<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
Commission File Number 0-24961
AMERICAN NATIONAL FINANCIAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0731548
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17911 Von Karman Avenue, Suite 240, Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 622-4700
----------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common stock, no par value, 7,150,000 shares as of May 11, 1999
Exhibit Index appears on page 10 of 11 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
March 31, 1999 and December 31, 1998
B. Condensed Consolidated Statements of Earnings 4
for the three-month periods ended
March 31, 1999 and 1998
C. Condensed Consolidated Statements of Cash Flows 5
for the three-month periods ended March 31, 1999 and 1998
D. Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and Qualitative Market Risk Disclosures 9
Part II: OTHER INFORMATION
Items 1, 3, 4 and 5 of Part II have been omitted because they are
not applicable with respect to the current reporting period.
Item 2. Changes in Security and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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.
(Registrant)
By: /s/ Carl A. Strunk Date: May 11, 1999
------------------------------
Carl A. Strunk
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $18,361,081 $10,344,987
Short-term investments, at cost, which approximates fair market value ..... 150,000 150,000
Accounts receivable, net of allowance for doubtful accounts of
$1,843,453 in 1999 and $1,895,684 in 1998 ................................ 8,118,112 8,575,808
Deferred income taxes ..................................................... 2,395,298 2,395,298
Prepaid expenses and other current assets ................................. 2,794,440 2,796,888
----------- -----------
Total current assets ................................................... 31,818,931 24,262,981
Property and equipment, net ................................................. 4,831,131 4,010,187
Title plants ................................................................ 2,327,023 2,252,023
Deposits with Insurance Commissioner ........................................ 120,000 112,500
Intangibles, net of accumulated amortization of $689,248 in 1999 and
$609,103 in 1998 ........................................................... 6,764,057 6,738,350
----------- -----------
Total assets ........................................................... $45,861,142 $37,376,041
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 1,276,914 $ 1,159,588
Other accrued expenses, including $44,173 to affiliate in 1999 and $126,630
to affiliate in 1998 ..................................................... 4,071,005 5,194,767
Customer advances ......................................................... 2,197,524 2,190,364
Current portion of long-term debt ......................................... -- 442,500
Current portion of obligations under capital leases with affiliates ....... 63,254 741,561
Current portion of obligations under capital leases with non-affiliates ... 177,851 115,643
Income taxes payable ...................................................... 2,814,109 3,750,029
Due to affiliate .......................................................... 1,924,953 1,892,910
----------- -----------
Total current liabilities .............................................. 12,525,610 15,487,362
Obligations under capital leases with affiliates ............................ 653,136 669,435
Obligations under capital leases with non-affiliates ........................ 1,281,267 1,321,070
----------- -----------
Total liabilities ...................................................... 14,460,013 17,477,867
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares;
issued and outstanding, none .......................................... -- --
Common stock, no par value; authorized, 50,000,000 shares;
issued and outstanding, 7,150,000 in 1999 and 4,917,096 in 1998 ....... 21,745,777 12,324,264
Retained earnings ...................................................... 9,655,352 7,573,910
----------- -----------
Total shareholders' equity ............................................. 31,401,129 19,898,174
----------- -----------
Total liabilities and shareholders' equity ............................. $45,861,142 $37,376,041
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Net title service revenue -- related party .................... $ 14,277,321 $ 10,744,175
Escrow fees ................................................... 6,658,972 4,529,869
Other service charges ......................................... 3,475,141 2,969,554
------------ ------------
Total revenues ............................................. 24,411,434 18,243,598
------------ ------------
Expenses:
Personnel costs ............................................... 13,828,692 10,248,086
Other operating expenses, includes $1,048,443 with affiliate
in 1999 and $955,304 with affiliate in 1998 .................. 4,179,223 3,497,356
Title plant rent and maintenance .............................. 1,581,785 1,489,359
------------ ------------
Total expenses ............................................. 19,589,700 15,234,801
------------ ------------
Earnings before income taxes and minority interest
in net earnings of consolidated subsidiary ..................... 4,821,734 3,008,797
Provision for income taxes ...................................... 2,025,292 1,184,192
------------ ------------
Earnings before minority interest in net earnings of consolidated
subsidiary ..................................................... 2,796,442 1,824,605
Minority interest in net earnings of consolidated subsidiary .... -- (692,461)
------------ ------------
Net earnings .................................................... $ 2,796,442 $ 1,132,144
============ ============
Basic net earnings .............................................. $ 2,796,442 $ 1,132,144
============ ============
Basic earnings per share ........................................ $ 0.47 $ 0.39
============ ============
Weighted average shares outstanding, basic basis ................ 6,006,501 2,910,416
============ ============
Diluted net earnings ............................................ $ 2,796,442 $ 1,132,144
============ ============
Diluted earnings per share ...................................... $ 0.46 $ 0.36
============ ============
Weighted average shares outstanding, diluted basis .............. 6,138,979 3,127,680
============ ============
Cash dividends per share ........................................ $ 0.10 $ --
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 2,796,442 $ 1,132,144
Adjustments to reconcile net earnings to cash provided
by operating activities:
Depreciation and amortization ............................ 495,155 271,774
Minority interest in net income of consolidated subsidiary -- 692,461
Changes in:
Accounts receivable, net ............................ 457,696 (254,517)
Prepaid expenses and other assets ................... 2,448 226,943
Income taxes payable and deferred income taxes ...... (935,920) 884,192
Accounts payable and other accrued expenses ......... (1,721,436) 865,753
Due to affiliate .................................... 32,043 39
Customer advances ................................... 7,160 (484,510)
----------- -----------
Total cash provided by operating activities .... 1,133,588 3,334,279
----------- -----------
Cash flow from investing activities:
Purchase of title plant ..................................... (75,000) --
Purchase of property and equipment .......................... (1,235,954) (307,298)
Purchase of investments ..................................... (7,500) (1,700,106)
Acquisitions ................................................ (105,852) (150,099)
------------ ------------
Total cash used in investing activities ........ (1,424,306) (2,157,503)
------------ ------------
Repayment of long term debt ................................. (442,500) --
Proceeds from stock options exercised ....................... 219,717 --
Proceeds from issuance of common stock ...................... 9,201,796 --
Payments under capital lease obligations .................... (672,201) (157,926)
------------ ------------
Total cash provided by (used in)
financing activities ......................... 8,306,812 (157,926)
------------ ------------
Increase in cash and cash equivalents .......... 8,016,094 1,018,850
Cash and cash equivalents at the beginning of period ........ 10,344,987 7,223,635
------------ ------------
Cash and cash equivalents at end of period .................. $ 18,361,081 $ 8,242,485
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest ................................................. $ 42,458 $ 165,972
Income taxes ............................................. $ 2,825,000 $ 300,000
Non-cash financing activities:
Dividend declared and unpaid ............................. $ 715,000 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
Notes to Condensed Consolidated Financial Statements
Note A - Basis of Financial Statements
The financial information included in this report includes the accounts of
American National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. This report
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and the Prospectus dated February 12, 1999.
Note B - State Banking Department
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 April 14, 1999, Nations received approval to extend the response date to
State Banking Department until June 1, 1999. In addition, Nations received
approval to extend the annual audit filing date until June 1, 1999.
Note C - Dividends
On March 18, 1999, the Company's Board of Directors declared an initial
quarterly cash dividend of $.10 per share, payable on May 27, 1999, to
stockholders of record on April 8, 1999.
Note D - Santa Barbara Title Company Merger
On April 30, 1999, the Department of Insurance, State of California, approved
the merger of Santa Barbara Title Company, a wholly-owned subsidiary of American
Title Company, into American Title Company.
6
<PAGE> 7
tem 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The reader should consult the risk factors listed from time to time and other
information disclosed in the Company's reports on Forms 10-K and filings under
the Securities Act of 1933, as amended.
Results of Operations
Total revenue for the first quarter of 1999 increased 33.8% to $24,411,434 from
$18,243,598 for the first quarter of 1998. The increases in total revenue for
the three-month ended March 31, 1999 are primarily the result of continuing
strength in the Company's core title operations, which have been positively
impacted by favorable market conditions leading to an increase in real estate
activity and, in turn, increased order inventory levels and closings. The
current economic environment has led to one of the strongest real estate markets
in history, particularly on the west coast. Additionally, the contribution of
the Company's ancillary service subsidiaries has increased as the demand for
services has increased consistent with the trend in real estate activity and the
Company continues the successful integration of business.
The increase in title premiums of $3.5 million, or 32.9%, for the three-month
period ended March 31, 1999, is consistent with the current real estate market
environment. Title orders and requests for real estate related services have
continued to react favorably to existing conditions.
Escrow fees have followed the same trend as title premiums, as would be
expected. Escrow fees increased $2.1 million or 47.0% in the first quarter of
1999 to $6.7 million compared to $4.6 million in the comparable 1998 period. The
increase in escrow fees can also be attributed to current market conditions, the
continuing West Coast real estate recovery and the Company's efforts to expand
its presence in the southern California escrow market.
The Company has made a concerted effort to develop its ancillary service
segments. Ancillary services include document preparation services, appraisal
services, inspection services, central order processing, shortened title
assurance reports ("STAR product") trustee sales guarantee and property
management services. The growth of these subsidiaries has been significant.
First quarter revenue increased 17.0% to $3.5 million compared to $3.0 million
in the first quarter of 1998.
The Company's operating expenses consist primarily of personnel cost, other
operating expenses and title plant maintenance and expense. Title insurance
premiums, escrow fees and other fees and revenue are recognized as income at the
time the underlying transaction closes. As a result, revenue lags approximately
60-90 days behind expenses and therefore gross margins may fluctuate.
Personnel costs include base salaries, bonuses and sales commissions paid to
employees. These costs generally fluctuate with the level of orders opened and
closed and with the mix of revenue. Personnel costs, as a percentage of total
revenue, have slightly increased to 56.6% for the three-month period ended March
31, 1999 compared to 56.2% for the corresponding period in 1998. The Company has
taken significant measures to maintain personnel costs at levels consistent with
revenues. The Company continues to monitor the prevailing market conditions and
will adjust personnel costs in accordance with activity.
Other operating expenses consist primarily of facilities expenses, escrow
losses, provision for liquidated damages, courier services, computer services,
professional services, general insurance, interest expense, trade and notes
receivable allowances and depreciation. Certain fixed costs are incurred
regardless of revenue levels, resulting in period over period fluctuations.
Other operating expenses decreased as a percentage of total revenue to 17.1% in
the first quarter of 1999 from 19.2% in the first quarter of 1998. The Company
previously implemented and remains committed to aggressive cost control programs
that will help maintain operating expense levels consistent with revenue levels.
7
<PAGE> 8
Title plant maintenance decreased as a percent of total revenue to 6.5% in the
first quarter of 1999 from 8.20% in the first quarter of 1998. This reduction as
a percent of total revenue resulted from the recent negotiations regarding
various contracts within several counties in California and Arizona. These
agreements resulted in significant cost reductions throughout the Company.
Income tax expense for the three-month periods ended March 31, 1999 and 1998, as
a percentage of earnings before income taxes was 42.1% and 39.4%, respectively.
The fluctuations in income tax expense as a percentage of earnings before income
taxes are attributable to the Company's estimate of ultimate income tax
liability and the characteristics of net income, i.e., operating income versus
investment income, taxable versus non-taxable.
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 and existing cash
resources.
Net proceeds of approximately $8.4 million were received by the Company in
connection with its initial public offering on February 12, 1999. The
underwriters exercised an option for over allotment to purchase an additional
150,000 shares at $6 per share on March 31, 1999 which resulted in net proceeds
in the amount of $804,000.
On February 12, 1999, a director of the Company exercised options resulting in
the Company receiving proceeds in the amount of $219,717.
On April 14, 1999 the Company completed the purchase of a home office building
located in Orange, California for $2,600,000. The Company financed $2,080,000
secured by a first trust deed. The terms of the note require monthly interest
payments at prime and monthly principal payments of $4,432. The note matures on
April 1, 2004.
Year 2000
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.
8
<PAGE> 9
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.
Item 3. Quantitative and Qualitative Market Risk Disclosures
The Company does not believe that there have been any material changes in market
risks since year end.
9
<PAGE> 10
Part II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
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. Net proceeds of
approximately $8,400,000 were received by the Company. The underwriters
exercised an option for over allotment to purchase an additional 150,000 shares
at $6 per share on March 31, 1999 which resulted in additional net proceeds in
the amount of $804,000.
On February 12, 1999, a director of the Company exercised options resulting in
the Company receiving proceeds in the amount of $219,717.
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 May 10, 1999: $7.25 $4.00
</TABLE>
On May 10, 1999, the last reported sale price of the common stock on the NASDAQ
Stock Exchange was $5.25 per share. As of May 3, 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. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 -- Computation of Basic and Diluted Earnings Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None.
10
<PAGE> 1
EXHIBIT 11
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Net earnings, basic basis ......................... $2,796 $1,132
====== ======
Weighted average basic shares ..................... 6,007 2,911
------ ------
Basic earnings per share .......................... $ .47 $ .39
====== ======
Diluted net earning, basic basis .................. $2,796 $1,132
====== ======
Weighted average shares outstanding
during the period, basic basis .................. 6,007 2,911
Effect of dilutive options ........................ 132 217
------ ------
Weighted average shares outstanding
during the period, diluted basis ................ 6,139 3,128
====== ======
Diluted earnings per share ........................ $ .46 $ .36
====== ======
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,361,081
<SECURITIES> 0
<RECEIVABLES> 9,961,565
<ALLOWANCES> 1,843,453
<INVENTORY> 0
<CURRENT-ASSETS> 31,818,931
<PP&E> 6,995,140
<DEPRECIATION> 2,164,009
<TOTAL-ASSETS> 45,861,142
<CURRENT-LIABILITIES> 12,525,610
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,745,777
<TOTAL-LIABILITY-AND-EQUITY> 45,861,142
<SALES> 24,411,434
<TOTAL-REVENUES> 24,411,434
<CGS> 0
<TOTAL-COSTS> 19,589,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,821,734
<INCOME-TAX> 2,025,292
<INCOME-CONTINUING> 2,796,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,796,442
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
