,010
2003...................................... 921,348 -- 921,348
Thereafter................................ 36,893 -- 36,893
----------- -------- -----------
Total future minimum operating
lease payments................ $12,025,578 $619,647 $11,405,931
=========== ======== ===========
</TABLE>
Rent expense incurred under operating leases during the years ended
December 31, 1998 and 1997 was $3,546,607 and $2,373,097, respectively,
including $356,515 and 207,708 paid to an affiliate.
Capital Leases
In 1997, ATC entered into a capital lease arrangement with a subsidiary of
FNFI, which terminates in December 1999, for certain equipment. Also in 1997,
ATC entered into a capital lease agreement with FNTIC, which expires in June
2007, for three title plants. The gross amount of equipment recorded under
capital lease is $1,558,290 at December 31, 1998 and 1997. Accumulated
depreciation related to this equipment was $934,974 and $311,658 at December 31,
1998 and 1997, respectively. The gross amount of title plants recorded under
capital leases is $2,252,023 and $815,310 at December 31, 1998 and 1997,
respectively.
34
<PAGE> 37
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $1,436,713 at December 31,
1998. The capital lease agreement expires in August 2007.
Future minimum capital lease payments are as follows:
<TABLE>
<CAPTION>
TO TO
TOTAL AFFILIATE NON-AFFILIATE
---------- ---------- -------------
<S> <C> <C> <C>
1999................................... $1,066,794 $ 951,151 $ 115,643
2000................................... 342,222 217,291 124,931
2001................................... 342,222 207,257 134,965
2002................................... 342,222 196,418 145,804
2003................................... 342,222 184,708 157,514
Thereafter............................. 1,299,595 550,979 748,616
---------- ---------- ----------
Total future minimum capital
lease payments............. 3,735,277 2,307,804 1,427,473
Portion relating to
interest................... (887,568) (333,561) (554,007)
---------- ---------- ----------
Present value of minimum
capital lease payments..... $2,847,709 $1,974,243 $ 873,466
========== ========== ==========
</TABLE>
Depreciation of the equipment held under capital leases is included in
other operating expenses for the year ended December 31, 1998.
(10) RELATED PARTY TRANSACTIONS
The Company pays fees to affiliated underwriters for underwriting services
and management services under an exclusive agency agreement with FNTIC.
Underwriting services are provided for five years commencing July 1997, and
subject to a mutually agreed five year extension to the original term, for a fee
of 11% of gross title insurance premiums. Management services are cancelable
with 90 days notice and cost 1% of gross title insurance premiums.
ATC leases office space, title plants, and certain equipment from
subsidiaries of FNFI. See note 9. Additionally, the Company reimburses
subsidiaries of FNFI for expenses incurred on its behalf. Such reimbursements
aggregated $4,198,188 and $1,184,136 for years ending December 31, 1998 and
1997.
In March 1998, the Company agreed to acquire National Title Insurance of
New York Inc. ("National"), a New York domiciled underwriter, from a subsidiary
of FNFI for $3.25 million. This acquisition is intended to enable the Company to
generate underwriting fees and to expand geographically into counties and states
in which the Company does not presently operate. National is licensed to issue
title insurance in 35 states and the U.S. Virgin Islands. The completion of this
transaction is subject to certain conditions, including receipt of approval from
the New York Department of Insurance.
35
<PAGE> 38
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) REORGANIZATION
In August 1998, the Company agreed to acquire the remaining 40% of the
outstanding common stock of ATC from FNFI in exchange for 43% of the outstanding
common stock of the Company (2,099,996 shares). The exchange was consummated in
November 1998 upon receipt of regulatory approval. The 40% interest was
accounted for at the fair value of ANFI shares of $10,709,980 which resulted in
the recognition of goodwill in the amount of $3,901,160, which is being
amortized over 25 years. In connection with this transaction, the shareholders
of the Company, other than FNFI, assumed $1.2 million of the note payable
incurred in connection with the Company's acquisition of ATC. The assumption of
debt by the non-FNFI shareholders was accounted for as a capital contribution.
Additionally, the Company used the proceeds of a dividend from ATC of $3.5
million to repay the remaining balance of the note payable.
Selected unaudited pro forma results of operations assuming the acquisition
of 40% of ATC at December 31, 1998 and 1997, is presented as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Total revenue..................................... $91,424,919 $54,422,344
Net earnings...................................... 9,154,854 2,386,941
Basic earnings per share.......................... 1.84 .47
Diluted earnings per share........................ 1.74 .46
</TABLE>
(12) SUBSEQUENT EVENTS
On January 4, 1999, the Company agreed to purchase 100% of the assets of
Pacific Printers, a printing company providing affiliated and non-affiliated
reproduction of forms and printing material. The purchase price of this
acquisition was $125,000, paid in cash.
On February 12, 1999, the Company completed an Initial Public Offering of
1,750,000 million shares at $6 per share, resulting in Fidelity National
Financial, Inc. owning 31.5% of the outstanding shares and 36.7% owned by
management. Net proceeds of approximately $9.7 million were 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.
The State Banking Department, State of Arizona ("State Banking Department")
delivered their Report of Examination of Nations Title Insurance of Arizona,
Inc. ("Nations") as of and for the three-year period ending October 31, 1998, on
March 4, 1999. The report as forwarded to the Company by State Banking
Department indicates that the Company may not be in compliance with certain
State Banking Department regulations. The State Banking Department is providing
the Company with an opportunity to present additional information prior to
making their final determination as to compliance. The Company does not believe
this will have a material impact upon the financial statements of the Company.
On March 18, 1999, ANFI announced that the Company's Board of Directors
declared an initial quarterly cash dividend in the amount of $.10 per share. The
dividend will be payable on May 27, 1999 to stockholders of record as of April
8, 1999.
36
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American National Financial, Inc.:
We have audited the accompanying statements of combined operations,
statements of shareholders equity and cash flows of ANFI Predecessor, as defined
in Note 1 to the financial statements, for the six months ended June 30, 1997
and the year ended December 31, 1996. These 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of ANFI
Predecessor for the six months ended June 30, 1997 and for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
January 22, 1999
37
<PAGE> 40
ANFI PREDECESSOR
STATEMENTS OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
------------------- ------------
<S> <C> <C>
REVENUES:
Net title service revenue-related party................... $14,767,825 $32,702,365
Escrow fees............................................... 5,581,285 9,872,057
Other service charges..................................... 3,162,335 6,127,087
----------- -----------
Total revenues.................................... 23,511,445 48,701,509
----------- -----------
EXPENSES:
Personnel costs........................................... 13,952,776 28,966,154
Other operating expenses.................................. 6,520,630 15,925,037
Title plant rent and maintenance.......................... 2,009,188 4,306,505
----------- -----------
Total expenses.................................... 22,482,594 49,197,696
----------- -----------
Earnings (losses) before income taxes....................... 1,028,851 (496,187)
Pro forma provision for income taxes........................ -- 28,309
Provision for income taxes.................................. 436,981 (182,043)
----------- -----------
Net earnings (losses)....................................... $ 591,870 $ (342,453)
=========== ===========
</TABLE>
See accompanying notes to financial statements
38
<PAGE> 41
ANFI PREDECESSOR
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ATC NATIONS RETAINED
COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------- --------------- PAID-IN (ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIENCY) EQUITY
------ -------- ------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996............. 3,000 $300,000 1,000 $1,000 $ 505,710 $(289,802) $ 516,908
Capital contribution
predecessors of
American Title
Company................ -- -- -- -- 6,197,497 -- 6,197,497
Net losses................ -- -- -- -- -- (342,453) (342,453)
----- -------- ----- ------ ---------- --------- ----------
BALANCE,
DECEMBER 31, 1996........... 3,000 300,000 1,000 1,000 6,703,207 (632,255) 6,371,952
Capital
contribution -- cash... -- -- -- -- 257,869 -- 257,869
Net earnings.............. -- -- -- -- -- 591,870 591,870
----- -------- ----- ------ ---------- --------- ----------
BALANCE,
JUNE 30, 1997............... 3,000 $300,000 1,000 $1,000 $6,961,076 $ (40,385) $7,221,691
===== ======== ===== ====== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements
39
<PAGE> 42
ANFI PREDECESSOR
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (losses)..................................... $ 591,870 $ (342,453)
Adjustments to reconcile net earnings (losses) to cash
provided by operating activities:
Depreciation and amortization.......................... 169,079 126,932
Changes in:
Accounts receivable.................................. 2,574,688 (690,548)
Prepaid expenses and other asset..................... 273,969 (237,208)
Due to/from affiliates............................... 138,835 (1,363,685)
Payables and accruals................................ 893,286 1,455,034
---------- -----------
Total cash (used in) provided by operating
activities..................................... 4,641,727 (1,051,928)
---------- -----------
Cash flows from investing activities:
Net sales (purchase) of property and equipment............ (286,414) 43,994
Net collection from notes receivable...................... -- 7,457
---------- -----------
Total cash provided by (used in) investing
activities..................................... (286,414) 51,451
---------- -----------
Cash flows from financing activities:
Contribution from Parent.................................. 257,869 --
---------- -----------
Decrease (increase) in cash and cash equivalents.......... 4,613,182 (1,000,477)
Cash and cash equivalents at beginning of year............ 419,592 1,420,069
---------- -----------
Cash and cash equivalents at end of year.................. $5,032,774 $ 419,592
========== ===========
</TABLE>
See accompanying notes to financial statements
40
<PAGE> 43
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying financial statements include the divisions and/or
subsidiaries of Fidelity National Financial, Inc. ("FNFI") which were
subsequently merged into or acquired by American Title Company ("ATC" or "the
Company"). ATC was acquired by FNFI in January 1996 for $772,000 from an
unaffiliated party. The purchase price primarily represented the value of
licenses to operate as an underwritten title company in various counties in
California. At the time of acquisition, the operations of the acquired company
were not significant. In July, 1997 60% of ATC was sold to American National
Financial, Inc. ("ANFI") for $6,000,000. ANFI is owned by certain members of
management of ATC. Reference to "ANFI Predecessor" in these financial statements
refers to operations of these entities.
The predecessor operations included in the accompanying financial
statements are those of ATC since it was acquired by FNFI, other operations of
FNFI that were operated as separate profit centers but not separate legal
entities, and were contributed to ATC since its acquisition by FNFI, and Nations
Title Insurance of Arizona, Inc. ("Nations") and Landmark REO Management
Services, Inc. ("Landmark") which were contributed to ATC on July 1, 1997. The
profit centers or divisions of the Predecessor operations include all charges
incurred in operating these operations as if they were a separate legal entity.
All such charges including rent, depreciation, officer salaries, advertising,
utilities, accounting and legal costs have been specifically identified and
charged to the various Predecessor operations. No general or non-specific
allocations have been made.
(2) DESCRIPTION OF BUSINESS
ATC, an underwritten title company in the state of California, and the
other subsidiaries and operations of FNFI that were contributed to ATC, are
engaged in the business of providing title insurance services and other related
services in connection with real estate transactions. The Company operates
throughout California and in Maricopa County, Arizona. ATC and Nations function
as exclusive agents of Fidelity National Title Insurance Company ("FNTIC"), an
affiliate and a wholly owned subsidiary of FNFI. Title insurance policies are
underwritten by FNTIC for an underwriting fee. The underwriting agreement
generally provides that ATC and Nations are liable under any single policy for
only the first $5,000 of losses. As a result of the sale of 60% of ATC to ANFI,
FNFI agreed to make no claim on ATC for claims arising from policies written
prior to January 1, 1997.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following briefly describes the significant accounting policies of the
Company which have been followed in preparing the accompanying financial
statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturity dates of three months or less are considered cash
equivalents.
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 five
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.
41
<PAGE> 44
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Intangibles
Intangible assets include acquired licenses to operate within various
counties and cost in excess of net assets acquired in connection with certain
acquisitions. Intangibles are amortized 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.
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 reflected in the financial statements in the period enacted.
Revenue Recognition
Net title service revenue, escrow fees and the majority of other service
charges are recognized as revenue at the time of closing of the related real
estate transaction. Certain other service charges are recognized over the period
during which the services are provided. Net title service revenue is presented
net of the underwriting fee to affiliated underwriters on the accompanying
statement of combined operations. Related expenses are recognized when incurred.
A provision for losses on title policies is accrued at the time of closing of
the related real estate transaction to cover anticipated losses up to $5,000 per
policy under the underwriting agreement with FNTIC.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(4) INCOME TAXES
ANFI Predecessor's operating results through July 1, 1997 are included in
the income tax returns of FNFI for all periods since their acquisition by FNFI.
The entities that comprise ANFI Predecessor have formal tax allocation
agreements with FNFI whereby if these entities have taxable income, they will
pay FNFI a monthly amount equal to the GAAP book tax provision established for
Federal and state income taxes. If these entities have a taxable loss, FNFI will
pay to them an amount equal to the tax benefits received by FNFI from the
inclusion of these entities in the consolidated Federal and state income tax
returns even if the entities could not have utilized its losses and/or credits
on a separate return basis.
All tax benefits generated by the branches were utilized to offset taxable
income generated by other FNFI subsidiaries. However, for purposes of these
financial statements, a pro forma tax benefit has been provided in the
statements of combined operations for 1996 to reflect an estimate of the tax
benefit that would have been available if these operations had been legally a
part of ATC during these periods. The tax rate used for this estimate is a
combination of the statutory Federal and state tax rates.
42
<PAGE> 45
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Provision (benefit) for income taxes for the six months ended June 30, 1997
and for the year ended December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------
CURRENT DEFERRED TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Federal................................... $549,478 $(214,398) $335,080
State and local........................... 161,009 (59,108) 101,901
-------- --------- --------
$710,487 $(273,506) $436,981
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
CURRENT DEFERRED TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Federal.................................. $395,116 $(550,860) $(155,744)
State and local.......................... 111,557 (137,856) (26,299)
-------- --------- ---------
$506,673 $(688,716) $(182,043)
======== ========= =========
</TABLE>
The effective tax rate for the periods reported differs from the Federal
statutory income tax rate as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------------ ------------------
<S> <C> <C>
Statutory Federal income tax rate...... 35.0% (34.0)%
Non-deductible expenses................ 1.1 2.0
State taxes, net of Federal benefit.... 6.3 (6.0)
Amortization of intangibles............ .6 --
Other.................................. (.5) 1.3
---- -----
42.5% (36.7)%
==== =====
</TABLE>
The deferred tax assets and liabilities consist of excess book over tax
provision for bad debts and employee benefit and vacation accruals.
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 deferred tax assets. Management believes the existing
net deductible temporary differences 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.
(5) 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, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and are not included in the balance
sheet. The Company has a contingent liability relating to proper disposition of
these balances for its customers, which amounted to $47,490,068 at December 31,
1996.
43
<PAGE> 46
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deposits with Insurance Commissioner
The Company is required to maintain certain amounts on deposit with the
Insurance Commissioner in order to operate in certain counties.
Operating Leases
The Company leases certain of its premises and equipment under leases that
expire at various dates. Several of these agreements include escalation clauses
and provide for purchases and renewal options for periods ranging from one to
five years.
Future minimum operating lease payments at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997..................................................... $2,439,937
1998..................................................... 1,894,742
1999..................................................... 922,414
2000..................................................... 545,747
2001..................................................... 298,664
Thereafter............................................... 27,848
----------
Total future minimum operating lease
payments..................................... $6,129,352
==========
</TABLE>
Rent expense for the six months ended June 30, 1997 and the year ended
December 31, 1996 was $2,279,989 and $4,316,326, respectively, of which $630,753
and $1,374,308, respectively were amounts paid to affiliates.
Underwriting Agreement
On July 1, 1997, the Company signed an exclusive underwriting agreement
with FNTIC which is effective for five years. Under the agreement, the Company
is generally limited to write policies only for FNTIC within certain geographic
territories. Underwriting fees are based on a percentage of the gross title
insurance premiums written and approximate 12%. The 12% underwriting fee
includes a one percent fee paid to a FNFI affiliate for management services
provided by these affiliates for ATC.
(6) RELATED PARTY TRANSACTIONS
ANFI predecessor has cost reimbursement agreements with a FNFI subsidiary
whereby certain expenses are paid on behalf of and are later reimbursed by ATC.
(7) SUBSEQUENT EVENTS
Additionally, title insurance premiums are collected by ANFI Predecessor on
behalf of FNFI in accordance with an underwriting agreement (see Note 5).
44
<PAGE> 47
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, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998 and 1997.
Notes to Consolidated Financial Statements.
The following is a list of the financial statements of ANFI Predecessor
included in Item 8 of Part II.
Independent Auditors' Report.
Statements of Combined Operations for the six months ended June 30, 1997
and for the year ended December 31, 1996.
Statements of Shareholder's Equity for the six months ended June 30,
1997 and for the year ended December 31, 1996.
Statements of Cash Flows for the six months ended June 30, 1997 and for
the year ended 1996.
Notes to Financial Statements.
II.
(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 II: Valuation and Qualifying Accounts.
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.
45
<PAGE> 48
(a) The following exhibits are filed herewith or are incorporated by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353.
27 Financial Data Schedule.
</TABLE>
(b) The Company filed no reports on Form 8-K during the fourth quarter
ending December 31, 1998.
47
<PAGE> 50
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
Chief Executive Officer
Date: March 31, 1999
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM P. FOLEY, II Chairman of the Board of March 31, 1999
- ----------------------------------------------------- Directors
William P. Foley, II
/s/ MICHAEL C. LOWTHER Chief Executive Officer and March 31, 1999
- ----------------------------------------------------- Director
Michael C. Lowther
/s/ WAYNE D. DIAZ President and Director March 31, 1999
- -----------------------------------------------------
Wayne D. Diaz
/s/ CARL A. STRUNK Executive Vice President and March 31, 1999
- ----------------------------------------------------- Chief Financial Officer
Carl A. Strunk (Principal Financial and
Accounting Officer)
/s/ DENNIS R. DUFFY Executive Vice President and March 31, 1999
- ----------------------------------------------------- Director
Dennis R. Duffy
/s/ BARBARA A. FERGUSON Executive Vice President and March 31, 1999
- ----------------------------------------------------- Director
Barbara A. Ferguson
/s/ M'LISS JONES KANE Executive Vice President, March 31, 1999
- ----------------------------------------------------- General Counsel and Secretary
M'Liss Jones Kane
/s/ BRUCE ELIEFF Director March 31, 1999
- -----------------------------------------------------
Bruce Elieff
/s/ ROBERT MAJORINO Director March 31, 1999
- -----------------------------------------------------
Robert Majorino
Director March , 1999
- -----------------------------------------------------
Matthew K. Fong
</TABLE>
48
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American National Financial, Inc.:
Under date of March 29, 1999, we reported on the consolidated balance
sheets of American National Financial, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended 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 these 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
March 29, 1999
49
<PAGE> 52
SCHEDULE II
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
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
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Reserve for claim 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
YEAR ENDED DECEMBER 31, 1997:
Reserve for claim losses........... $ -- $465 $ -- $ -- $ 465
Allowance on:
Trade receivables............... -- 553 837(3) 290(1) 1,100
Amortization of cost in excess of
net assets acquired and other
intangible assets............... -- 181 76(3) -- 257
</TABLE>
- ---------------
(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) Balances from July 1, 1997 acquisition of American Title Company and
subsidiaries by American National Financial, Inc.
50
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.
21 List of Subsidiaries of Registrant, incorporated by
reference from Form S-1, Registration No. 333-62353.
27 Financial Data Schedule.
</TABLE>
52
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,344,987
<SECURITIES> 0
<RECEIVABLES> 10,471,492
<ALLOWANCES> 1,895,684
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,922,168
<DEPRECIATION> 1,911,981
<TOTAL-ASSETS> 37,376,041
<CURRENT-LIABILITIES> 15,487,362
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,898,174
<TOTAL-LIABILITY-AND-EQUITY> 37,376,041
<SALES> 0
<TOTAL-REVENUES> 91,424,919
<CGS> 0
<TOTAL-COSTS> 74,067,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 341,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,356,948
<INCOME-TAX> 7,256,883
<INCOME-CONTINUING> 6,865,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,865,347
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 1.96
<FN>
Earnings before minority interest = $10,100,065
</FN>
</TABLE>
