<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1999.
REGISTRATION NO. 333-62353
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
AMERICAN NATIONAL FINANCIAL, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6361 33-0731648
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
17911 VON KARMAN, SUITE 200
IRVINE, CALIFORNIA 92614
(949) 622-4700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
MICHAEL C. LOWTHER
CHIEF EXECUTIVE OFFICER
17911 VON KARMAN, SUITE 200
IRVINE, CALIFORNIA 92614
(949) 622-4700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS G. BROCKINGTON, ESQ. NICK E. YOCCA, ESQ.
SCOTT SANTAGATA, ESQ. J. MICHAEL VAUGHN, ESQ.
RUTAN & TUCKER, LLP STRADLING YOCCA CARLSON & RAUTH
611 Anton Boulevard, Suite 1400 660 Newport Center Drive, Suite 1600
Costa Mesa, California 92626 Newport Beach, California 92660
(714) 641-5100 (949) 725-4000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value.................. 2,300,000 shares $9.00 $20,700,000 (3)
Representatives' Warrants(4)................ 125,000 shares .001 $125 (4)
Common Stock, no par value(5)............... 125,000 shares $10.80 $1,350,000 (6)
TOTAL....................................... (3)(6)
</TABLE>
(1) Includes 300,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(3) Includes (a) $5,088.75, which was paid with the initial filing of this
Registration Statement, relating to the maximum aggregate offering price at
that time of $17,250,000 calculated at the then applicable rate of .000295
and (b) $959.10 relating to the additional equity of $3,450,000 included in
this filing calculated at the current rate of .000278.
(4) To be issued to the Representatives of the several Underwriters. No fee
pursuant to Rule 457(g).
(5) Issuable upon exercise of the Representatives' Warrants. Pursuant to Rule
416, there are also being registered such additional shares as may be issued
pursuant to the anti-dilution provisions of the Representatives' Warrants.
(6) A filing fee of $531 was previously paid with the initial filing of this
Registration Statement with respect to these securities based on the initial
maximum aggregate offering price of $1,800,000 (which has been reduced to
$1,350,000 with this filing) calculated at the then applicable rate of
.000295.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 25, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------
All of the 2,000,000 shares of Common Stock (the "Common Stock") offered
hereby are being sold by American National Financial, Inc. (the "Company").
Prior to this offering there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
of the Common Stock will be between $7.00 and $9.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Fidelity National Financial, Inc. (NYSE:FNF) will own approximately 30.4% of
the Company's outstanding Common Stock upon the completion of this offering.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "ANFI."
----------------
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 6 HEREOF.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total(3)................................................. $ $ $
</TABLE>
(1) Excludes additional compensation to Cruttenden Roth Incorporated and
Josephthal & Co. Inc., the representatives of the Underwriters (the
"Representatives") in the form of warrants to purchase 125,000 shares of
Common Stock, exercisable over a period of four years commencing one year
from the date of this Prospectus (the "Representatives' Warrants"). The
Company has agreed to indemnify the Underwriters against certain civil
liabilities, including certain liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses estimated to be approximately $800,000
payable by the Company, including $240,000 in the form of a nonaccountable
expense allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
----------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of the certificates for the Common Stock will be made against payment therefor
at the offices of Cruttenden Roth Incorporated, Irvine, California or through
the facilities of the Depository Trust Company, on or about , 1999.
[JOSEPHTHAL & CO. LOGO]
[CRUTTENDEN ROTH INC. LOGO]
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[MAP]
This map shows the locations of the current Company offices (shaded in red),
and the states (shaded in blue) in which National Title Insurance of New York
Inc. is presently licensed to underwrite title insurance. American Title
Company, a subsidiary of the Company, has agreed to acquire National Title
Insurance of New York Inc., although the consummation of this acquisition is
subject to certain conditions and is not a condition to the consummation of this
offering. See "Risk Factors--Risks Associated with the Acquisition of National"
and "Business--Acquisition of National."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE SHORT COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN
THIS PROSPECTUS, EXCEPT WHERE THE CONTEXT REQUIRES OTHERWISE, REFERENCES MADE TO
"ANFI" OR THE "COMPANY" MEAN AMERICAN NATIONAL FINANCIAL, INC. AND ITS
SUBSIDIARIES, AND REFERENCES TO THE "PREDECESSOR" OR "PREDECESSORS" MEAN THE
OPERATIONS DURING ALL PERIODS PRIOR TO JULY 1, 1997 OF VARIOUS SUBSIDIARIES OR
DIVISIONS OF FIDELITY NATIONAL FINANCIAL, INC. ("FNFI") THAT ARE NOW OPERATED BY
THE COMPANY AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION
CONTAINED IN THIS PROSPECTUS (I) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF
$8.00 PER SHARE; (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION; (III) ASSUMES NO EXERCISE OF ANY OTHER OUTSTANDING WARRANTS OR OPTIONS;
(IV) EXCEPT AS SET FORTH HEREIN GIVES PRO FORMA EFFECT TO THE REORGANIZATION
DESCRIBED HEREIN (SEE "REORGANIZATION"); AND (V) REFLECTS A 6.0528-FOR-1 SPLIT
OF THE COMPANY'S COMMON STOCK EFFECTED IN AUGUST 1998.
THE COMPANY
American National Financial, Inc. ("ANFI" or 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 Fidelity National Title Insurance Company ("FNTIC"), a title
underwriter. For the fiscal year ended December 31, 1997 and the nine months
ended September 30, 1998, net title insurance premiums represented approximately
58.3% and 56.7% of the Company's revenues, respectively.
The title insurance industry consists of insurers ("underwriters") who issue
policies through direct operations or through agents. The Company's principal
subsidiary, American Title Company ("ATC"), is an agent, known in California as
an "underwritten title company."
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. FNTIC is a wholly owned subsidiary of
FNFI. Upon completion of this offering, FNFI will own approximately 30.4% of the
outstanding Common Stock. ATC's net title insurance premiums consist of 88% of
the gross title premiums collected on policies issued. The remaining 12% is
comprised of an 11% underwriting fee and a 1% administrative service fee, both
paid to FNTIC pursuant to ATC's agreement with FNTIC. As an agent, ATC is not
subject to the loss and reserve requirements applicable to insurers, and under
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 Company has not
incurred any material liability under its obligation to reimburse FNTIC for such
losses.
The Company has agreed to acquire National Title Insurance of New York Inc.
("National"), a New York underwriter licensed in 35 states and the U.S. Virgin
Islands, from a subsidiary of FNFI. The Company's planned acquisition of
National (the "National Acquisition"), which is subject to regulatory approval,
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 acquisition of National is not a condition to the consummation of
this offering.
The Company provides a variety of other real estate transaction services, in
addition to title insurance, the most significant of which is escrow services.
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 23.8% of the
Company's revenues in 1997 and 26.1% of the Company's revenues for the nine
months ended September 30, 1998.
The key elements of the Company's business strategy include: expanding
geographically into key markets through a combination of opening new offices,
teaming with local companies, and acquiring established operations; leveraging
the business relationships it develops through its title insurance business to
generate additional demand for its other services; recruiting highly qualified
personnel with business relationships that permit the expansion of the Company's
business; and pursuing strategic acquisitions of title insurance and related
real estate service companies in order to penetrate new markets.
The Company's principal executive offices are located at 17911 Von Karman,
Suite 200, Irvine, California 92614. The Company's telephone number is (949)
622-4700.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...... 2,000,000 shares
Common Stock to be Outstanding after the
Offering(1)............................ 6,917,096 shares
Use of Proceeds.......................... To finance the National Acquisition and for
general corporate purposes, which may include
strategic acquisitions. See "Use of Proceeds"
and "Business-- Acquisition of National."
Nasdaq National Market Symbol............ ANFI
</TABLE>
- ------------------------
(1) Excludes (i) 125,000 shares issuable upon exercise of the Representatives'
Warrants; (ii) 332,904 shares issuable upon exercise of outstanding options
at an exercise price of $0.66 per share; and (iii) 650,000 shares initially
reserved for issuance and any additional shares which become issuable under
the Company's 1998 Stock Incentive Plan, of which 330,000 shares will be
issuable, subject to certain vesting requirements, pursuant to options to be
granted upon consummation of this offering at an exercise price equal to the
initial public offering price. See "Management--Stock Incentive Plan."
RISK FACTORS
Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION(1)
(In thousands, except per share and other operating data)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------- ----------------------------
SIX MONTHS PRO FORMA(2)
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED YEAR ENDED
------------------------------------------ JUNE 30, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997 1997 1997
--------- --------- --------- --------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................... $ 17,294 $ 16,790 $ 30,815 $ 48,702 $ 23,511 $ 30,911 $ 59,375
Personnel costs..................... 9,810 13,917 21,497 28,966 13,953 16,599 30,712
Other operating expenses............ 5,782 7,649 10,999 15,925 6,521 8,084 15,717
Agent commissions................... -- -- -- -- -- 4,351
Title plant rent and maintenance.... 1,215 1,538 2,642 4,306 2,009 2,664 4,673
Income (loss) before minority
interest.......................... 280 (3,909) (2,721) (342) 592 1,790 1,808
Net income (loss)(3)................ 280 (3,909) (2,721) (342) 592 709 1,808
PER SHARE DATA:
Earnings per share:
Basic............................. $ 0.24
Diluted........................... $ 0.23
Weighted average common shares
outstanding:......................
Basic............................. 2,972
Diluted........................... 3,107
PRO FORMA DATA (UNAUDITED)(2):
Net income.......................... 1,808
Earnings per share:
Basic............................. $ 0.36
Diluted........................... $ 0.35
Weighted average common shares
outstanding:
Basic............................. 5,072
Diluted........................... 5,207
OTHER OPERATING DATA:
Gross title insurance premiums...... $ 10,719 $ 12,650 $ 24,494 $ 37,148 $ 16,773 $ 20,641 $ 42,273
Files opened........................ 60,600 94,900 40,700 46,800 87,500
Files closed........................ 36,700 63,700 28,200 32,600 60,800
Average fee per file(4)............. $ 786 $ 773 $ 835 $ 886 $ 863
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
--------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................... $ 65,724
Personnel costs..................... 35,281
Other operating expenses............ 12,654
Agent commissions................... --
Title plant rent and maintenance.... 5,137
Income (loss) before minority
interest.......................... 7,370
Net income (loss)(3)................ 4,476
PER SHARE DATA:
Earnings per share:
Basic............................. $ 1.55
Diluted........................... $ 1.41
Weighted average common shares
outstanding:......................
Basic............................. 2,890
Diluted........................... 3,178
PRO FORMA DATA (UNAUDITED)(2):
Net income.......................... 7,069
Earnings per share:
Basic............................. $ 1.42
Diluted........................... $ 1.34
Weighted average common shares
outstanding:
Basic............................. 4,990
Diluted........................... 5,278
OTHER OPERATING DATA:
Gross title insurance premiums...... $ 42,367
Files opened........................ 103,600
Files closed........................ 68,600
Average fee per file(4)............. $ 835
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 (UNAUDITED)
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)(5)
--------- ------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 6,977 $ 6,305 $ 18,305
Working capital....................................................... 7,054 8,024 20,024
Total assets.......................................................... 28,821 43,321 55,321
Long-term debt and capitalized leases................................. 3,223 4,023 2,023
Minority interest..................................................... 6,468 -- --
Shareholders' equity.................................................. 5,599 21,078 35,078
</TABLE>
- ----------------------------------
(1) The Company was incorporated in November 1996 and acquired 60% of the
outstanding common stock of ATC on July 1, 1997. Pursuant to the
Reorganization (See "Reorganization"), the Company acquired the remaining
40% of the outstanding common stock of ATC subsequent to September 30, 1998.
The summary financial information set forth above includes financial
information for the Predecessor for the years ended December 31, 1993, 1994,
1995 and 1996 and historical information for the Company for the year ended
December 31, 1997, which includes the results of operations of ATC for the
six month period from July 1, 1997 to December 31, 1997, and from January 1,
1998 to September 30, 1998.
(2) Gives pro forma effect to the Reorganization, the National Acquisition and
the acquisition of 60% of ATC as if all such transactions were consummated
on January 1, 1997. See "Reorganization," "Unaudited Pro Forma Combined
Condensed Financial Information" and "Business--Acquisition of National."
(3) The statutory tax rate was 40% (combined federal and state) for each of the
periods presented. The effective tax rate fluctuates from period to period
based on the components of taxable income.
(4) 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 Shortened Title Assurance Reports ("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."
(5) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered hereby at the assumed initial public offering price of
$8.00 per share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
IN EVALUATING AN INVESTMENT IN THE COMMON STOCK BEING OFFERED HEREBY,
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
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 results 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. In the first half of 1998, low
mortgage interest rates and a strong California real estate market contributed
to increased residential transaction activity. Accordingly, 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. 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 based title 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
6
<PAGE>
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, 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. See
"Business-- Business Strategy" and "Business--Acquisition of National." The
acquisition of National is not a condition to the consummation of this offering.
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. See "Business--Competition."
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. See "Business--Business Strategy."
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,
7
<PAGE>
develop, motivate and retain its employees. The Company's rapid growth has
presented and will continue to present numerous operational challenges, such as
the assimilation of financial reporting systems, and will increase the demands
on the Company's senior management and the Company's systems and internal
controls. In addition, the Company's success depends in large part upon its
ability to attract, develop, motivate and retain talented employees with
significant industry experience and contacts. Such employees are currently in
great demand and there is significant competition for employees with the
requisite skills and experience from other national and regional title
companies. There can be no assurance that the Company will be able to attract
and retain the qualified personnel necessary to pursue its growth strategy.
There can be no assurance that the Company will be able to maintain or
accelerate its current growth, effectively manage its expanding operations or
achieve planned growth on a timely or profitable basis. To the extent the
Company is unable to manage its growth effectively and efficiently, the
Company's business, financial condition and results of operations could be
materially and adversely affected. See "Business-- Business Strategy."
GOVERNMENT REGULATION OF SUBSIDIARIES
The Company's underwritten title company subsidiaries, ATC, Nations Title
Insurance of Arizona, Inc. and Santa Barbara Title Company, are subject to
regulation by the state insurance authorities of the various states in which
they transact business. The regulation of underwritten title companies is
generally limited to requirements to maintain specified levels of net worth and
working capital, and to obtain and maintain a license in each of the counties in
which it operates.
If ATC acquires National, it will be subject to more extensive regulations
applicable to title insurance underwriters. The nature and extent of such
regulation of title insurance underwriters varies from jurisdiction to
jurisdiction, but typically involves regulation of dividend payments, prior
approval of the acquisition and control of a title company or of any company
controlling a title company, certain transactions entered into by a title
company with any of its affiliates, standards of solvency and minimum amounts of
capital surplus which must be maintained, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured, approval of
policy forms and premium rates, methods of accounting, establishing reserves for
losses and loss adjustment expenses, underwriting and marketing practices, and
reinsurance. These regulations may impede, or impose burdensome conditions on,
rate increases or other actions that the Company might want to take to enhance
its operating results. Such regulation is generally intended for the protection
of policyholders rather than security holders. In addition, state regulatory
examiners perform periodic examination of title underwriters.
The insurance underwriter regulatory framework has recently been subject to
increased scrutiny by the National Association of Insurance Commissioners, state
legislators and insurance regulators in the United States Congress. No assurance
can be given that future legislative or regulatory changes resulting from such
activity will not adversely affect the Company or its subsidiaries.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is highly dependent on the efforts of William P.
Foley, II, Chairman of the Board, Michael C. Lowther, Chief Executive Officer,
Wayne D. Diaz, President, Barbara A. Ferguson, Executive Vice President, Dennis
R. Duffy, Executive Vice President, and Carl A. Strunk, Executive Vice President
and Chief Financial Officer. The loss of services of Messrs. Foley, Lowther,
Diaz, Duffy, or Strunk, or Ms. Ferguson, or any of the Company's key executives,
for any reason, could materially and adversely affect the Company's business,
operating results and financial condition. The Company has entered into
three-year employment agreements with Mr. Lowther, Mr. Diaz, Ms. Ferguson and
Mr. Duffy. The Company does not maintain key man insurance on any of its
executive officers.
8
<PAGE>
HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS FROM SUBSIDIARIES
As a holding company whose principal assets include the securities of its
underwritten title company subsidiaries, the Company's ability to meet debt
service obligations and pay operating expenses and dividends, if authorized by
its Board of Directors, depends primarily on the receipt of sufficient dividends
from its subsidiaries. The insurance statutes and related regulations of
California and Arizona, among other states, require the maintenance of minimum
amounts of net worth, which may affect the underwritten title company's ability
to pay dividends to the Company.
VARIABILITY IN QUARTERLY RESULTS
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including differences in the
timing of the recognition of revenues and expenses, changes in the mix of title
orders relating to refinancing transactions and real estate sale transactions,
the seasonality of the real estate industry, the fluctuation of interest rates
and general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company has allocated a substantial portion of the net proceeds to be
received in connection with this offering to increase the Company's funds
available for working capital and general corporate purposes. The Company's
management will have broad discretion to allocate the proceeds of the offering
and the purposes for which such funds are used may vary significantly depending
on a number of factors, including the amount of future revenues, the amount of
cash generated or used by the Company's operations and acquisition opportunities
presented to the Company.
CONTROL BY PRINCIPAL SHAREHOLDERS
Following the consummation of the offering, FNFI will beneficially own
approximately 30.4% of the Company's outstanding Common Stock (approximately
29.1% if the Underwriters' over-allotment option is exercised in full), and will
have the ability to control or significantly influence the election of directors
and the results of other matters submitted to a vote of shareholders. In
addition, Messrs. Lowther and Diaz, who are executive officers and directors of
the Company, will collectively own approximately 28.1% of the Company's
outstanding Common Stock (approximately 27.0% if the Underwriters'
over-allotment option is exercised in full) after the consummation of the
offering. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company and may adversely affect the
voting or other rights of other holders of Common Stock. See "Management" and
"Principal Shareholders."
SUBSTANTIAL DILUTION
The initial public offering price for the shares of Common Stock in this
offering is substantially higher than the net tangible book value per share of
Common Stock. Purchasers of the Common Stock offered hereby will therefore incur
an immediate substantial dilution in the amount of $4.48 per share in pro forma
net tangible book value. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiations among the Company and the
Representative of the Underwriters and may bear no relationship to the Company's
book value, earnings history or other investment criterion or to the price at
which the Common Stock will trade after the offering. See "Underwriting" for
factors to be considered in determining the initial public offering
9
<PAGE>
price. The Company believes that factors such as announcements of developments
related to the Company's business, the Company's failure to meet securities
analysts' expectations, general conditions in the real estate market and the
economy, acquisitions, and changes in government regulations could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations which have affected the market price of many service based
companies and which have at times been unrelated to the operating performance of
the specific companies whose stocks were affected. Such fluctuations could
adversely affect the market price of the Company's Common Stock. Pursuant to the
Bylaws of the NASD, the Common Stock will be offered at a price no greater than
that recommended by a qualified independent underwriter. See "Underwriting."
POTENTIAL ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 5,000,000
shares of "blank check" preferred stock, which will have such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of such
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. See "Description of Securities-- Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF OUTSTANDING OPTIONS
Sales of a substantial number of shares of Common Stock including shares of
Common Stock issued upon the exercise of outstanding options and warrants in the
public market following the offering could adversely affect the market price for
the Common Stock. The officers, directors and substantially all other
shareholders of the Company have agreed not to sell or otherwise transfer any
Common Stock for 180 days following the date of the Underwriting Agreement
without the consent of Cruttenden Roth Incorporated on behalf of the
Underwriters. The Company has outstanding options to purchase 332,904 shares of
Common Stock at an exercise price of $0.66 per share. The Company intends to
grant options to certain directors and employees to purchase 330,000 shares of
Common Stock at the initial public offering price and subject to certain vesting
requirements pursuant to the Company's 1998 Stock Incentive Plan. The Company
intends to register all of such shares, as well as options to purchase an
additional 320,000 shares reserved for issuance under the 1998 Stock Incentive
Plan, on a registration statement on Form S-8, shortly after the date of this
Prospectus. The possibility that substantial amounts of Common Stock may be sold
in the public market would likely have a material adverse effect on prevailing
market prices of the Common Stock and could impair the Company's ability to
raise capital through the sale of its equity securities. See "Shares Eligible
for Future Sale."
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. As a result, any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. The Company has performed a review of its internal
systems to identify and resolve the effect of Year 2000 software issues on the
integrity and reliability of its financial and operational systems. The Company
has a plan to correct and test the programs affected by the conversion of a two
digit year to a four digit year. The final phase of the project is scheduled to
be completed by mid-1999. The review of systems also includes the identification
of vendors that may have a significant impact on the Company's operations and
their expected completion of any conversions.
10
<PAGE>
The Company believes that its information systems operations and those of
its significant vendors are or will become Year 2000 compliant such that there
will not be any material adverse impact on the Company's results of operations
or financial condition. The Year 2000 compliance changes are being made
concurrently with planned systems upgrades and conversions in the normal course
of business as such expenses associated with Year 2000 conversions are not
expected to materially impact the Company. Presently, the Company does not have
a contingency plan for Year 2000 issues. The Company expects to have such a plan
in effect by the end of the first quarter of 1999. Management believes that if
financial and operational systems relating to its escrow services are not Year
2000 compliant, the Company's business may be significantly interrupted,
resulting in a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. Such forward-looking statements are
principally contained in the sections "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and include, without limitation, (i) the Company's
expectation and estimates as to the Company's business operations (including the
introduction of new products or services) and future financial performance
(including growth in revenues and net income and cash flows); (ii) the ability
of the Company to finance its working capital requirements; (iii) the Company's
business strategy for expanding its presence in the title insurance and real
estate related services markets; and (iv) the Company's ability to distinguish
itself from its current and future competitors. In addition, in those and other
portions of this Prospectus, the words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions, as they relate to the
Company or its management, are intended to identify forward-looking statements.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
In addition to the other risks described elsewhere in this "Risk Factors"
discussion, factors that could cause or contribute to such differences include,
but are not limited to (i) those relating to conducting operations in a
competitive and regulated environment; (ii) the effect of fluctuations in the
volume of, and the seasonal nature of, real estate transactions; (iii) the
relatively high costs of producing title evidence when premiums are subject to
regulatory and competitive restraints; (iv) changes in external competitive
market factors or in the Company's internal budgeting process which might impact
trends in the Company's results of operations; (v) unanticipated working capital
or other cash requirements; (vi) changes in the Company's business strategy or
an inability to execute its strategy due to unanticipated changes in the title
insurance and real estate services markets; and (vii) various other factors that
may prevent the Company from competing successfully in the marketplace.
11
<PAGE>
THE COMPANY
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 presently maintains 62 offices in 13 counties throughout
California and one county in Arizona.
ATC, the Company's primary subsidiary, commenced business in 1989, and was
acquired by FNFI in January 1996, at which time ATC's operations had been
conducted solely in Kern County, California. Following the acquisition by FNFI,
ATC pursued an expansion strategy that included acquiring and opening offices in
selected other counties located throughout California. In January 1997, FNFI
contributed to ATC all of the outstanding stock of 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.
The Company was incorporated in November 1996 by its current management, and
in July 1997 acquired 60% of the outstanding stock of ATC from 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. 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.
In March 1998, the Company agreed to acquire National, a New York
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. The acquisition of National is not a condition to the consummation of
this offering. See "Risk Factors--Risks Associated with the Acquisition of
National" and "Business--Acquisition of National."
REORGANIZATION
In November 1998, the Company acquired the remaining 40% of the outstanding
common stock of ATC from FNFI in exchange for shares of Common Stock
representing approximately 43% of the Company's outstanding shares immediately
prior to this offering. In connection with this exchange, approximately $3.5
million of the Company's acquisition debt was repaid, and the remaining unpaid
balance of the acquisition debt, in the amount of approximately $1.2 million,
was assumed by the shareholders of the Company, other than FNFI. (These
transactions are collectively referred to as the "Reorganization"). The
acquisition of 40% of ATC will be recorded at the estimated fair market value of
the Company's Common Stock that was issued in the Reorganization and will result
in the recognition of goodwill, which will be amortized over 25 years.
12
<PAGE>
The following diagram illustrates the Company's corporate structure before
the Reorganization.
[GRAPHIC]
[Graphic consists of organizational chart showing subsidiaries and classes
of shareholders of American Title Company, before reorganization.]
(1) Includes American Document Services, Inc., West Point Appraisal Services,
Inc., West Point Support Services, Inc. and West Point Properties, Inc.
13
<PAGE>
The following diagram illustrates the corporate structure of the Company
after the Reorganization.
[GRAPHIC]
[Graphic consists of organizational chart showing subsidiaries and classes
of shareholders of American National Financial, Inc. and American Title Company,
after reorganization.]
(1) Includes American Document Services, Inc., West Point Appraisal Services,
Inc., West Point Support Services, Inc. and West Point Properties, Inc.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and other offering expenses (estimated to be approximately
$800,000), all of which are payable by the Company, are estimated to be
approximately $14.0 million ($16.2 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use $3.25 million of the
net proceeds to complete the acquisition of National. See "Business--
Acquisition of National." The remainder will be used for general corporate
purposes, which may include strategic acquisitions. 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 acquisitions.
Management will have broad discretion with respect to the expenditure of such
proceeds. See "Risk Factors--Broad Discretion as to Use of Proceeds."
In addition to providing the Company with funds to complete the purchase of
National and other possible strategic acquisitions, the purposes of this
offering are to increase the Company's working capital and equity base, to
provide a public market for its Common Stock, to provide liquidity for its
shareholders and to permit the use of publicly tradeable Common Stock in future
acquisitions.
Pending their application by the Company, the net proceeds of the offering
not immediately required for the purposes described above will be invested
principally in U.S. Government securities, short-term certificates of deposit,
money market funds or other short-term, interest-bearing securities.
DIVIDEND POLICY
ANFI has not declared or paid any cash dividends on its capital stock since
its inception and for the foreseeable future intends to follow a policy of
retaining all of its earnings, if any, to finance the development and continued
expansion of its business. There can be no assurance that dividends will ever be
paid by the Company. Any future determination as to payment of dividends will
depend upon the Company's financial condition, results of operations and such
other factors as the Board of Directors deems relevant. The Company's
underwritten title company subsidiaries are subject to certain governmental
regulations requiring the maintenance of minimum amounts of net worth, which may
affect their ability to pay dividends to the Company and, accordingly, the
Company's ability to pay dividends to its shareholders. See "Risk
Factors--Holding Company Structure; Reliance on Dividends from Subsidiaries."
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at September 30, 1998
after giving effect to the Reorganization was approximately $10.4 million or
$2.11 per share. Pro forma net tangible book value per share represents the
amount of the Company's total tangible assets less total liabilities, divided by
the number of shares of Common Stock outstanding. After giving effect to the
receipt by the Company of the estimated net proceeds from the sale of the shares
of Common Stock offered hereby at an assumed initial public offering price of
$8.00 per share, the pro forma as adjusted net tangible book value of the
Company at September 30, 1998 would have been approximately $24.4 million, or
$3.52 per share. This represents an immediate increase in pro forma net tangible
book value of $1.41 per share to the existing shareholders and an immediate
dilution of $4.48 per share to new investors purchasing shares in the offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $ 8.00
Pro forma net tangible book value per share as of
September 30, 1998..................................... 2.11
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.41
-----
Pro forma net tangible book value per share after the
offering................................................. 3.52
-----
Dilution per share to new investors........................ $ 4.48
-----
-----
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1998, after giving effect to the Reorganization, the differences between the
existing shareholders and new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 4,917,096 71.1% $ 7,668,432(1) 32.4% $ 1.56
New investors........................... 2,000,000 28.9 $16,000,000 67.6 $ 8.00
--------- -------- ----------- -------
Total................................. 6,917,096 100.0% $23,668,432 100.0%
--------- -------- ----------- -------
--------- -------- ----------- -------
</TABLE>
- ------------------------
(1) Includes approximately $6.5 million, representing the book value at
September 30, 1998 of the minority interest associated with the shares of
ATC owned by FNFI, which were exchanged for 2,099,996 shares of Common Stock
in connection with the Reorganization, and $1.2 million, representing the
principal amount of indebtedness of the Company assumed by the existing
shareholders (other than FNFI) in connection with the Reorganization.
Excludes $414,000 attributable to stock options granted to a director.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) at
September 30, 1998, (ii) on a pro forma basis to give effect to the
Reorganization and the National Acquisition and (iii) pro forma as adjusted, to
give effect to the Reorganization and the National Acquisition and to reflect
the sale of 2,000,000 shares of Common Stock offered by the Company hereby and
the application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Reorganization." The following table should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.............................................. $ 6,977 $ 6,305 $ 18,305
--------- ----------- -----------
--------- ----------- -----------
Acquisition debt....................................................... $ 1,200(1) $ 2,000(2) $ --
Note payable, secured by building(3)................................... 473 473 473
Obligations under capital leases with affiliates(4).................... 1,550 1,550 1,550
--------- ----------- -----------
Total long term debt and capital lease obligations..................... 3,223 4,023 2,023
Minority interest in consolidated subsidiary........................... 6,468 -- --
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares authorized; no shares
issued and outstanding............................................. -- -- --
Common Stock, no par value, 50,000,000 shares authorized; 2,817,100
shares issued and outstanding, actual; 4,917,096 shares issued and
outstanding, pro forma; and 6,917,096 shares issued and
outstanding, pro forma as adjusted(5).............................. -- -- --
Additional paid-in-capital........................................... 414 15,893 29,893
Retained earnings.................................................... 5,185 5,185 5,185
--------- ----------- -----------
Total shareholders' equity......................................... 5,599 21,078 35,078
--------- ----------- -----------
Total capitalization............................................. $ 15,290 $ 25,101 $ 37,101
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Acquisition debt bears interest at the prime rate and matures in November
2002. This amount was assumed by the shareholders in connection with the
Reorganization.
(2) Represents the $2,000,000 promissory note constituting a portion of the
purchase price for National. The Company intends to use the proceeds of this
offering to pay the entire $3.25 million purchase price for National at the
closing of that acquisition.
(3) Note payable, secured by building, bears interest at the prime rate and
matures in December 1999.
(4) Includes current maturities of $720,313.
(5) Excludes (i) 125,000 shares issuable upon exercise of the Representatives'
Warrants; (ii) 332,904 shares issuable upon exercise of outstanding options
at an exercise price of $0.66 per share; and (iii) 650,000 shares initially
reserved for issuance and any additional shares which become issuable under
the Company's 1998 Stock Incentive Plan, of which 330,000 shares will be
issuable, subject to certain vesting requirements, pursuant to options to be
granted upon consummation of this offering at an exercise price equal to the
initial public offering price. See "Management--Stock Incentive Plan."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
The Predecessor financial information included in this Prospectus 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. 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 income statement data for the year ended December 31, 1997, and
the balance sheet data at 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
in this Prospectus. The Predecessor balance sheet data at December 31, 1996 and
the Predecessor income statement data for each of the two fiscal years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997 have been
derived from the Predecessor's Financial Statements, which statements are
included elsewhere in this Prospectus. The Company's data for the nine months
ended September 30, 1998 have been derived from unaudited Financial Statements
also appearing elsewhere herein and which, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results of interim periods presented. Results for the
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the entire year. 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 Prospectus.
<TABLE>
<CAPTION>
COMPANY
-------------------
PREDECESSOR
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS NINE MONTHS
------------------------------------------ ENDED JUNE 30, ENDED SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net title insurance premiums............ $ 9,437 $ 11,147 $ 21,560 $ 32,703 $ 14,768 $ 8,478
Escrow fees............................. 6,205 4,470 6,350 9,872 5,581 3,539
Other fees and income................... 1,652 1,173 2,905 6,127 3,162 3,409
--------- --------- --------- --------- ------- -------
Total revenue......................... $ 17,294 $ 16,790 $ 30,815 $ 48,702 $ 23,511 $ 15,426
Personnel costs......................... 9,810 13,917 21,497 28,966 13,953 8,380
Other operating expenses................ 5,782 7,649 10,999 15,925 6,521 4,209
Title plant rent and maintenance........ 1,215 1,538 2,642 4,306 2,009 1,455
Agent commissions....................... -- -- -- -- -- --
Income (loss) before minority
interest.............................. 280 (3,909) (2,721) (342) 592 696
Net income (loss)(3).................... 280 (3,909) (2,721) (342) 592 190
PER SHARE DATA:
Earnings per share:
Basic.................................
Diluted...............................
Weighted average common shares
outstanding:
Basic.................................
Diluted...............................
PRO FORMA DATA (UNAUDITED) (1):
Net income..............................
Earnings per share:
Basic.................................
Diluted...............................
Weighted average common shares
outstanding:
Basic.................................
Diluted...............................
OTHER OPERATING DATA:
Gross title insurance premiums.......... $ 10,719 $ 12,650 $ 24,494 $ 37,148 $ 16,773 $ 9,634
Files opened............................ 60,600 94,900 40,700
Files closed............................ 36,700 63,700 28,200
Average fee per file(4)................. $ 786 $ 773 $ 835
<CAPTION>
PRO
FORMA(1)(2)
YEAR NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1998
--------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net title insurance premiums............ $ 18,027 $ 37,654 $ 37,274
Escrow fees............................. 7,352 12,934 17,179
Other fees and income................... 5,532 8,787 11,271
------- ------------- -------------
Total revenue......................... $ 30,911 $ 59,375 $ 65,724
Personnel costs......................... 16,599 30,712 35,281
Other operating expenses................ 8,084 15,717 12,654
Title plant rent and maintenance........ 2,664 4,673 5,137
Agent commissions....................... 4,351
Income (loss) before minority
interest.............................. 1,790 1,808 7,370
Net income (loss)(3).................... 709 1,808 4,476
PER SHARE DATA:
Earnings per share:
Basic................................. $ 0.24 $ 1.55
Diluted............................... $ 0.23 $ 1.41
Weighted average common shares
outstanding:
Basic................................. 2,972 2,890
Diluted............................... 3,107 3,178
PRO FORMA DATA (UNAUDITED) (1):
Net income.............................. 1,808 7,254
Earnings per share:
Basic................................. $ 0.36 $ 1.45
Diluted............................... $ 0.35 $ 1.37
Weighted average common shares
outstanding:
Basic................................. 5,072 4,990
Diluted............................... 5,207 5,278
OTHER OPERATING DATA:
Gross title insurance premiums.......... $ 20,641 $ 42,273 $ 42,368
Files opened............................ 46,800 87,500 103,600
Files closed............................ 32,600 60,800 68,600
Average fee per file(4)................. $ 886 $ 863 $ 835
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
-------
COMPANY
---------------------------
<S> <C> <C> <C>
DECEMBER DECEMBER
31, 31,
1996 1997
------- -------
SEPTEMBER 30,
1998
---------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 420 $7,224 $ 6,977
Working capital....................... 4,035 5,047 7,054
Total assets.......................... 10,661 22,365 28,821
Due to affiliates..................... 722 1,411 --
Shareholders' equity.................. 6,372 1,123 5,599
</TABLE>
- ----------------------------------
(1) Gives pro forma effect to the Reorganization (see "Reorganization"), the
National Acquisition (see "Business--Acquisition of National"), and the
acquisition of 60% of ATC as if all such transactions were consummated on
January 1, 1997.
(2) See "Unaudited Pro Forma Combined Condensed Financial Information."
(3) The statutory tax rate was 40% (combined federal and state) for each of the
periods presented. The effective tax rate fluctuates from period to period
based on the components of taxable income.
(4) 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."
19
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma combined condensed financial information
is based upon historical financial statements of the Company, National and ANFI
Predecessor, and has been prepared to illustrate the effects of (i) the
acquisition of 60% of the common stock of ATC (the "Majority Acquisition"),
which occurred on July 1, 1997, (ii) the Reorganization whereby the Company
acquired the remaining 40% of ATC, and (iii) the National Acquisition. See
"Reorganization" and "Business-- Acquisition of National."
The unaudited pro forma condensed balance sheet as of September 30, 1998
gives effect to the National Acqisition and Reorganization as if these
transactions were consumated on September 30, 1998, and was prepared based on
the historical balance sheets of the Company and National as of September 30,
1998. The unaudited pro forma combined condensed income statements for the year
ended December 31, 1997 and the nine months ended September 30, 1998 give effect
to the Majority Acquisition, Reorganization, and National Acquisition as if
these transactions had been completed at the beginning of each period presented.
The unaudited pro forma combined condensed income statements for the year ended
December 31, 1997 and the period ended September 30, 1998 were prepared based
upon the historical financial statements of the Company and National for those
periods.
The unaudited pro forma combined condensed financial information is provided
for comparative purposes only and is not indicative of the results of operations
or financial position of the combined companies that would have occurred had
these transactions been consumated at the beginning of the periods presented or
on the date indicated, nor is it indicative of future operating results or
financial position. The unaudited pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes are
reasonable under the circumstances. The unaudited pro forma combined condensed
financial information and related notes thereto should be read in conjunction
with the Company's consolidated financial statements and the financial
statements of ANFI Predecessor and National included in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------------------
PRO FORMA ADJUSTED TO
ADJUSTMENTS PRO FORMA REFLECT
TO REFLECT ADJUSTMENTS NATIONAL
COMPANY NATIONAL NATIONAL TO REFLECT ACQUISITION AND
PRO FORMA CONDENSED BALANCE SHEET HISTORICAL HISTORICAL ACQUISITION REORGANIZATION REORGANIZATION
---------- ---------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 6,977 $ 578 $(1,250)(1) $-- $ 6,305
Investments......................... 1,879 6,372 -- -- 8,251
Other current assets................ 12,450 284 -- -- 12,734
---------- ---------- ------- ------- -------
Total current assets.............. 21,306 7,234 (1,250) -- 27,290
Intangibles............................. 2,904 -- 655(2) 7,811(5) 11,370
Other assets............................ 4,611 50 -- -- 4,661
---------- ---------- ------- ------- -------
Total assets...................... $28,821 $7,284 $ (595) $ 7,811 $43,321
---------- ---------- ------- ------- -------
---------- ---------- ------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities....................... $12,727 $ 529 $-- $-- $13,256
Reserve for claim losses............ 805 4,160 -- -- 4,965
Current portion of long-term debt... -- -- 325(1) -- 325
Current portion of capitalized
leases............................ 720 -- -- -- 720
---------- ---------- ------- ------- -------
Total current liabilities......... 14,252 4,689 325 19,266
Long-term debt.......................... 1,673 -- 1,675(1) (1,200)(4) 2,148
Obligation under capital leases with
affiliates............................. 829 -- -- -- 829
---------- ---------- ------- ------- -------
Total liabilities................. $16,754 $4,689 $ 2,000 $(1,200) $22,243
---------- ---------- ------- ------- -------
Minority interest....................... 6,468 -- -- (6,468)(5) --
---------- ---------- ------- ------- -------
Shareholders' equity:
Common stock, $0 par value.......... -- 977 (977)(3) -- --
Additional paid-in capital.......... 414 1,750 (1,750)(3) 15,479 (5)(4 15,893
Retained earnings................... 5,185 (236) 236(3) -- 5,185
Net unrealized investment gains..... -- 104 (104)(3) -- --
---------- ---------- ------- ------- -------
Total shareholders' equity........ 5,599 2,595 (2,595) 15,479 21,078
---------- ---------- ------- ------- -------
Total liabilities and
shareholders' equity............ $28,821 $7,284 $ (595) $ 7,811 $43,321
---------- ---------- ------- ------- -------
---------- ---------- ------- ------- -------
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Information on
page 22.
20
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------
ADJUSTED TO
PRO FORMA ADJUSTMENTS REFLECT
TO REFLECT MAJORITY MAJORITY
PRO FORMA PRO FORMA ACQUISITION ACQUISITION,
COMBINED ADJUSTMENTS ----------------------- PRO FORMA NATIONAL
CONDENSED TO REFLECT ANFI OTHER PRO ADJUSTMENTS ACQUISITION,
INCOME COMPANY NATIONAL NATIONAL PREDECESSOR FORMA TO REFLECT AND
STATEMENT HISTORICAL HISTORICAL ACQUISITION HISTORICAL ADJUSTMENTS REORGANIZATION REORGANIZATION
---------- ---------- ------------ ---------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net title
insurance
premiums...... $18,026 $4,860 $-- $14,768 $-- $-- $37,654
Escrow fees.... 7,353 -- -- 5,581 -- -- 12,934
Other fees and
income........ 5,532 188 -- 3,162 -- (95)(13) 8,787
---------- ---------- ----- ---------- --------- ----------- -------
Total
revenue... 30,911 5,048 -- 23,511 -- (95) 59,375
---------- ---------- ----- ---------- --------- ----------- -------
Expenses:
Personnel
costs......... 16,599 13,953 -- 160(10) 30,712
Other operating
expenses...... 8,084 976 209(1)(2) 6,521 137 (7)(8 (210)(11) 15,717
Agent
Commissions... -- 4,351 -- -- -- -- 4,351
Title plant
rent and
maintenance... 2,664 -- -- 2,009 -- -- 4,673
---------- ---------- ----- ---------- --------- ----------- -------
Total
expenses... 27,347 5,327 209 22,483 137 (50) 55,453
---------- ---------- ----- ---------- --------- ----------- -------
Income before
income taxes
and minority
interest..... 3,564 (279) (209) 1,028 (137) (45) 3,922
Provision for
income
taxes......... 1,774 (95) (65)(6) 436 (45)(6) 109(6) 2,114
---------- ---------- ----- ---------- --------- ----------- -------
Income before
minority
interest..... 1,790 (184) (144) 592 (92) (154) 1,808
Minority
interest...... (1,081) -- -- -- (237)(9) 1,318(12) --
---------- ---------- ----- ---------- --------- ----------- -------
Net income..... $ 709 $ (184) $(144) $ 592 $(329) $1,164 $ 1,808
---------- ---------- ----- ---------- --------- ----------- -------
---------- ---------- ----- ---------- --------- ----------- -------
Weighted
average
shares
outstanding:
basic........ 2,972 5,072
---------- -------
---------- -------
diluted...... 3,107 5,207
---------- -------
---------- -------
Basic net
earnings per
share........ $ 0.24 $ 0.36
---------- -------
---------- -------
Diluted net
earnings per
share........ $ 0.23 $ 0.35
---------- -------
---------- -------
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Information on
page 22.
21
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA PRO FORMA ADJUSTED TO
ADJUSTMENTS TO ADJUSTMENTS REFLECT NATIONAL
PRO FORMA COMBINED CONDENSED INCOME COMPANY NATIONAL REFLECT NATIONAL TO REFLECT ACQUISITION AND
STATEMENT HISTORICAL HISTORICAL ACQUISITION REORGANIZATION REORGANIZATION
---------- ---------- ---------------- ----------- ------------------
Revenues:
Net title insurance premiums............ $37,274 $250 -$- $-- $37,524
Escrow fees............................. 17,179 -- -- -- 17,179
Other fees and income................... 11,271 229 -- (55)(13) 11,445
---------- ----- ----- ----------- -------
Total revenue..................... 65,724 479 -- (55) 66,148
---------- ----- ----- ----------- -------
Expenses:
Personnel costs......................... 35,281 -- -- 80(10) 35,361
Other operating expenses................ 12,654 374 135(1)(2) (26)(11) 13,137
Agent commissions....................... 179 -- -- 179
Title plant rent and maintenance........ 5,137 -- -- -- 5,137
---------- ----- ----- ----------- -------
Total expenses.................... 53,072 553 135 54 53,814
---------- ----- ----- ----------- -------
Income before income taxes and minority
interest.............................. 12,652 (74) (135) (109) 12,334
Provision for income taxes(6)........... 5,280 (25) (41)(6) 51(6) 5,265
---------- ----- ----- ----------- -------
Income before minority interest......... 7,372 (49) (94) (160) 7,069
Minority interest....................... (2,894) -- -- 2,894(12) --
---------- ----- ----- ----------- -------
Net income.............................. $ 4,478 $(49) $ (94) $2,734 $ 7,069
---------- ----- ----- ----------- -------
---------- ----- ----- ----------- -------
Weighted average shares outstanding,
basic.................................. 2,890 4,990
---------- -------
---------- -------
Weighted average shares outstanding,
diluted................................ 3,178 5,278
---------- -------
---------- -------
Basic net earnings per share............ $ 1.55 $ 1.42
---------- -------
---------- -------
Diluted net earnings per share.......... $ 1.41 $ 1.34
---------- -------
---------- -------
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(1) The purchase price for National is $3.25 million, comprised of $1.25
million in cash and $2 million of debt which will accrue interest at an
annual rate of 10%. Principal and interest payments on the debt will be
$42,494 per month for sixty months. Pro forma interest expense on the note
for the year ended December 31, 1997 and the nine months ended September
30, 1998 would have been $185,000 and $117,000, respectively.
(2) The increase in intangibles is computed as the purchase price of $3.25
million, less the fair market value of the net assets acquired of $2.6
million. Intangibles will be amortized over 25 years. Pro forma
amortization of intangibles for the year ended December 31, 1997 and the
nine months ended September 30, 1998 would be $24,000 and $18,000,
respectively.
(3) Eliminates equity account of National.
(4) Reflects the assumption of $1.2 million of the Company's acquisition debt
by certain shareholders.
(5) Reflects the acquisition of the remaining 40% of ATC, at the fair value of
$14,280,000. The goodwill of $7,811,000 is calculated as the excess of the
purchase price of $14,280,000 over the fair value of the net assets
acquired.
(6) To give effect to the tax impact of the pro forma adjustments. The tax
impact of the Reorganization adjustments is computed based on an estimated
effective tax rate of 40.7% and includes all income statement adjustments
except for amortization of intangibles, as this is not tax deductible. The
tax impact of the National Acquisition adjustments is calculated based on
an estimated effective tax rate of 34% and includes all income statement
adjustments except for the amortization of intangibles.
(7) Includes amortization of goodwill of $27,000 from the Majority Acquisition
from January 1, 1997 to June 30, 1997.
(8) Includes the increase to interest expense that would have been incurred had
the acquisition debt been outstanding since January 1, 1997, estimated at
approximately $110,000.
(9) Reflects the pro forma minority interest in the Predecessor earnings for
the six months ended June 30, 1997, calculated as 40% of net income.
(10) Reflects the pro forma effect of the 1998 executive employment agreements
executed in connection with the Reorganization. Such agreements are
expected to increase compensation expense by approximately $160,000 per
year. Amounts exclude any additional bonuses that may become payable, as
such bonuses are purely discretionary.
(11) Reflects the reduction of interest expense that would have resulted had
the acquisition debt been repaid on January 1, 1997 (1997 pro forma) or
January 1, 1998 (1998 pro forma). The 1997 and 1998 interest expense
reductions would have been approximately $522,000 and $260,000,
respectively. This is offset by the amortization of goodwill of $312,000
(1997) and $234,000 (1998) from the acquisition of 40% of the common stock
of ATC.
(12) Reflects the elimination of the minority interest resulting from the
Reorganization.
(13) Reflects the forfeiture of interest income on the cash used to repay the
debt. The 1997 and 1998 forfeiture of interest income would have been
approximately $95,000 and $55,000, respectively.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company and the Predecessors and the
related Notes thereto appearing elsewhere herein.
The discussion of the Company's historical results of operations includes
solely the historical financial information of ANFI and does not include any
financial information of the Predecessor.
The discussion of pro forma results of operations set forth below includes
both historical financial information relating to the Company and financial
information relating to the Company's Predecessors. All amounts and related
information for 1995 and 1996 relate solely to Predecessor operations, which
consisted of the operations that are now ATC.
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. ("NTA") 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.
For purposes of the pro forma discussion below, the Company operations
(which includes ATC for July 1, 1997 through December 31, 1997) and the
Predecessor operations (for January 1, 1997 through June 30, 1997) have been
combined as though ANFI had acquired 100% of ATC as of January 1, 1997. This pro
forma information excludes the impact of the proposed acquisition of National.
Despite existing as separate legal entities during the year, for comparison
purposes the substance of the operations of these businesses were consistent
throughout 1997. Therefore, presenting the pro forma financial information for
1997 provides the most consistent basis for a meaningful comparison with
operations in 1996 and 1995. The information for the nine months ended September
30, 1997 and September 30, 1998 consist of Predecessor information for the first
six months of 1997, and actual historical information for the Company for the
three months ended September 30, 1997 and the nine months ended September 1998.
Operations during the nine months of 1997 include both the ATC, NTA and West
Point Support Services, Inc. ("WPSS") operations whereas operations during the
nine months of 1998 also include certain other Company Subsidiaries which are
immaterial to the results of operations of the Company. See "The Company."
The Company has recently completed several acquisitions and the
Reorganization and is currently involved in an additional pending acquisition.
Pursuant to the Reorganization, the minority interest in consolidated subsidiary
as shown on the Company's balance sheet was eliminated in November 1998. The
Company believes that the acquisition of Santa Barbara Title Company will not
have a material impact on the Company's results of operations. In addition, the
Company is currently in the process of completing a resource allocation plan
concerning the operation of National following its acquisition. 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. The impact of such acquisition on
the Company's results of operations is dependent upon the resource allocation
plan ultimately adopted by the Company.
23
<PAGE>
OVERVIEW
The following table sets forth certain financial and other data of the
Company and its Predecessor operations for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR
---------------- COMPANY
-------------
YEAR ENDED PRO FORMA
DECEMBER 31, YEAR ENDED
---------------- DECEMBER 31,
1995 1996 1997
------- ------- -------------
(DOLLARS IN THOUSANDS, OTHER
THAN FEE PER FILE)
<S> <C> <C> <C>
Total revenue........................... $30,815 $48,702 $54,327
Total expenses.......................... 35,137 49,197 49,917
Income before minority
interest.............................. (2,721) (342) 2,136
Net income (loss)....................... $(2,721) $ (342) $2,136
------- ------- -------------
------- ------- -------------
Gross title insurance premiums.......... $24,494 $37,148 $42,273
Orders opened(1)........................ 60,600 94,900 87,500
Orders closed(1)........................ 36,700 63,700 60,800
Average fee per file(1)................. $ 786 $ 773 $ 863
</TABLE>
- ------------------------
(1) Excludes orders and fees related to STAR products.
The Company's revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, reductions in mortgage interest rates beginning in
the latter part of 1991 triggered an increase in refinancing activity, which
continued at 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 the second half of 1996, all of
1997 and the first three quarters of 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 revenues from net title insurance premiums
(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 insurance premiums 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 Issuing Agency Agreements with that underwriter,
and similar fees paid by the Company's other underwritten title company
subsidiaries. Prior to 1997, the Predecessor operations were charged a 12%
underwriting fee by its underwriters. Beginning in January 1997, ATC entered
into an Issuing Agency Agreement with FNTIC under which ATC pays FNTIC
24
<PAGE>
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. See "Certain Transactions."
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.
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.
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. The repayment of debt pursuant to the terms
of the Reorganization will result in a material decrease in interest expense.
Interest expense incurred during 1997 and the nine month period ended September
30, 1998, related to the debt repaid in the Reorganization was $413,000 and
$343,000, respectively.
Net title insurance premiums 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. These factors may result in fluctuations in gross margins from quarter
to quarter.
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.
HISTORICAL RESULTS OF OPERATIONS
The Company was incorporated in November 1996 but had no operations until it
acquired 60% of the outstanding stock of ATC in July 1997. For the nine months
ended September 30, 1997, the Company's revenue and expenses included only three
months of ATC's operations compared to nine months of ATC-related operations
included in the period ended September 30, 1998. Therefore, revenue and expenses
are not comparable from period to period.
25
<PAGE>
REVENUE
The Company's total revenues were $15.4 million, $30.9 million and $65.7
million for the nine months ended September 30, 1997, the year ended December
31, 1997 and the nine months ended September 30, 1998, 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 generally as well as an increase in the number of real estate
transactions handled by the Company.
EXPENSES
The Company's personnel costs were $8.4 million, $16.6 million and $35.3
million for the nine months ended September 30, 1997, the year ended December
31, 1997 and the nine months ended September 30, 1998, respectively and
represented 54.5%, 53.7%, and 53.7% of total revenues for those periods. Other
operating expenses were $4.2 million, $8.1 million and $12.7 million for the
nine months ended September 30, 1997, the year ended December 31, 1997 and the
nine months ended September 30, 1998, respectively and represented 27.3%, 26.2%,
and 19.3% of total revenues for those periods. Title plant rent and maintenance
expenses $1.5 million, $2.7 million and $5.1 million for the nine months ended
September 30, 1997, the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, and represented 9.7%, 8.7%, and 7.8% of total
revenues for those periods. The Company's expenses have increased since its
inception as the Company has acquired other operations, hired additional
personnel, expanded its business and handled more real estate transactions.
PRO FORMA RESULTS OF OPERATIONS--INTERIM PERIODS
The following table presents information regarding the components of the
Company's revenue for the periods presented. The percentages shown reflect the
dollar amounts shown expressed as a percentage of total revenues for the
corresponding period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
PRO FORMA
1997 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net title insurance premiums........................... $ 23,246 59.7% $ 37,274 56.7%
Escrow fees............................................ 9,120 23.4% 17,179 26.1%
Other fees and revenue................................. 6,572 16.9% 11,271 17.2%
--------- --------- --------- ---------
Total revenue...................................... $ 38,938 100.0% $ 65,724 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
Personnel costs........................................ $ 22,333 57.3% $ 35,281 53.7%
Other operating expenses............................... 10,729 27.6% 12,654 19.3%
Title plant rent and maintenance....................... 3,464 8.9% 5,138 7.8%
--------- --------- --------- ---------
Total expenses..................................... $ 36,526 93.8% $ 53,073 80.8%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
REVENUE
TITLE INSURANCE PREMIUMS. Revenues from net title insurance premiums were
$37.3 million for the nine months ended September 30, 1998 (the "1998 Period")
as compared to $23.2 million for the same period in 1997 (the "1997 Period"), an
increase of $14.1 million or 60.8%. This growth is a result of increases in both
home prices and the number of sale and refinancing transactions that occurred in
the 1998 Period. During this time period the number of orders closed increased
by 51.0%. The average fee per file, defined as total revenues (including gross
title insurance premiums) net of abbreviated title policies issued primarily to
lenders, divided by the number of orders closed, was $835 for the 1998 Period,
as compared to $838 for the 1997 Period. Gross title insurance premiums were
$42.4 million for the 1998 Period, as compared to $26.4 million for the 1997
Period.
26
<PAGE>
ESCROW FEES. Revenues from escrow fees were $17.2 million for the 1998
Period as compared to $9.1 million for the 1997 Period, an increase of $8.1
million or 89.0%. This increase is a result of a continuing favorable market for
real estate transactions as well as continuing efforts by the Company to expand
its escrow operations in Southern California. Ten new escrow offices were opened
during 1998. The favorable real estate market has resulted from demand and from
favorable mortgage interest rates.
OTHER FEES AND REVENUE. Other fees and revenue were $11.3 million for the
1998 Period, as compared to $6.6 million for the 1997 Period, an increase of
$4.7 million or 71.2%. This increase is a result of the increased number of real
estate transactions handled by the Company during the 1998 Period, as described
above, as well as an expansion of the services offered by the Company between
the periods. Services offered in the 1998 Period that were not offered in the
1997 Period include real estate appraisal services, property site inspections,
and document retrieval services. Revenues from the expanded services for the
1998 Period were $1.8 million. The remaining $2.9 million increase is attributed
to the increased number of real estate transactions in the 1998 Period.
EXPENSES
PERSONNEL COSTS. Personnel costs were $35.3 million for the 1998 Period as
compared to $22.3 million for the 1997 Period, an increase of $13.0 million or
58.3%. Personnel costs were 53.7% of total revenues for the 1998 Period as
compared to 57.3% for the 1997 Period. This decrease of personnel costs as a
percentage of revenues is a result of increased productivity and operating
efficiencies resulting from the implementation of automated escrow and title
systems, which has been ongoing since 1997. Management does not expect the
improvement in productivity to continue at the same rate in the future.
Management has entered into new employment agreements with certain of its
executive officers and projects that these will result in at least $160,000 of
additional personnel costs annually, exclusive of any additional discretionary
bonus that may become payable.
OTHER OPERATING EXPENSES. Other operating expenses were $12.7 million for
the 1998 Period as compared to $10.7 million for the 1997 Period, an increase of
$2.0 million or 18.7%. As a percentage of total revenues, other operating
expenses decreased to 19.3% during the 1998 Period from 27.6% for the 1997
Period. This reduction as a percentage of revenues resulted from the
implementation of automated escrow and title systems and cost control programs
by the Company during 1997 and from centralized oversight of operating branches.
TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance
expenses were $5.1 million for the 1998 Period as compared to $3.5 million for
the 1997 Period, an increase of $1.6 million or 45.7%. This increase is
primarily due to the variable component relating to the volume of orders, which
increased during the 1998 Period. The variable component of title plant rent and
maintenance expense relates to a per order charge for title plant usage. Title
plant rent and maintenance expenses as a percentage of net title insurance
premiums were 13.8% during the 1998 Period as compared to 14.9% during the 1997
period. Certain title plant rent expenses are incurred by the Company regardless
of volume levels. This is reflected by the fact that compared to the 1997
period, the Company's title plant rent and maintenance expenses as a percentage
of title insurance premiums, were lower during the 1998 Period when the
Company's volume levels were much higher.
27
<PAGE>
PREDECESSOR AND PRO FORMA RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995
The following table presents information regarding the components of the
Company's revenue for the periods presented.
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------ COMPANY
--------------------
YEAR ENDED DECEMBER 31,
------------------------------------------ PRO FORMA YEAR ENDED
1995 1996 DECEMBER 31, 1997
-------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net title insurance premiums....... $ 21,560 70.0 $ 32,702 67.1 $ 32,794 60.4
Escrow fees........................ 6,350 20.6 9,872 20.3 12,934 23.8
Other fees and revenue............. 2,905 9.4 6,127 12.6 8,599 15.8
--------- --------- --------- --------- --------- ---------
Total revenue.................. $ 30,815 100.0% $ 48,701 100.0% $ 54,327 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Personnel costs.................... $ 21,497 69.8 $ 28,966 59.5 $ 30,712 56.5
Other operating expenses........... 10,999 35.7 15,925 32.5 14,532 26.7
Title plant rent and maintenance... 2,642 8.6 4,306 8.8 4,673 8.6
--------- --------- --------- --------- --------- ---------
Total expenses................. $ 35,138 114.0% $ 49,197 100.8% $ 49,917 91.8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUE
TITLE INSURANCE PREMIUMS. Revenues from net title insurance premiums was
$32.8 million for 1997, as compared to $32.7 million for 1996, an increase of
$0.1 million or 0.3%. This increase resulted from increases in both refinancing
and real estate sale transactions during 1997, 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. The Company's average fee per file for orders closed in
1997 was $863 compared to $773 in 1996, an increase of $90 or 11.6%. Gross title
insurance premiums were $37.4 million and $37.1 million in 1997 and 1996,
respectively.
ESCROW FEES. Revenues from escrow fees were $12.9 million for 1997, as
compared to $9.9 million for 1996, an increase of $3.0 million or 30.3%. The
increase in escrow fees, which occurred despite the more modest increase in
title premiums during the same period, is primarily related to the establishment
of new operations in Southern California, which contributed approximately $2.0
million.
OTHER FEES AND REVENUE. Other fees and revenue were $8.7 million for 1997
as compared to $6.1 million for 1996, an increase of $2.5 million or 41.0%. This
increase is primarily a result of the additional services offered by the Company
from its support services, appraisal and asset management divisions
(representing approximately $2.2 million of the increase). The remaining
increase of approximately $400,000 is related to the increase in business volume
in the title-related divisions.
EXPENSES
PERSONNEL COSTS. Personnel costs were $30.7 million for 1997, as compared
to $29.0 million for 1996, an increase of $1.7 million or 5.9%. As a percentage
of total revenue, personnel costs decreased to 56.5% in 1997 from 59.5% in 1996.
This decrease of personnel costs as a percentage of revenues is a result of
increased productivity and operating efficiencies resulting from the
implementation of automated escrow and title systems. Management does not expect
the improvement in productivity to continue at the same rate in the future,
however.
OTHER OPERATING EXPENSES. Other operating expenses were $14.6 million in
1997 as compared to $15.9 million in 1996, a decrease of $1.3 million or 8.2%.
As a percentage of total revenue, other operating expenses decreased to 26.7% in
1997 from 32.5% in 1996. This decrease resulted from cost control programs
implemented in 1997.
28
<PAGE>
TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance
expenses were $4.7 million for 1997 as compared to $4.3 million for 1996, an
increase of $0.4 million or 9.3%. This increase is primarily due to the variable
component relating to the volume of orders, which increased during 1997. Title
plant rent and maintenance expenses as a percentage of net title insurance
premiums were 14.3% in 1997 as compared to 13.1% during 1996. The period to
period increase resulted primarily from the expansion of the Company's
operations during 1997 and the related increase in fixed title plant costs
without a corresponding increase in title insurance premiums.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUE
TITLE INSURANCE PREMIUMS. Revenue from net title insurance premiums was
$32.7 million for 1996, as compared to $21.6 million for 1995, an increase of
$11.1 million or 51.4%. This increase resulted from increases in both
refinancing and real estate sale transactions during fiscal 1996, which resulted
primarily from decreases in mortgage interest rates in late 1995.
ESCROW FEES. Revenue from escrow fees were $9.9 million for 1996, as
compared to $6.4 million for 1995, an increase of $3.5 million or 54.7%. This
increase is a result of year to year improvement in the real estate market
described above, as well as focused efforts by the Predecessor to expand its
escrow business in certain markets, such as Southern California, during 1996.
OTHER FEES AND REVENUES. Other fees and revenues increased to $6.1 million
for 1996 as compared to $2.9 million for 1995, an increase of $3.2 million or
110.0%. This increase is a result of the introduction of the STAR product, which
is the Company's "Shortened Title Assurance Report," a limited coverage title
policy offered to lenders. STAR product revenue accounted for $2.7 million of
the $3.2 million increase from 1995 to 1996.
EXPENSES
PERSONNEL COSTS. Personnel costs were $29.0 million for 1996, as compared
to $21.5 million for 1995, an increase of $7.5 million or 34.9%. As a percentage
of total revenue, personnel costs decreased to 59.5% in 1996 from 69.8% in 1995,
due principally to the year to year growth in revenues. The increase in
personnel costs relates to an increase in the number of employees of the
Company, which accompanied the 74.1% increase in total revenue during these
periods.
OTHER OPERATING EXPENSES. Other operating expenses increased to $15.9
million in 1996 from $11.0 million in 1995. The increase resulted from growth in
the Predecessor's existing operations, which resulted in $2.1 million of
additional expenses primarily relating to variable costs associated with the
growth of the Predecessor's operations, as well as expenses of $1.2 million
relating to the acquisition of NTA and expenses of an additional $1.2 million
relating to the introduction of the STAR division products. As a percentage of
total revenue, other operating expenses decreased to 32.5% in 1996 from 35.7% in
1995. This decrease resulted from the fixed nature of certain of the other
operating expenses which were covered by a larger revenue base.
TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance
expenses were $4.3 million for 1996 as compared to $2.6 million for 1995, an
increase of $1.7 million or 65.4%. This increase is primarily due to the
variable component relating to the volume of orders, which increased during
1996. Title plant rent and maintenance expenses as a percentage of net title
insurance premiums was 13.2% in 1996 as compared to 12.3% in 1995. The slight
increase can be attributed to the increase in the number of title operations in
1996 given the partially fixed nature of these expenses.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $8.5 million for the nine months
ended September 30, 1998. At September 30, 1998, the Company held cash and cash
equivalents of $7.0 million. At that date, the Company had long term debt of
$2.5 million which consisted of capitalized leases, real estate indebtedness and
$1.2 million of debt (the "Acquisition Debt") incurred in connection with the
acquisition by the Company of 60% of the outstanding common stock of ATC from
FNFI. In September 1998, $3.5 million of the Company's Acquisition Debt was
repaid and the remaining $1.2 million was assumed by the Company's shareholders
in October 1998 as part of the Reorganization. See "Reorganization."
Cash provided by (used in) operating activities was $2.8 million and $(4.6)
million for the years ended December 31, 1997 (the Company) and 1996 (the
Predecessor), respectively. At December 31, 1997, the Company had $7.2 million
of cash and cash equivalents and long term debt of $8.5 million.
The Company's current cash requirements include debt service, operating
expenses and taxes. 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 if the acquisition is consummated. 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.
At December 31, 1997, the Company was not in compliance with certain
covenants in the agreements relating to the Acquisition Debt, which covenants
relate to minimum tangible net worth and capital expenditure restrictions. The
lender waived its right to recall the debt with respect to these two violations.
The Company does not expect to violate any debt covenants relating to the
Acquisition Debt in the future. As a result of the Reorganization, none of the
Acquisition Debt remains outstanding.
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 $10.4 million as of December 31, 1997 and
$12.8 million as of September 30, 1998. The net worth of Santa Barbara Title
Company was $380,000 as of December 31, 1997 and $260,000 as of September 30,
1998.
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
30
<PAGE>
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 insurance premium 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.
YEAR 2000 ISSUES
The Company has completed a review of the Year 2000 issues affecting its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company believes that it has
identified substantially all of the internal application software programs which
require modification in order to become Year 2000 compliant and has a plan to
correct and test the programs affected by the conversion of a two-digit year to
a four-digit year. The Company expects the early phases of the project to be
completed by the end of 1998. The final phase of the project is scheduled to be
completed by mid-1999. The review of systems also includes the identification of
vendors that may have a significant impact on the Company's operations and their
expected completion of any conversions.
The Company believes that its information systems operations and those of
its significant vendors are or will become Year 2000 compliant such that there
will not be any material adverse impact on the Company's results of operations
or financial condition. The Year 2000 compliance changes are being made
concurrently with planned systems upgrades and conversions in the normal course
of business as such expenses associated with Year 2000 conversions are not
expected to materially impact the Company. Presently, the Company does not have
a contingency plan for Year 2000 issues. The Company expects to have such a plan
in effect by the end of the first quarter of 1999. Management believes that if
financial and operational systems relating to its escrow services are not Year
2000 compliant, the Company's business may be significantly interrupted,
resulting in a material adverse effect on the Company's financial condition and
results of operations.
31
<PAGE>
BUSINESS
INTRODUCTION
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 a title underwriter. For
the year ended December 31, 1997 and the nine months ended September 30, 1998,
net title insurance premiums represented approximately 58.3% and 56.7% of the
Company's revenues, respectively.
The title insurance industry consists of insurers ("underwriters") who issue
policies through direct operations or through agents. The Company's principal
subsidiary, ATC, is an agent, known in California as an "underwritten title
company." ATC has entered into an Issuing Agency Agreement to issue policies on
behalf of FNTIC, an insurer which is licensed in California and Arizona, among
other states. The Company has agreed to acquire National, a New York 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'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).
REAL ESTATE INDUSTRY
Title insurance revenue is closely related to the level of real estate
purchase and 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 and
1997 and into the first half of 1998. It is impossible to predict the future
direction interest rates and the real estate market may move or fluctuate.
According to Corporate Development Services, title insurance premiums in the
United States were approximately $6.0 billion in 1997, representing an 11.8%
compound annual growth rate since 1995. The Company believes that the increase
in title premiums is primarily a result of an increase in new home sales and an
increase in refinancing transactions, both of which resulted in large part from
a decrease in mortgage interest rates during this period. The Mortgage Bankers
Association estimates that refinancing transactions during the first four months
of 1998 were four times higher than during the same period in 1997. In addition,
the National Association of Realtors anticipates record sales of 4.35 million
residential units in 1998, as compared to 4.22 million units in 1997.
32
<PAGE>
Historically, as interest rates decrease, the number of housing starts
typically rise in following periods. The following chart displays this
relationship between national housing starts and interest rates.
[GRAPHIC]
Historical data shows the correlation between mortgage interest rates and
title policy premiums: as interest rates decrease, the volume of title policies
typically increases.
[GRAPHIC]
33
<PAGE>
TITLE INDUSTRY
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.
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.
34
<PAGE>
(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.
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.
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.
REAL ESTATE RELATED SERVICES
In addition to title insurance, real estate transactions often require other
services such as escrow, appraisals, property management, trustee sale
guarantees, and document preparation. The demand for faster closings and more
cost effective transactions has resulted in a trend toward purchasing real
estate related services on a "one stop" basis from vendors who offer the full
array of such services. Because title companies occupy a central role in the
process of closing a real estate transaction they are in a unique position to
provide these services.
The demand for some of these real estate related services is also
countercyclical to the title insurance business. For example, as the economy
declines, interest rates rise and residential housing sales drop, which causes
foreclosures and the corresponding demand for trustee sale guarantees and
property management services to increase.
35
<PAGE>
[GRAPHIC]
COMPANY OPERATIONS
TITLE 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 insurance premiums consist 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 Industry and
- --Relationship With Fidelity National Financial, Inc."
However, 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, if successfully 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 "Business--Acquisition of
National" and "Risk Factors--Risks Associated with the Acquisition of National."
The maximum amount of liability for an insurer, such as National, 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.
36
<PAGE>
ATC'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 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.
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 calendar years 1996 and 1997 and the nine months ended September 30,
1998, the following branch operations of the Company and the Predecessor
accounted for the indicated percentages of total gross title insurance premium
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
NINE MONTHS ENDED
1996 1997 SEPTEMBER 30, 1998
-------------------------- -------------------------- --------------------------
PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alameda, CA................................. $ 2,801,290 7.7% $ 2,340,155 6.3% $ 3,263,047 7.7%
Contra Costa, CA............................ 878,216 2.4% 1,422,190 3.8% 2,305,649 5.4%
Fresno, CA.................................. 494,605 1.4%
Inland Empire, CA (Riverside and
San Bernardino)........................... 2,887,014 7.9% 3,239,259 8.7% 2,184,460 5.2%
Kern, CA.................................... 2,593,224 7.1% 2,569,164 6.9% 2,237,639 5.3%
Los Angeles................................. 5,909,103 16.1% 6,622,961 17.6% 6,090,129 14.4%
Orange, CA.................................. 10,606,365 29.1% 9,310,389 24.8% 11,287,076 26.6%
Phoenix, AZ................................. 1,912,400 5.2% 2,680,274 7.2% 2,637,105 6.2%
Sacramento, CA.............................. 764,427 2.1% 348,751 0.9% 457,146 1.1%
San Diego, CA............................... 2,946,284 8.0% 2,279,367 6.1% 3,276,303 7.7%
San Mateo, CA............................... 1,005,697 2.7% 899,866 2.4% 631,964 1.5%
Santa Barbara, CA........................... -- -- 371,192 0.9%
Santa Clara, CA............................. 3,529,743 9.6% 2,863,894 7.7% 3,903,202 9.2%
Ventura, CA................................. 271,626 0.7% 2,837,472 7.6% 3,721,845 8.8%
------------- ----- ------------- ----- ------------- -----
$ 36,599,994 100.0% $ 37,413,742 100.0% $ 42,366,757 100.0%
------------- ----- ------------- ----- ------------- -----
------------- ----- ------------- ----- ------------- -----
</TABLE>
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 "Business--Relationship With Fidelity National
Financial, Inc." The Company has also entered into a 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
37
<PAGE>
which it operates through joint plant user agreements with Experian Group and
Security Union Title Insurance Company.
Maintenance activities 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 $21,000 per month per branch.
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 23.8% of
the Company's revenues in 1997 and 26.1% of the Company's revenues for the nine
months ended September 30, 1998. This higher growth rate is primarily
attributable to the opening of 10 new escrow offices by the Company in
California during 1998.
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 17.9% of the
Company's revenues in 1997, and 17.1% of the Company's revenue for the nine
months ended September 30, 1998.
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.
DOCUMENT PREPARATION SERVICES. The Company also 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 provision of 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 provided through independent approved fee appraisers.
SHORTENED TITLE ASSURANCE REPORTS. 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.
38
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become a leading supplier of title insurance
and related real estate financial and informational services. The key elements
in the Company's strategy to achieve this objective are to:
- EXPAND TO KEY GEOGRAPHIC MARKETS. A large percentage of title insurance
policies are generated in a relatively small number of markets throughout
the United States. The Company believes it can maximize its growth
opportunities by expanding into these key real estate markets, initially
in the western region of the United States. In 1997, premiums paid in
California, Arizona, Texas, Oregon, Washington and New Mexico together
represented 36.7% of the policy premiums written in the United States
according to Corporate Development Services, Inc. The Company intends to
pursue such expansion through a combination of opening new offices,
teaming with local companies, and acquiring established operations.
- EXPAND PROVISION OF REAL ESTATE RELATED SERVICES. The Company's
complementary real estate related services, such as trustee sale services,
property management and disposition services and document services,
provide an additional source of revenue to the Company, much of which is
countercyclical to the title insurance business. The Company believes it
can leverage its relationships developed through the issuance of title
insurance to generate additional business for these services. The
provision of these value-added services to escrow companies, lenders, real
estate brokers and agents, also increases their familiarity with and
reliance upon the Company's title insurance services.
- RECRUIT HIGHLY QUALIFIED PERSONNEL. The Company believes that the
development of personal relationships between the Company's personnel and
its customers is crucial to the expansion of the Company's business. For
this purpose, the Company seeks to recruit experienced and talented
personnel who the Company believes have substantial business contacts in
relevant markets. The Company has implemented a 1998 Stock Incentive Plan
and intends to implement a Stock Purchase Plan to provide additional
incentives for its employees.
- LEVERAGE ACQUISITION OF NATIONAL. The Company has recently agreed to
acquire National in order to facilitate its entry into the markets in
which National is licensed and to permit the Company to directly
underwrite the title insurance policies in geographic areas not covered by
the Company's exclusive relationship with FNTIC. In addition, the Company
anticipates that National will provide the opportunity to create agency
relationships in a variety of geographic locations and generate revenues
through underwriting title policies issued by those agents and expand
escrow operations in other areas.
- PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic
acquisitions of title insurance and real estate service companies in order
to penetrate new markets, increase its diversity of service offerings, and
add qualified personnel to its existing staff.
MARKETING AND SALES
The Company attempts to increase the volume of its title insurance and real
estate related services business primarily through customer solicitation by
sales personnel. The primary source of this business is from independent escrow
companies, real estate brokers and agents, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. The Company believes
that the personal contacts maintained by 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
39
<PAGE>
important competitive factor in attracting and retaining customers, and measures
customer service in terms of quality and timeliness in the delivery of services.
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. As a result of the Reorganization, FNFI owns
approximately 42.7% of the Common Stock of the Company outstanding prior to this
offering. See "Reorganization" and "Principal Shareholders."
Operationally, the Company and FNTIC, a subsidiary of FNFI, 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. 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.
ACQUISITION OF NATIONAL
ATC has agreed to purchase all of the outstanding capital stock of National
from a subsidiary of FNFI for a purchase price of $3.25 million, payable $1.25
million in cash and the remainder with interest at 10% over five years. The
Company intends to pay the entire $3.25 million purchase price at the closing of
this acquisition with the proceeds of this offering. See "Use of Proceeds." The
closing of this acquisition is currently awaiting, and is conditioned upon,
approval from the New York State Department of Insurance. See "Risk
Factors--Risks Associated with the Acquisition of National."
National is a title insurance underwriter, licensed to issue title insurance
in the State of New York and 34 other states and the U.S. Virgin Islands.
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 primary purpose of the acquisition is to acquire an underwriter, which
will enable the Company to generate underwriting fees and permit the Company to
expand geographically into counties and states in which the Company is not
presently licensed. The Company believes this expansion can be accomplished more
quickly and cost-effectively through the acquisition than through other means.
The Company also believes that the acquisition will expand the business
opportunities for its current and potential employees and affiliates, which will
aid in the Company's recruitment efforts, and will permit the Company to
generate additional revenue by writing title insurance policies in those
geographic areas which are not covered by ATC's exclusive agency arrangement
with FNTIC. See "Relationship with Fidelity National Financial, Inc."
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
40
<PAGE>
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 seven largest title insurance underwriters, either
directly or through their agents, accounted for approximately 89% of the policy
premium revenue in the United States in 1997. In the Company's principal
markets, competitors currently include direct operations and agents of the title
insurance subsidiaries of FNFI, Chicago Title Corporation, The 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 the provision of 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. 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 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 $10.4 million as of December 31, 1997, and
$12.8 million as of September 30, 1998. The net worth of Santa Barbara Title
Company was $380,000 as of December 31, 1997 and $260,000 as of September 30,
1998.
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.
EMPLOYEES
As of December 31, 1998, the Company, including its subsidiaries, had 889
full-time employees. The Company believes its success depends significantly on
attracting and retaining talented and experienced
41
<PAGE>
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.
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
institution's prime lending rate and is due in full in December 1999. 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.
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.
42
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
William P. Foley, II........................ 54 Chairman of the Board of Directors
Michael C. Lowther.......................... 56 Chief Executive Officer and Director
Wayne D. Diaz............................... 50 President and Director
Carl A. Strunk.............................. 60 Executive Vice President and Chief Financial Officer
Dennis R. Duffy............................. 56 Executive Vice President and Director
Barbara A. Ferguson......................... 42 Executive Vice President and Director
M'Liss Jones Kane........................... 46 Executive Vice President, General Counsel and Secretary
Bruce Elieff(1)(2).......................... 44 Director
Robert Majorino(1)(2)....................... 49 Director
Matthew K. Fong............................. 45 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
There are no family relationships among any of the Company's directors or
executive officers.
The business experience, principal occupations and employment, as well as
periods of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below.
WILLIAM P. FOLEY, II joined the Company as its Chairman of the Board in June
1997. He has been Chairman of the Board of ATC since 1996. Mr. Foley is the
Chairman of the Board and Chief Executive Officer of FNFI and has been since its
formation in 1984. Mr. Foley was President of FNFI from its formation in 1984
until December 31, 1994. Mr. Foley is currently serving as Chairman of the Board
and Chief Executive Officer of CKE Restaurants, Inc. and as Chairman of the
Board of Rally's Hamburgers, Inc., Checkers Drive-In Restaurants, Inc. and Santa
Barbara Restaurant Group, Inc. Additionally, he is a member of the Board of
Directors of Fresh Foods, Inc., Miravant Medical Technologies, Inc. and Micro
General Corporation.
MICHAEL C. LOWTHER has been Chief Executive Officer and a director of the
Company since its formation in November 1996, and of ATC since 1995. For
approximately 15 years prior to joining ATC, Mr. Lowther served as Chairman of
the Board and Chief Executive Officer of World Title Company which he co-founded
in 1980. A conservatorship was filed against World Title Company by the
California Department of Insurance in 1995. Mr. Lowther has 34 years of
experience in the title industry.
WAYNE D. DIAZ has been President and a director of the Company since its
formation. During the five years prior to joining the Company, Mr. Diaz held the
position of Executive Vice President of FNTIC. Mr. Diaz has 18 years of
experience in the title industry.
CARL A. STRUNK joined the Company as its Executive Vice President and Chief
Financial Officer in August 1998. Mr. Strunk has been the Executive Vice
President and Chief Financial Officer of CKE Restaurants, Inc. since February
1997. Mr. Strunk is the Executive Vice President/Finance for FNFI and Santa
Barbara Restaurant Group, Inc. and has been with FNFI since 1992 and Santa
Barbara Restaurant Group, Inc. since December 1997. Mr. Strunk previously served
as President of Land Resources Corporation from 1986 to 1991. Mr. Strunk is a
Certified Public Accountant and is also a member of the Board of Directors of
Micro General Corporation.
43
<PAGE>
DENNIS R. DUFFY has held his position of Executive Vice President and
director of the Company since 1996, and has over 30 years of experience in the
title industry. From 1995 to 1996, he was Regional Vice President--Operations of
Gateway Title Company. Mr. Duffy was the owner of Duffy's Pacific Enterprises, a
property management company, from 1993 to 1995. From 1985 to 1993, Mr. Duffy was
affiliated with a wholly-owned subsidiary of SAFECO, initially as President, and
subsequently as a consultant. Prior to that time, he worked in various
management positions with both Title Insurance and Trust Company (TICOR) and
SAFECO.
BARBARA A. FERGUSON joined the Company in August 1997 as Executive Vice
President and a director. From 1988 to 1997, Ms. Ferguson held various positions
with FNTIC, including Trust Accounting Manager, Banking Administrator, and
Senior Vice President and Manager of two separate divisions.
M'LISS JONES KANE was appointed Executive Vice President, General Counsel
and Secretary of the Company in August 1998 and has served as Senior Vice
President, General Counsel and Secretary of ATC since July 1998. Ms. Kane has
held various positions with FNFI since March 1995. She has been Senior Vice
President since March 1995 and Corporate Secretary since April 1995. Ms. Kane
also is the Corporate Counsel of FNFI. From March 1990 to March 1995, Ms. Kane
served as the Vice President and General Counsel of SPI Pharmaceuticals, Inc.
and ICN Biomedicals, Inc., affiliates of ICN Pharmaceuticals, Inc. From February
1988 to March 1990, Ms. Kane was the Senior Vice President, Corporate Counsel
and Secretary for Countrywide Credit Industries, Inc. Ms. Kane has also served
as Senior Vice President and Corporate Counsel for ICN Pharmaceuticals, Inc.
BRUCE ELIEFF was elected to the Company's Board of Directors in August 1998.
Mr. Elieff is a principal of Sun Cal Companies, a real estate development firm
located in Southern California. He has held this position since 1977.
ROBERT MAJORINO was appointed to the Company's Board of Directors in August
1998. Mr. Majorino is currently President and serves on the Board of Directors
of G.E.M.M.M. Corporation, a residential real estate brokerage located in
Southern California, which position he has held since 1993. Prior to that time,
he was the owner of Century 21 Ambassador Realty, a residential real estate
brokerage company.
MATTHEW K. FONG was appointed to the Company's Board of Directors in
November 1998. In January 1999, Mr. Fong joined the law firm of Sheppard,
Mullin, Richter & Hampton LLP. From 1995 to 1998, Mr. Fong served as the State
Treasurer of the State of California. From 1991 to 1995, Mr. Fong served as Vice
Chairman of the California State Board of Equalization.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will be paid a fee of $2,000
per meeting they attend, plus reimbursement of reasonable expenses. Directors
who are employees of the Company will not receive compensation for their
services as directors.
EMPLOYMENT AGREEMENTS
In August 1998, the Company entered into an employment agreement with each
of Michael C. Lowther, Wayne D. Diaz, Dennis R. Duffy, and Barbara A. Ferguson.
Each employment agreement provides for a three year term and a possible merit
bonus granted at the sole discretion of the Board. The minimum base salary of
Messrs. Lowther, Diaz and Duffy under their respective employment agreements is
$260,000, $260,000 and $160,000, respectively. The minimum base salary for Ms.
Ferguson under her employment agreement is $160,000.
In the event of the termination of the employee by the Company without
"cause," each employment agreement provides that the Company shall pay to the
employee an amount equal to the product of the employee's minimum base salary in
effect upon termination plus the total bonus paid or payable to the employee for
the most recently ended calendar year multiplied by the greater of either the
number of years remaining thereunder or two years.
44
<PAGE>
Upon termination of employment either by the employee or by the Company (in
breach of the employment agreement or without cause) following a "change in
control" of the Company, the employee would be entitled to receive (i) his or
her full salary through the date of termination; and (ii) an amount equal to the
product of the employee's minimum base salary in effect upon termination plus
the total bonus paid or payable to the employee for the most recently ended
calendar year multiplied by the greater of either the number of years remaining
hereunder or two years. In addition, upon termination due to a "change in
control," the employee is entitled to continue to participate in all employee
benefit plans and programs in which such employee was entitled to participate
prior to the date of termination provided that such continuation is possible
under the terms of the plan or program for a period equal to either (i) the
greater of the number of years remaining in the term of employment or (ii) two
years. If, however, any payment required to be made by the Company to an
employee upon termination due to a "change in control," constitutes a "parachute
payment" (as defined in section 280G of the Internal Revenue Code), such payment
shall be limited to the highest amount of such payment which can be paid without
constituting a "parachute payment." The employee may only elect to terminate the
employment agreement due to a "change in control" of the Company during the
period commencing 60 days and expiring 365 days after such "change in control."
Following the expiration of the initial term, the employment agreements will
automatically renew for successive one-year terms unless the employee or the
Company notifies the other of his or its intent not to renew the agreement.
However, the Company may only decline to renew the agreement if ANFI or any of
its subsidiaries does not meet the budgeted expectations for such entities as
determined by the Company's Board of Directors in the exercise of reasonable
discretion.
BOARD COMMITTEES
The Board's Audit Committee will consist of Mr. Elieff and Mr. Majorino. The
Audit Committee will meet periodically with management and the Company's
independent accountants to review the results and scope of the audit and other
services provided by the Company's independent auditors and the need for
internal auditing procedures and the adequacy of internal controls.
The Compensation Committee will consist of Mr. Elieff and Mr. Majorino. The
Compensation Committee will establish salaries, incentives and other forms of
compensation for officers, directors and certain key employees, administer the
Company's various incentive compensation and benefit plans, including the
Company's 1998 Stock Incentive Plan, and recommend policies relating to such
plans.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company for the fiscal years ended December 31, 1997 and 1998 to the
Chief Executive Officer and executive officers of the Company whose annual
compensation exceeded $100,000 (the "Named Executive Officers").
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS(2) COMPENSATION
- ------------------------------------------------------------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Michael C. Lowther, Chief Executive Officer....................... 1997 $ 200,568 $ 150,000 $ 8,150(3)
1998 $ 246,667 $ 9,675(4)
Wayne D. Diaz, President.......................................... 1997 $ 195,000 $ 150,000 $ 15,711(5)
1998 $ 246,667 $ 16,200(6)
Dennis R. Duffy, Executive Vice President......................... 1997 $ 124,133 $ 100,000 $ 6,578(7)
1998 $ 151,333 $ 7,720(8)
Barbara A. Ferguson, Executive Vice President..................... 1997 $ 54,092 $ 100,000 $ 3,926(9)
1998 $ 149,333 $ 12,823(10)
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for such person.
(2) The Named Executive Officers are eligible for merit bonuses granted at the
sole discretion of the Board. The amount of bonus that may be paid to the
Named Executive Officers for the fiscal year ended December 31, 1998 is not
known at this time.
(3) Consists of $900 in premiums paid on a life insurance policy of which Mr.
Lowther is the beneficiary, $2,250 in automobile allowance and approximately
$5,000 in membership dues.
(4) Consists of $675 in premiums paid on a life insurance policy of which Mr.
Lowther is the beneficiary and $9,000 in automobile allowance.
(5) Consists of $261 in premiums paid on a life insurance policy of which Mr.
Diaz is the beneficiary, $8,700 in matching contributions made by FNFI
pursuant to FNFI's employee stock purchase plan and $6,750 in automobile
allowance.
(6) Consists of $450 in premiums paid on a life insurance policy of which Mr.
Diaz is the beneficiary, $6,750 in matching contributions made by FNFI
pursuant to FNFI's employee stock purchase plan and $9,000 in automobile
allowance.
(7) Consists of $578 in premiums paid on a life insurance policy of which Mr.
Duffy is the beneficiary and $6,000 in automobile allowance.
(8) Consists of $720 in premiums paid on a life insurance policy of which Mr.
Duffy is the beneficiary and $7,000 in automobile allowance.
(9) Consists of $51 in premiums paid on a life insurance policy of which Ms.
Ferguson is the beneficiary, $1,875 in matching contributions made by FNFI
pursuant to FNFI's employee stock purchase plan, and $2,000 in automobile
allowance.
(10) Consists of $153 in premiums paid on a life insurance policy of which Ms.
Ferguson is the beneficiary, $5,670 in matching contributions made by FNFI
pursuant to FNFI's employee stock purchase plan and $7,000 in automobile
allowance.
46
<PAGE>
STOCK OPTIONS
The Company did not grant stock options to any Named Executive Officer
during fiscal year ended December 31, 1998. None of the Named Executive Officers
exercised or held stock options during the fiscal year ended December 31, 1998.
STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "Stock Incentive Plan")
authorizes up to 650,000 shares of Common Stock, plus an additional 200,000
shares of Common Stock on the date of each annual meeting of shareholders, for
issuance under the terms of the Stock Incentive Plan. The authorized number of
shares is subject to adjustment in the event of stock splits, stock dividends or
certain other similar changes in the capital structure of the Company. The Stock
Incentive Plan provides for grants of "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options and rights to purchase shares of Common Stock
("Purchase Rights"). Incentive stock options may be granted to officers and
other employees of the Company and its subsidiaries and affiliates (including
members of the Board of Directors if they are also employees). Nonqualified
stock options and Purchase Rights may be granted to officers, employees,
non-employee directors and officers, consultants and other service providers of
the Company and its subsidiaries and affiliates.
The Board of Directors, or a committee consisting of two or more members of
the Board of Directors, will administer the Stock Incentive Plan (the
"Administrator"). The Administrator has full power and authority to interpret
the Stock Incentive Plan, select the recipients of options and Purchase Rights,
determine and authorize the type, terms and conditions of, including vesting
provisions, and the number of shares subject to, grants under the Stock
Incentive Plan, and adopt, amend and rescind rules relating to the Stock
Incentive Plan. The term of options may not exceed 10 years from the date of
grant (5 years in the case of an incentive stock option granted from the date of
grant (5 years in the case of an incentive stock option granted to a person who
owns more than 10% of the combined voting power of all classes of stock of the
Company). The option exercise price for each share granted pursuant to an
incentive stock option may not be less than 100% of the fair market value of a
share of Common Stock at the time such option is granted (110% of fair market
value in the case of an incentive stock option granted to a person who owns more
than 10% of the combined voting power of all classes of stock of the Company).
There is no minimum purchase price for shares of Common Stock purchased pursuant
to a Purchase Right, and any such purchase price shall be determined by the
Administrator. The maximum number of shares for which options or Purchase Rights
may be granted to any one person during any one calendar year under the Stock
Incentive Plan is 300,000. The aggregate fair market value of the Common Stock
(determined as of the date of grant) with respect to which incentive stock
options granted under the Stock Incentive Plan or any other stock option plan of
the Company become exercisable for the first time by any optionee during any
calendar year may not exceed $100,000.
Except as otherwise provided by the Administrator, neither options nor
Purchase Rights granted under the Stock Incentive Plan may be transferred other
than by will or by the laws of descent and distribution. Shares purchased
pursuant to Purchase Rights generally shall be restricted for a period of time,
during which such shares may be repurchased by the Company, and therefore these
shares may not be sold, assigned, pledged or transferred until such time as the
Company no longer has the right to reacquire any such shares.
In the event that the outstanding shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of a recapitalization, stock split,
combination of shares, reclassification, stock dividend or other change in the
capital structure of the Company while the Stock Incentive Plan is in effect,
appropriate adjustments shall be made by the Administrator to the aggregate
number and kind of shares subject to the Stock Incentive Plan, and the number
and kind of shares and the price per share subject to outstanding incentive
options, nonqualified the price per share subject to outstanding incentive
options, nonqualified options and
47
<PAGE>
restricted shares in order to preserve, but not to increase, the benefits to
persons then holding incentive options, nonqualified options or restricted
shares.
In the event of a Change of Control (as defined below) of the Company the
time period relating to the exercise or realization of all outstanding options
and Purchase Rights shall automatically accelerate immediately prior to the
consummation of such Change of Control. For purposes of the Stock Incentive
Plan, "Change in Control" means (i) the acquisition, directly or indirectly, by
any person or group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) of the beneficial ownership of securities of
the Company possessing more than fifty percent (50%) of the total combined
voting power of all outstanding securities of the Company; (ii) a merger or
consolidation in which the Company is not the surviving entity, except for a
transaction in which the holders of the outstanding voting securities of the
Company immediately prior to such merger or consolidation hold, in the
aggregate, securities possessing more than fifty percent (50%) of the total
combined voting power of all outstanding voting securities of the surviving
entity immediately after such merger or consolidation; (iii) a reverse merger in
which the Company is the surviving entity but in which securities possessing
more than fifty percent (50%) of the total combined voting power of all
outstanding voting securities of the Company are transferred to or acquired by a
person or persons different from the persons holding those securities
immediately prior to such merger; (iv) the sale, transfer or other disposition
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Company; or (v) the approval by the stockholders of a
plan or proposal for the liquidation or dissolution of the Company.
The Board of Directors may alter, amend, suspend or terminate the Stock
Incentive Plan at any time. Unless sooner terminated by the Board of Directors,
the Stock Incentive Plan will terminate in 2008. Upon completion of this
offering, the Company intends to grant options to purchase, subject to certain
vesting requirements, an aggregate of 330,000 shares of Common Stock pursuant to
the Stock Incentive Plan, at an exercise price per share equal to the initial
public offering price, of which options to purchase an aggregate of 185,280
shares of Common Stock are to be granted to the following directors or executive
officers of the Company:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Michael C. Lowther................................................................ 27,640
Wayne D. Diaz..................................................................... 27,640
Carl A. Strunk.................................................................... 50,000
Dennis R. Duffy................................................................... 10,000
Barbara A. Ferguson............................................................... 10,000
M'Liss Jones Kane................................................................. 30,000
Bruce Elieff...................................................................... 10,000
Robert Majorino................................................................... 10,000
Matthew K. Fong................................................................... 10,000
-----------
185,280
-----------
-----------
</TABLE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation provide that the liability of the
Company's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its shareholders subject to certain limitations in Section 204 of the California
Corporations Code described below.
The Articles also provide that the Company is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Company's Bylaws or through agreements with such
agents or both, for breach of duty to the Company and its shareholders, in
excess of the indemnification otherwise permitted by Section 317 of the
California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.
48
<PAGE>
Section 317 of the California Corporations Code provides that a corporation
may indemnify an agent who is, or who is threatened to be made a party to any
"proceeding" (as that term is defined therein) for actions taken in their
corporate capacity upon a determination that such agent acted in good faith and
in a manner which such agent believed to be in the best interest of the
corporation. In addition, Section 317 provides for mandatory indemnification of
an agent who is successful on the merits in defense of any such proceeding.
Indemnification is prohibited under this section (with certain express
exceptions) in any circumstance where it appears that it would be inconsistent
with (i) any provision of the corporation's articles of incorporation or bylaws,
any resolution of the shareholders or any agreement in effect at the time of the
alleged cause of acton asserted in the proceeding; and (ii) any condition
expressly imposed by a court in approving a settlement.
In addition, the ability of a corporation to indemnify its agents and to
eliminate the liability of a director for monetary damages is further limited by
Section 204 of the California Corporations Code which provides that a
corporation may not provide for indemnification of agents or eliminate the
liability of a director for monetary damages for (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law; (ii)
for acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence of
good faith on the part of the director; (iii) for any transaction from which a
director derived an improper personal benefit; (iv) for acts or omissions that
show a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders; (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders; (vi)
with respect to certain transactions, or the approval of transactions in which a
director has a material financial interest; and (vii) expressly imposed by
statute, for approval of certain improper distributions to shareholders or
certain loans or guarantees.
The Bylaws of the Company provide that the Company shall indemnify each of
its "agents" (as defined in Section 317 of the California Corporations Code) to
the fullest extent permissible under the California Corporations Code against
expenses, judgments, fines, settlements and other amounts, actually and
reasonably incurred by such person by reason of such person's having been made
or having been threatened to be made a party to a proceeding. The Bylaws further
provide that the Company shall advance the expenses reasonably expected to be
incurred by such agent in defending against any such proceeding upon receipt of
the agent's undertaking to repay such amounts to the Company if it is determined
that the agent was not entitled to indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in the
Articles of Incorporation and Bylaws. Among other things, these agreements
provide that the Company will indemnify, subject to certain requirements, each
of the Company's directors for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services by such person as a director or officer of the Company, or as a
director or officer of any other company or enterprise to which the person
provides services at the request of the Company.
The above provisions may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Company and its shareholders. At present, there is no litigation
or proceeding pending involving a director of the Company as to which
indemnification is being sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification by any director.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 15, 1999 and as
adjusted to reflect the sale of Common Stock offered hereby, by (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers of the Company
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES COMMON STOCK OWNED
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
Fidelity National Financial, Inc.................. 2,099,996(2) 42.7% 30.4%
William P. Foley, II.............................. 332,904(3) 6.3% 4.6%
Michael C. Lowther................................ 981,806(4) 19.9% 14.2%
Wayne D. Diaz..................................... 981,806(4) 19.9% 14.2%
Dennis R. Duffy................................... 104,124(5) 2.1% 1.5%
Barbara A. Ferguson............................... 154,653(5) 3.1% 2.2%
Bruce Elieff...................................... 3,333(5) * *
Robert Majorino................................... 3,333(5) * *
Matthew K. Fong................................... 3,333(5) * *
All directors and executive officers as a group
(10 persons).................................... 2,591,959(6) 48.8% 35.4%
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of each of Messrs. Foley, Lowther, Duffy and Diaz and Ms.
Ferguson is 17911 Von Karman Avenue, Suite 200, Irvine, California 92614.
The address for FNFI is 17911 Von Karman Avenue, Suite 300, Irvine,
California 92614.
(2) Mr. Foley and Carol J. Foley beneficially own 18% of the common stock of
FNFI including 1,155,510 shares subject to currently exercisable stock
options. Mr. Richard Pickup beneficially owns 1,597,000 shares of the Common
Stock of FNFI, or 6.8%.
(3) Consists solely of shares issuable under presently exercisable options. Mr.
Foley is the Chairman of the Board of Directors and Chief Executive Officer
of FNFI.
(4) Includes 9,213 shares issuable under options to be granted upon consummation
of the offering and which will become exercisable within 60 days. See
"Management -- Stock Incentive Plan."
(5) Includes 3,333 shares issuable under options to be granted upon consummation
of the offering and which will become exercisable within 60 days. See
"Management -- Stock Incentive Plan."
(6) Includes 394,662 shares issuable under options presently exercisable or to
be granted upon consummation of the offering and which will become
exercisable within 60 days. See "Management -- Stock Incentive Plan."
50
<PAGE>
CERTAIN TRANSACTIONS
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. Upon consummation of this offering (assuming no exercise of the
Underwriters' over-allotment option) FNFI will own approximately 30.4% of the
outstanding Common Stock of the Company. Mr. Foley, the Company's Chairman of
the Board, is the Chairman of the Board and Chief Executive Officer and a
principal shareholder of FNFI.
In July 1997, the Company acquired 60% of the outstanding common stock of
ATC from FNFI in exchange for $6.0 million. This price was negotiated between
FNFI and the Company's founders, Messrs. Lowther, Diaz and Duffy, based on ATC's
operations and financial results during 1996, on estimates of its growth
potential at the time and on the estimated value of the infrastructure
(including licenses) being acquired. FNFI acquired ATC in January 1996 for
approximately $772,000.
In November 1998, the Company acquired the remaining 40% of the outstanding
common stock of ATC from FNFI in exchange for shares of Common Stock
representing approximately 42.7% of the Company's outstanding shares. In
connection with that exchange, ATC declared a dividend of $3.5 million to the
Company, approximately $3.5 million of Acquisition Debt was repaid and the
remaining unpaid balance of the Acquisition Debt, in the amount of approximately
$1.2 million, was assumed by the shareholders of the Company, other than FNFI.
The price and economic terms of the Reorganization were based upon the agreement
of the parties that a 42.7% interest in ANFI (40% fully diluted) is of equal
value to a 40% interest in ATC. These terms were negotiated between officers of
FNFI and Mr. Lowther, on behalf of the Company. The parties determined that
FNFI's proportional interest in the dividend paid by ATC to ANFI (which FNFI
would have shared absent the Reorganization), which dividend was utilized to
repay certain ANFI indebtedness, is approximately equal to the value of the
proportionate interest in ANFI subsidiaries, other than ATC, which FNFI acquires
as a result of the Reorganization. See "Reorganization."
In July 1997, the Company issued options to purchase 332,904 shares of
Common Stock to William P. Foley, II, the Company's Chairman of the Board. The
options are exercisable for a period of ten years at an exercise price of $0.66
per share.
FNTIC, a subsidiary of FNFI, 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. FNTIC receives 11% of the gross title insurance premiums as
consideration for underwriting the policies. ATC paid FNTIC approximately $4.1
million in 1997 and $6.5 million in 1998 under this agreement. Under the Issuing
Agency Agreement, FNTIC also provides a wide variety of administrative services
for ATC, including accounting and legal and human resources services. ATC pays
FNTIC a management fee of 1% of gross title insurance premiums for these
services. This administrative services arrangement is terminable by ATC upon 90
days prior notice to FNTIC. The amounts of administrative fees paid to FNTIC
under this arrangement for 1997 and 1998 were approximately $375,000 and
$592,000, respectively. The Company reimburses subsidiaries of FNFI for expenses
incurred on its behalf. Such reimbursements aggregated approximately $1.2
million in 1997 and approximately $2.8 million in 1998.
On March 16, 1998, ATC agreed to purchase all of the outstanding capital
stock of National from a subsidiary of FNFI for a purchase price of $3.25
million, payable $1.25 million in cash and the remainder with interest at 10%
over five years. This price had been offered by FNFI, and was accepted by the
Company, based on the Board's belief that the price was fair in light of the
amount of net assets to be acquired and the value of the insurance licenses held
by National. Due to the affiliated nature of the parties, the terms of the
agreement were not the result of an arm's length negotiation. The Company
intends to pay the deferred portion of the purchase price in full upon the
completion of this offering. See
51
<PAGE>
"Use of Proceeds." When the acquisition is closed, National will be a
wholly-owned subsidiary of ATC. The closing of this acquisition is currently
awaiting, and is conditioned upon, approval from the New York State Department
of Insurance. See "Business--Acquisition of National."
After the closing, ATC will pay FNTIC a monthly management fee equal to 1%
of total gross title insurance premiums generated by the Company regardless of
which underwriter is used. In addition, for a period of twenty four months
following the closing, ATC will pay to FNTIC $8,333.33 per month for claims
processing services, compliance with statutory reporting requirements and agency
reporting services. After the closing FNFI will continue to manage National's
investment portfolio for a fee equal to 1.67 basis points of the average
investment balance managed for the immediately preceding month. With respect to
Trustee Sale Guaranty commitments originated after the closing by ATC, ATC will
be entitled to underwrite the first $100,000 of such commitments with National
and FNTIC will reinsure the remaining portion of such commitment and pay FNTIC a
fee equal to 6% of the gross policy premium. If ATC has FNTIC underwrite the
entire commitment ATC will pay FNTIC a fee of 11% of the gross policy premium in
connection with each Trustee Sale Guaranty policy. With respect to post closing
non-Trustee Sale Guaranty commitments in a county where ATC is currently
licensed, ATC will underwrite the entire commitment with FNTIC and pay a fee
equal to 11% of the gross policy premium. With respect to post closing
non-Trustee Sale Guaranty commitments by ATC in counties where ATC is not
currently licensed, ATC will be able to elect to have National underwrite the
first $50,000 of such commitment. FNTIC will then reinsure the remainder of the
commitment and pay FNTIC a fee equal to 6% of the gross policy premium as a
reinsurance fee. If ATC elects to have FNTIC underwrite the entire commitment
ATC will pay a fee equal to 11% of the gross policy premium.
On January 28, 1998, ATC and FNTIC entered into a sublease pursuant to which
ATC subleases the Company's principal executive office from FNTIC. Such lease
provides for monthly rental payments to FNTIC of $33,494 and expires on July 11,
2000. The aggregate payments under the lease in 1998 were $295,000.
Messrs. Lowther, Diaz, and Duffy founded the Company in November 1996. In
March 1997, the Company issued 976,093, 976,093, 100,791 and 151,320 shares of
Common Stock to Mr. Lowther, Mr. Diaz, Mr. Duffy, and Ms. Ferguson,
respectively, for a purchase price of $.40 per share. These individuals
purchased the shares with funds received from personal loans (the "Shareholder
Loans"). The Company issued Common Stock to other employees of the Company in
March 1997 on the same terms and conditions. In August 1997, the Company
borrowed $6.0 million to refinance its then existing indebtedness of $4.8
million and to repay the Shareholder Loans. At that same time, Messrs. Lowther,
Diaz and Duffy and Ms. Ferguson guaranteed, in the aggregate, approximately
34.5% of the Company's new $6.0 million loan. The new loan bears interest at the
lender's prime rate.
In August 1998, the Company entered into Indemnification Agreements with all
of its directors and executive officers providing for indemnification rights in
certain circumstances. See "Management-- Indemnification of Officers and
Directors."
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock and selected
provisions of its Articles of Incorporation and Bylaws is a summary and is
qualified in its entirety by the Company's Articles of Incorporation and Bylaws,
copies of which have been filed with the Securities and Exchange Commission as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, no par
value. Shareholders have no preemptive rights and no right to convert their
Common Stock into any other securities. The holders of Common Stock are entitled
to one vote for each share held of record on all matters submitted to a vote of
the shareholders, except that holders of Common Stock are entitled to cumulative
voting with respect to the election of directors upon giving notice as required
by law. In cumulative voting, the holders of Common Stock are entitled to cast
for each share held the number of votes equal to the number of directors to be
elected. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares are, and all
shares to be sold and issued as contemplated hereby will be, fully paid and
nonassessable and legally issued. The Board of Directors is authorized to issue
additional shares of Common Stock within the limits authorized by the Company's
charter and without shareholder action. As of January 15, 1999 there were
4,917,096 shares of Common Stock outstanding held by 26 holders of record.
PREFERRED STOCK
The Company's authorized preferred stock consists of 5,000,000 shares, no
par value (the "Preferred Stock"). The Board of Directors has the authority,
without further action by the shareholders, to issue from time to time shares of
Preferred Stock in one or more series and to fix the dividend rights and terms,
conversion rights, voting rights (whole, limited or none), redemption rights and
terms, liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred Stock.
The purpose of authorizing the Board of Directors to determine such rights and
preferences is to eliminate delays associated with a shareholder vote on
specific issuances. The issuance of the Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, could make it more
difficult for a third party to gain control of the Company. Such issuance of
Preferred Stock could also adversely affect the distributions on and liquidation
preference of the Common Stock by creating more series of Preferred Stock with
distribution or liquidation preferences senior to the Common Stock. No shares of
Preferred Stock are currently outstanding and the Company currently has no plans
or proposals to issue any Preferred Stock.
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is U.S. Stock Transfer
Corporation, Glendale, California.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,917,096 shares of
Common Stock outstanding (excluding approximately 662,904 shares of Common Stock
issuable upon exercise of outstanding stock options). The 2,000,000 shares sold
by the Company in the offering will be freely tradeable without restriction or
further registration under the Securities Act, unless held by an "affiliate" of
the Company within the meaning of Rule 144 adopted under the Securities Act. Any
such affiliate would be subject to the resale limitations of Rule 144.
The remaining shares of outstanding Common Stock are "restricted securities"
(the "Restricted Shares") within the meaning of Rule 144 under the Securities
Act and may not be sold in the absence of a registration under the Securities
Act unless an exemption from registration is available, including an exemption
contained in Rule 144. In general, under Rule 144 as currently in effect, any
person (or persons whose shares are aggregated for purposes of Rule 144) who has
beneficially owned "restricted securities," as that term is defined in Rule 144,
for at least one year is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale, provided that certain public information about the Company, as required by
Rule 144, is then available and the seller complies with the manner of sale and
notification requirements of the rule. A person who is not an affiliate and has
not been an affiliate within three months prior to the sale and has, together
with any previous owners who were not affiliates, beneficially owned restricted
securities for at least two years is entitled to sell such shares under Rule
144(k) without regard to any of the volume limitations described above. None of
the Restricted Shares are presently eligible for sale upon compliance with Rule
144(k).
The officers, directors and substantially all shareholders of the Company
have agreed not to sell or otherwise transfer any shares of Common Stock, or any
securities convertible into or exercisable for shares of Common Stock, for the
180 days following the date of the Underwriting Agreement without the consent of
Cruttenden Roth Incorporated on behalf of the Underwriters. In addition, for the
next 180 days such persons have also agreed not to sell or otherwise transfer
shares of Common Stock in excess of the amounts eligible for sale under Rule 144
and in any event to effectuate any such sales or dispositions through Cruttenden
Roth Incorporated.
No predictions can be made of the effect, if any, that future sales of
shares of Common Stock, and grants of options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market prices of the Common Stock.
See "Principal Shareholders," "Description of Securities" and "Underwriting."
54
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions set forth in an underwriting
agreement (the "Underwriting Agreement), the Underwriters named below, for whom
Cruttenden Roth Incorporated and Josephthal & Co. Inc. are acting as manager and
representatives (the "Representatives"), have severally agreed to purchase from
the Company an aggregate of 2,000,000 shares of Common Stock. The number of
shares of Common Stock that each Underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
Josephthal & Co. Inc.............................................................
----------
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the overallotment option described below) must be so
purchased.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the initial public
offering price set forth on the coverage page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price less a concession not
to exceed $. per share. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $. per share to any other Underwriter and
certain other dealers. After the initial public distribution of the shares
offered hereby, the offering price and other selling terms may be changed by the
Representatives. The Representatives have advised the Company that the
Underwriters do not intend to confirm any shares to any accounts over which they
exercise discretionary control without the prior specific written approval of
the customer.
The Company has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an aggregate of 300,000
additional shares of Common Stock at the initial public offering price less
underwriting discounts and commissions. Such option may be exercised solely for
the purpose of converting overallotments, if any, in connection with the
offering of the shares offered hereby. To the extent that the Underwriters
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
The offering of the shares offered hereby is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering
55
<PAGE>
without notice. The Underwriters reserve the right to reject an order for the
purchase of shares in whole or in part.
The Company has agreed to pay the Representatives a nonaccountable expense
allowance of 1.5% of the gross proceeds of the offering to cover certain
underwriting costs and due diligence expenses related to this offering and to
sell to the Representatives for nominal consideration the Representatives'
Warrants to purchase from the Company up to 125,000 shares of Common Stock
(subject to certain antidilution adjustments) at an exercise price per share
equal to 120% of the initial public offering price per share. The exercise price
may be paid in cash or on a cashless net issuance basis by foregoing receipt of
a number of shares otherwise issuable upon exercise having a fair market value
equal to the aggregate exercise price. The Representatives' Warrants will be
exercisable for a period beginning one year from the date of this Prospectus
until five years from the date of this Prospectus. The Representatives' Warrants
may not be sold, transferred, assigned, pledged or hypothecated by the
Representatives for a period of one year from the date of issuance except to
officers and partners of the Representative, the Underwriters or officers and
partners of the Underwriters. In addition, the Company has granted certain
demand and piggyback registration rights to the holders of the Representatives'
Warrants, which enable them to register the resale of the Common Stock
underlying the Representatives' Warrants under the Securities Act.
The Company, all directors and executive officers of the Company, and
certain stockholders and option holders of the Company have agreed that, without
the prior written consent of Cruttenden Roth Incorporated, they will not, with
certain limited exceptions, directly or indirectly, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of the Common Stock, for a period of
180 days after the Effective Date, other than the shares of Common Stock offered
hereby. See "Shares Eligible for Future Sale."
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as
amended, pursuant to which such persons may bid for or purchase shares of Common
Stock for the purpose of stabilizing the market price for shares of Common
Stock. The Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with this
offering than they are committed to purchase from the Company and in such case
may purchase shares of Common Stock in the open market following the completion
of this offering to cover all or a portion of the shares of Common Stock or by
exercising the Underwriters' over-allotment option referred to above. In
addition, the Representatives, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the other Underwriters
whereby it may reclaim for an Underwriter (or a dealer participating in this
offering) for the account of the other Underwriters, the selling concession with
respect to shares of Common Stock that are distributed in this offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, may be discontinued at any
time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock offered hereby has
been determined by negotiation between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were prevailing market conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the history of and
56
<PAGE>
prospects for the Company's business and the industry in which it competes, the
Company's management and other factors deemed relevant.
FNFI beneficially owns 2,099,996 shares of Common Stock, or approximately
43% of the outstanding shares of the Company, as well as more than 10% of the
outstanding common stock of Cruttenden Roth Incorporated. Under Rule 2720 of the
NASD, when a member of the NASD, such as Cruttenden Roth Incorporated,
participates in the public distribution of securities of a company in which it
or its affiliates own 10% or more of the outstanding voting securities, and
where there is no "bona fide independent market" for such securities, the public
offering price can be no higher than recommended by a qualified independent
underwriter. The independent investment banking firm of Josephthal & Co. Inc.
will serve in such role and will recommend a price in compliance with the
requirements of Rule 2720. Josephthal & Co. Inc. has performed due diligence
investigation and reviewed and participated in the preparation of this
Prospectus and the registration statement of which this Prospectus is a part.
The NASD and the Securities and Exchange Commission have indicated that, in
their view, Josephthal & Co. Inc. may be deemed to be an underwriter as that
term is defined in the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Rutan & Tucker, LLP, Costa
Mesa, California. Certain matters in connection with the sale of Common Stock
offered hereby will be passed on for the Underwriters by Stradling Yocca Carlson
& Rauth, a professional corporation, Newport Beach, California.
EXPERTS
The consolidated financial statements of ANFI as of and for the year ended
December 31, 1997, have been included herein and in the Registration Statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The balance sheet of ANFI Predecessor as of December 31, 1996, and the
related statements of combined operations for each of the years in the two-year
period ended December 31, 1996 and for the six-month period ended June 30, 1997,
and the statements of shareholder's equity and cash flows for the year ended
December 31, 1996 and the six months ended June 30, 1997, have been included
herein and in the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of National as of and for the year ended December
31, 1997, have been included herein and in the Registration Statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
57
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
While all material elements of the contracts and documents referenced in this
Prospectus are contained herein, statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the full text of such
contract or other document which is filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and the
exhibits and schedules thereto. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by the Company's independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheet at December 31, 1997............................................................ F-3
Consolidated Statement of Operations for the Year Ended December 31, 1997.................................. F-4
Consolidated Statement of Cash Flows for the Year Ended December 31, 1997.................................. F-5
Consolidated Statement of Shareholders' Equity for the Year Ended December 31, 1997........................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
FINANCIAL STATEMENTS FOR
ANFI PREDECESSOR (NOTE 1)
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-16
Balance Sheet at December 31, 1996................................................... F-17
Statements of Combined Operations for the Years Ended December 31, 1995 and 1996 and
for the six months ended June 30, 1997............................................. F-18
Statement of Shareholder's Equity for the Year Ended December 31, 1996 and for the
six months ended June 30, 1997..................................................... F-19
Statement of Cash Flows for the Year Ended December 31, 1996 and for the six months
ended June 30, 1997................................................................ F-20
Notes to Financial Statements........................................................ F-21
</TABLE>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheet at September 30, 1998 (unaudited)............... F-27
Condensed Consolidated Statement of Operations for the Nine Months Ended September
30, 1997 and 1998 (unaudited)...................................................... F-28
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1997 and 1998 (unaudited)...................................................... F-29
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-30
</TABLE>
FINANCIAL STATEMENTS FOR
NATIONAL TITLE INSURANCE OF NEW YORK INC.
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-31
Balance Sheet at December 31, 1997................................................... F-32
Statement of Operations for the Year Ended December 31, 1997......................... F-33
Statement of Stockholder's Equity for the Year Ended December 31, 1997............... F-34
Statement of Cash Flows for the Year Ended December 31, 1997......................... F-35
Notes to Financial Statements........................................................ F-36
</TABLE>
UNAUDITED FINANCIAL STATEMENTS FOR
NATIONAL TITLE INSURANCE OF NEW YORK INC.
<TABLE>
<S> <C>
Balance Sheet at September 30, 1998 (unaudited)...................................... F-43
Statements of Operations for the Nine Months Ended September 30, 1997
and 1998 (unaudited)............................................................... F-44
Statements of Cash Flows for the Nine Months Ended September 30, 1997
and 1998 (unaudited)............................................................... F-45
Notes to Financial Statements (unaudited)............................................ F-46
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American National Financial, Inc.:
We have audited the consolidated balance sheet of American National
Financial, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting amounts and disclosures in the consolidated 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
National Financial, Inc and subsidiaries as of December 31, 1997 and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Orange County, California
August 26, 1998
F-2
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $7,223,635
Accounts receivable, net of an allowance for doubtful accounts of $1,100,449...................... 6,809,177
Deferred income taxes............................................................................. 832,732
Prepaid expenses and other current assets......................................................... 903,002
------------
Total current assets.......................................................................... 15,768,546
Property and equipment, net....................................................................... 2,723,670
Title plants...................................................................................... 815,310
Deposits with Insurance Commissioner.............................................................. 105,000
Intangibles, net of accumulated amortization of $257,349.......................................... 2,952,417
------------
Total assets.................................................................................. $22,364,943
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $1,958,813
Other accrued expenses, including $587,750 to affiliate........................................... 3,403,219
Customer advances................................................................................. 1,155,536
Current portion of long-term debt................................................................. 936,672
Current portion of obligations under capital leases with affiliates............................... 660,176
Income taxes payable.............................................................................. 1,195,581
Due to affiliate.................................................................................. 1,411,170
------------
Total current liabilities..................................................................... 10,721,167
Long-term debt...................................................................................... 5,535,828
Obligations under capital leases with affiliates.................................................... 1,411,001
------------
Total liabilities............................................................................. 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, 2,910,416
shares.......................................................................................... --
Additional paid in capital........................................................................ 414,284
Retained earnings................................................................................. 708,563
------------
Total shareholders' equity.................................................................... 1,122,847
------------
Total liabilities and shareholders' equity.................................................... $22,364,943
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Net title insurance premiums..................................................................... $ 18,026,297
Escrow fees...................................................................................... 7,352,399
Other service charges............................................................................ 5,532,203
-------------
Total revenues................................................................................. 30,910,899
-------------
Expenses:
Personnel costs.................................................................................. 16,599,428
Other operating expenses, includes $1,184,136 with affiliate..................................... 8,083,626
Title plant rent and maintenance................................................................. 2,664,201
-------------
Total expenses................................................................................. 27,347,255
-------------
Earnings before income taxes and minority interest in net earnings of consolidated subsidiary...... 3,563,644
Provision for income taxes......................................................................... 1,774,417
-------------
Earnings before minority interest in net earnings of consolidated
subsidiary....................................................................................... 1,789,227
Minority interest in net earnings of consolidated subsidiary....................................... (1,080,664)
-------------
Net earnings....................................................................................... $ 708,563
-------------
-------------
Basic net earnings per share....................................................................... $ 0.24
Diluted net earnings per share..................................................................... $ 0.23
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings.................................................................. $ 708,563
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation and amortization............................................... 644,720
Minority interest in net income of consolidated subsidiary.................. 1,080,664
Compensation expense--stock options......................................... 414,284
Changes in:
Accounts receivable, net.................................................. (2,493,048)
Prepaid expenses and other assets......................................... 94,379
Income taxes.............................................................. 341,909
Accounts payable and other accrued expenses............................... 2,156,510
Customer advances......................................................... (340,140)
Due to affiliate.......................................................... 233,544
------------
Total cash provided by operating activities........................... 2,841,385
------------
Cash flows from investing activities:
Collection of notes receivable................................................ 27,844
Purchases of property and equipment........................................... (999,087)
Acquisition of consolidated subsidiary, net of cash acquired.................. (816,584)
------------
Total cash used in investing activities............................... (1,787,827)
------------
Cash flows from financing activities:
Borrowings.................................................................... 6,472,500
Payments under capital lease obligations...................................... (302,423)
------------
Total cash provided in financing activities........................... 6,170,077
------------
Increase in cash and cash equivalents................................. 7,223,635
Cash and cash equivalents at beginning of year.................................. --
------------
Cash and cash equivalents at end of year........................................ $ 7,223,635
------------
------------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest.................................................................... $ 473,285
Income taxes................................................................ $ 1,885,105
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<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
---------- ----- ---------- ---------- -------------
---------- ----- ---------- ---------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 the 60% interest in ATC. In August 1997, the Company refinanced
all of the debt issued in April 1997.
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.
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.
F-7
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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, 1997 title plant balance relates
to a capital lease. See note 9. Costs incurred to maintain, update and operate
title plants are expensed as incurred. Title plant is 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 OBLIGATION
Capital lease obligation with affiliates is recorded at the present value of
the minimum lease payments at the beginning of the lease term. 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 agreement with FNTIC. The Company's reserve for claim losses on the
policies is immaterial as of December 31, 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
F-8
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common shareholders 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 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. The number of weighted average shares outstanding
used in basic and diluted earnings per share was 2,971,983 and 3,107,303
respectively. Diluted earnings per share reflects the impact of the options.
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 those 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. See note 12.
Assets and liabilities of ATC at acquisition were as follows:
<TABLE>
<CAPTION>
<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.
F-9
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(3) ACQUISITION (CONTINUED)
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>
<CAPTION>
<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.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment............................... $ 2,044,598
Leasehold improvements.......................................... 429,406
Office building................................................. 667,888
------------
3,141,892
Accumulated depreciation and amortization....................... (418,222)
------------
$ 2,723,670
------------
------------
</TABLE>
(5) INCOME TAXES
Income tax expense (benefit) for year ended December 31, 1997 consists of
the following:
<TABLE>
<CAPTION>
---------------------------------------
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>
<S> <C>
Statutory Federal income tax rate................................... 35.0%
Non-deductible expenses............................................. 7.0
Amortization of intangibles......................................... 1.6
State taxes, net of Federal benefit................................. 6.6
Other............................................................... (.4)
---------
49.8%
---------
---------
</TABLE>
F-10
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(5) INCOME TAXES (CONTINUED)
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>
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 has a $6,000,000 note payable to a financial institution that
bears interest at the institution's prime lending rate (8.50% at December 31,
1997) and is due in November 2002. The note requires monthly payments in the
amount of $33,334 beginning in May 1998. Interest is payable monthly.
Additionally, the Company must 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 is $670,000 which has been
classified as a current liability. The note is collateralized by a first
priority lien on all the Company's assets and all of its outstanding common
stock. The Company is also required to maintain tangible net worth of at least
$200,000 and working capital of at least $250,000 on a quarterly basis. As of
December 31, 1997, the Company is out of compliance with certain covenants
related to minimum tangible net worth and capital expenditure restrictions. The
financial institution has agreed to waive its right to recall the note with
respect to these violations. The Company does not expect to violate any debt
covenants in the future. In April 1998, the Company voluntarily prepaid $340,000
on the note.
The Company also has a $472,500 note payable to the same financial
institution that bears interest at the institution's prime lending rate (8.50%
at December 31, 1997) and is due in full in December 1999 with interest payable
monthly. The note is collateralized by a deed of trust on the office building.
F-11
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(6) NOTES PAYABLE (CONTINUED)
Future fixed principal maturities of these notes payable are as follows for
the years ending December 31 excluding the variable payment:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 266,672
1999............................................................................ 872,508
2000............................................................................ 400,008
2001............................................................................ 400,008
2002............................................................................ 4,533,304
------------
$ 6,472,500
------------
------------
</TABLE>
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 regulation 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 the date of issuance.
Subsequently, certain of these executives surrendered a total of 115,984 shares.
(8) EMPLOYEE BENEFIT PLANS
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
F-12
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
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. No options have been granted
under the 1998 Incentive Plan.
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.
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 and 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 used for 1997 was 0%.
A weighted average expected life of 10 years was used.
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, 1997 follows:
<TABLE>
<CAPTION>
<S> <C>
Pro forma basic net earnings.................................... $ 606,786
Pro forma basic earnings per share.............................. $ .20
---------
---------
</TABLE>
(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 $63,735,628 at December 31, 1997.
F-13
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 NON
TOTAL TO AFFILIATE AFFILIATE
------------ ------------ --------------
<S> <C> <C> <C>
1998............................................ $ 3,022,054 $ 441,098 $ 2,580,956
1999............................................ 2,454,143 517,200 1,936,943
2000............................................ 2,071,593 336,513 1,735,080
2001............................................ 1,357,519 39,617 1,317,902
2002............................................ 811,893 -- 811,893
Thereafter...................................... 323,454 -- 323,454
------------ ------------ --------------
Total future minimum operating lease
payments.................................... $ 10,040,656 $ 1,334,428 $ 8,706,228
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
Rent expense incurred under operating leases during 1997 totaled $2,373,097,
including $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 title plants recorded under
capital leases is $815,310 at December 31, 1997. The gross amount of equipment
recorded under capital lease is $1,558,290 at December 31, 1997. Accumulated
depreciation related to this equipment is $311,658 as of December 31, 1997.
Future minimum capital lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................ $ 844,572
1999............................................................ 844,572
2000............................................................ 120,000
2001............................................................ 120,000
2002............................................................ 120,000
Thereafter...................................................... 540,000
------------
Total future minimum capital lease payments................... 2,589,144
Portion relating to interest.................................. 517,967
------------
Present value of minimum capital lease payments............... $ 2,071,177
------------
------------
</TABLE>
F-14
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Depreciation of the equipment held under capital leases is included in other
operating expenses for the year ended December 31, 1997.
(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 for a fee
of 11% of gross title insurance premiums. Management services are cancellable
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 $1,184,136 in 1997.
(11) SUBSEQUENT EVENT
ACQUISITIONS
On March 16, 1998, the ATC signed a stock purchase agreement with Fidelity
National Title Insurance Company of New York (FNNEW), a wholly-owned subsidiary
of FNFI, and National Title Insurance of New York Inc. (National), a
wholly-owned subsidiary of FNNEW, for the purchase of National. The sale is
subject to regulatory approval and certain other conditions. The purchase price
of $3,250,000 is payable in $1,250,000 cash and a note for $2,000,000. National
was acquired in April 1996 by FNFI and has not been actively underwriting
policies since the transaction closed. In connection with this transaction, ATC
advanced $1,150,000 to FNNEW in May 1998, which FNNEW contributed to the capital
of National. Such advances will be returned to ATC in the event the transaction
does not close.
On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast
Title of Santa Barbara County (PCT) for the purchase of 100% of the issued and
outstanding stock of Santa Barbara Title Company. The purchase price of $160,000
is payable in cash. The sale is subject to regulatory approval and certain other
conditions. On January 9, 1998, the Insurance Commissioner of the State of
California approved the transaction and the sale was consummated.
(12) PROPOSED 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. The Company is currently awaiting regulatory
approval. The agreement will automatically be consummated upon regulatory
approval. The 40% interest will be accounted for at the fair value of ANFI
Shares which is expected to result in the recognition of goodwill. In connection
with this transaction, the shareholders of the Company, other than FNFI, will
assume approximately $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 will be accounted for as a capital contribution. Additionally, the
Company will use the proceeds of a dividend from ATC of approximately $3.5
million to repay the remaining balance of the note payable. Had the
Reorganization taken place as of January 1, 1997, net earnings would have been
$2.2 million. Basic and fully diluted earnings per share would have been $0.44
and $0.43, respectively.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American National Financial, Inc.:
We have audited the accompanying balance sheet of ANFI Predecessor, as
defined in note 1 to the financial statements, as of December 31, 1996 and the
related statements of combined operations for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, and the statements of
shareholder's equity and cash flows for the year ended December 31, 1996 and the
six months ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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
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 financial position of ANFI Predecessor as of
December 31, 1996 and the results of its operations for the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997 and its cash flows for
the year ended December 31, 1996 and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.
KPMG LLP
Orange County, California
August 26, 1998
F-16
<PAGE>
ANFI PREDECESSOR
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Current assets:
Cash and cash equivalents........................................................................ $ 419,592
Accounts receivable, net of an allowance for doubtful accounts of $889,317....................... 6,817,066
Prepaid expenses and other current assets........................................................ 259,948
Deferred income tax asset........................................................................ 688,716
Due from affiliates.............................................................................. 138,835
-------------
Total current assets......................................................................... 8,324,157
-------------
Other assets:
Property and equipment, net...................................................................... 146,968
Deposits with Insurance Commissioner............................................................. 105,000
Intangibles, net of accumulated amortization of $112,000......................................... 1,932,584
Other assets..................................................................................... 152,757
-------------
Total assets................................................................................. $ 10,661,466
-------------
-------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................................. $ 1,293,933
Due to affiliates................................................................................ 722,530
Other accrued expenses........................................................................... 1,322,176
Customer advances................................................................................ 217,036
Income taxes payable............................................................................. 733,839
-------------
Total liabilities.............................................................................. 4,289,514
-------------
Shareholder's equity:
ATC common stock, $100 par value. Authorized 1,000,000 shares; issued and outstanding 3,000
shares......................................................................................... 300,000
Nations common stock, $1 par value. Authorized 2,000,000 shares; issued and outstanding 1,000
shares......................................................................................... 1,000
Additional paid-in capital....................................................................... 6,703,207
Accumulated deficiency........................................................................... (632,255)
-------------
Total shareholder's equity................................................................... 6,371,952
-------------
Total liabilities and shareholder's equity................................................... $ 10,661,466
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
ANFI PREDECESSOR
STATEMENTS OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS
---------------------------- ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Net title insurance premiums...................................... $ 21,560,119 $ 32,702,365 $ 14,767,825
Escrow fees....................................................... 6,350,125 9,872,057 5,581,285
Other service charges............................................. 2,904,699 6,127,087 3,162,335
------------- ------------- -------------
Total revenues.................................................. 30,814,943 48,701,509 23,511,445
------------- ------------- -------------
Expenses:
Personnel costs................................................... 21,496,535 28,966,154 13,952,776
Other operating expenses.......................................... 10,998,771 15,925,037 6,520,630
Title plant rent and maintenance.................................. 2,641,505 4,306,505 2,009,188
------------- ------------- -------------
Total expenses...................................................... 35,136,811 49,197,696 22,482,594
------------- ------------- -------------
Earnings (losses) before income taxes............................... (4,321,868) (496,187) 1,028,851
Pro forma provision for income taxes................................ (1,601,237) 28,309 --
Provision for income taxes.......................................... -- (182,043) 436,981
------------- ------------- -------------
Net earnings (losses)............................................... (2,720,631) (342,453) 591,870
Less: Net earnings (losses) of
predecessors of American Title Company............................. (2,399,554) 42,464 --
------------- ------------- -------------
Net earnings (losses) of American Title Company................... $ (321,077) $ (384,917) $ 591,870
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
ANFI PREDECESSOR
STATEMENT 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 $ (247,338) $ 559,372
Capital contribution --
predecessors of American
Title Company............ -- -- -- -- 6,197,497 -- 6,197,497
Net losses................. -- -- -- -- -- (384,917) (384,917)
----- ---------- --------- --------- ------------ ------------ -------------
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.
F-19
<PAGE>
ANFI PREDECESSOR
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (losses)............................................................. $ (342,453) $ 591,870
Adjustments to reconcile net earnings (losses) to cash provided by operating
activities:
Depreciation and amortization................................................... 126,932 169,079
Changes in:
Accounts receivable........................................................... (690,548) 2,574,688
Prepaid expenses and other assets............................................. (237,208) 273,969
Due to/from affiliates........................................................ (1,363,685) 138,835
Payables and accruals......................................................... 1,455,034 893,286
------------ -------------
Total cash (used in) provided by operating activities....................... (1,051,928) 4,641,727
------------ -------------
Cash flows from investing activities:
Net sales (purchase) of property and equipment.................................... 43,994 (286,414)
Net collection from notes receivable.............................................. 7,457 --
------------ -------------
Total cash provided by (used in) investing activities....................... 51,451 (286,414)
------------ -------------
Cash flows from financing activities:
Contribution from Parent.......................................................... -- 257,869
------------ -------------
Decrease (increase) in cash and cash equivalents............................ (1,000,477) 4,613,182
Cash and cash equivalents at beginning of year...................................... 1,420,069 419,592
------------ -------------
Cash and cash equivalents at end of year............................................ $ 419,592 $ 5,032,774
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying financial statements present the financial position and
results of operations of 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.
Separate financial statements for ATC prior to its acquisition by FNFI are
not presented as such information is not material to the presentation of ANFI
Predecessor financial statements.
(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. The carrying amounts reported in the balance sheets for these
instruments approximate their fair value.
F-21
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The carrying amounts reported in the balance sheets for accounts receivable
approximate their fair value. Accounts receivable is reported net of allowance
for doubtful accounts and represents management's estimate of those balances
that are uncollectible as of the balance sheet date.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated 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.
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 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 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 assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the
F-22
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Leasehold improvements............................................................ $ 312,501
Furniture, fixtures and equipment................................................. 115,063
----------
427,564
Accumulated depreciation and amortization......................................... (280,596)
----------
$ 146,968
----------
----------
</TABLE>
(5) 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 1995 and 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.
Provision (benefit) for income taxes for the year ended December 31, 1996
and the six months ended June 30, 1997 consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996
-------------------------------
CURRENT DEFERRED TOTAL
--------- --------- ---------
Federal................................................... $ 395,116 $(550,860) $(155,744)
<S> <C> <C> <C>
State and local........................................... 111,557 (137,856) (26,299)
--------- --------- ---------
$ 506,673 $(688,716) $(182,043)
--------- --------- ---------
--------- --------- ---------
<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>
F-23
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
The effective tax rate for the periods reported differs from the Federal
statutory income tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -------------------
<S> <C> <C>
Statutory Federal income tax rate......................... (34.0)% 35.0%
Non-deductible expenses................................... 2.0 1.1
State taxes, net of Federal benefit....................... (6.0) 6.3
Amortization of intangibles............................... -- .6
Other..................................................... 1.3 (.5)
------ -----
(36.7)% 42.5%
------ -----
------ -----
</TABLE>
The deferred tax assets and liabilities at December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
----------- -----------
<S> <C> <C>
Excess book over tax provision for bad debts....................... $ 410,944 $ --
Employee benefit and vacation accruals............................. 277,772 --
----------- -----------
Total deferred taxes........................................... $ 688,716 $ --
----------- -----------
----------- -----------
</TABLE>
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) SHAREHOLDER'S EQUITY
The Company is subject to certain regulation by insurance regulatory
authorities, primarily relating to minimum net worth and working capital
requirements. In connection with the acquisition of the Company by FNFI in 1996,
minimum net worth of $400,000 and working capital of $10,000 is required for ATC
at December 31, 1996.
(7) 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.
F-24
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 have not been included in the
accompanying balance sheet. The Company has contingent liability relating to
proper disposition of these balances for its customers, which amounted to
$47,490,068 at December 31, 1996.
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. The required
deposit is reflected on the accompanying balance sheets at December 31, 1996.
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 years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997 was $3,528,220, $4,316,326 and $2,279,989
respectively, of which $1,022,542, $1,374,308, and $630,753, respectively, are
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.
(8) RELATED PARTY TRANSACTIONS
Amounts due to affiliates at December 31, 1996 were $722,530, primarily
related to underwriting fees due to a FNFI subsidiary and amounts due under cost
reimbursement agreements whereby a FNFI
F-25
<PAGE>
ANFI PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
subsidiary pays certain expenses for ATC, and is later reimbursed by ATC.
Amounts due from affiliates of $138,835 primarily related to amounts due to ATC
under the income tax allocation agreement.
(9) SUBSEQUENT EVENTS
ACQUISITIONS
On March 16, 1998, the Company signed a stock purchase agreement with
Fidelity National Title Insurance Company of New York ("FNNEW"), a wholly-owned
subsidiary of FNFI, and National Title Insurance of New York Inc. ("National"),
a wholly-owned subsidiary of FNNEW, for the purchase of National. The sale is
subject to regulatory approval and certain other conditions. The purchase price
of $3,250,000 is payable in $1,250,000 cash and a note for $2,000,000. National
was acquired in April 1996 by FNFI and has not been actively underwriting
policies since that transaction closed. In connection with this transaction, ATC
advanced $1,150,000 to FNNEW in May 1998, which FNNEW contributed to the capital
of National. Such advance will be returned to ATC in the event the transaction
does not close.
On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast
Title of Santa Barbara County ("PCT") for the purchase of 100% of the issued and
outstanding stock of Santa Barbara Title Company. The purchase price of $160,000
is payable in cash. The sale is subject to regulatory approval and certain other
conditions. On January 9, 1998, the Insurance Commissioner of the State of
California approved the transaction and the sale was consummated.
F-26
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 6,976,759
Short-term investments, at cost, which approximates fair market value....................... 1,879,135
Accounts receivable, net of an allowance for doubtful accounts of $1,089,745................ 8,906,074
Advance to related party.................................................................... 1,531,169
Deferred income tax......................................................................... 832,732
Prepaid expenses and other current assets, including $1,536,679 with affiliate.............. 1,180,446
------------------
Total current assets.................................................................... 21,306,315
Property and equipment...................................................................... 3,683,258
Deposits with Insurance Commissioner........................................................ 112,500
Title plants................................................................................ 815,310
Intangibles, net of accumulated amortization of $455,826.................................... 2,903,940
------------------
Total assets............................................................................ $ 28,821,323
------------------
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, including $2,627,746 with affiliates...................................... $ 7,762,352
Other accrued expenses...................................................................... 1,283,233
Customer advances........................................................................... 2,035,162
Current portion of long-term debt........................................................... --
Current portion of obligations under capital leases with affiliates......................... 720,313
Income taxes payable........................................................................ 2,450,799
------------------
Total current liabilities............................................................... 14,251,859
Long-term debt................................................................................ 1,672,500
Obligations under capital leases with affiliates.............................................. 829,654
------------------
Total liabilities....................................................................... 16,754,013
Minority interest in consolidated subsidiary.................................................. 6,468,432
Shareholders' equity:
Preferred stock, no par value; authorized, 5,000,000 shares; issued and outstanding, none... --
Common stock, $0 par value; authorized 50,000,000 shares; issued and outstanding 2,817,100
shares.................................................................................... --
Additional paid-in capital.................................................................. 414,284
Retained earnings........................................................................... 5,184,594
------------------
Total shareholders' equity.............................................................. 5,598,878
------------------
Total liabilities and shareholders' equity.............................................. $ 28,821,323
------------------
------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Revenues:
Net title insurance premiums..................................................... $ 8,477,806 $ 37,273,468
Escrow fees...................................................................... 3,538,587 17,179,061
Other service charges............................................................ 3,409,378 11,270,691
------------- -------------
Total revenues................................................................. 15,425,771 65,723,220
------------- -------------
Expenses:
Personnel costs.................................................................. 8,380,327 35,280,827
Other operating expenses, includes $630,812 and $2,565,125 with affiliate in 1997
and 1998, respectively......................................................... 4,208,772 12,654,305
Title plant rent and maintenance................................................. 1,455,434 5,137,292
------------- -------------
Total expenses................................................................. 14,044,533 53,072,424
------------- -------------
Earnings before income taxes and minority interest in net earnings of consolidated
subsidiary....................................................................... 1,381,238 12,650,796
Provision for income taxes......................................................... 685,373 5,280,433
------------- -------------
Earnings before minority interest in net earnings of consolidated
subsidiary....................................................................... 695,865 7,370,363
Minority interest in net earnings of consolidated subsidiary....................... (505,374) (2,894,332)
------------- -------------
Net earnings....................................................................... $ 190,491 $ 4,476,031
------------- -------------
------------- -------------
Basic net earnings per share....................................................... $ 0.06 $ 1.55
Diluted net earnings per share..................................................... $ 0.06 $ 1.41
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings...................................................................... $ 190,491 $ 4,476,031
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization................................................... 180,743 1,012,362
Minority interest in net income of consolidated subsidiary...................... 505,374 2,894,332
Changes in:
Accounts receivable, net...................................................... (2,272,855) (2,096,897)
Prepaid expenses and other assets............................................. (507,428) (277,444)
Short-term investments........................................................ -- (1,879,135)
Income taxes.................................................................. 512,288 1,255,218
Accounts payable and other accrued expenses................................... 799,227 4,563,179
Due to affiliate.............................................................. (419,197) (1,411,170)
Deposits with Insurance Commissioner.......................................... -- (7,500)
Compensation expense--stock options........................................... 414,284 --
------------- -------------
Total cash provided by (used in) operating activities....................... (597,073) 8,528,976
------------- -------------
Cash flows from investing activities:
Advance to related party.......................................................... -- (1,531,169)
Acquisition of consolidated subsidiary, net of cash acquired...................... (816,584) --
Purchases of property and equipment............................................... (40,423) (1,763,473)
Acquisition of Santa Barbara Title Company........................................ -- (160,000)
------------- -------------
Total cash provided by (used in) investing activities....................... (857,007) (3,454,642)
------------- -------------
Cash flows from financing activities:
Borrowings (payments) on longterm debt............................................ 6,000,000 (4,800,000)
Payments under capital lease obligations.......................................... (149,018) (521,210)
------------- -------------
Total cash provided by (used in) in financing activities.................... 5,850,982 (5,321,210)
------------- -------------
Increase (decrease) in cash and cash equivalents............................ 4,396,902 (246,876)
Cash and cash equivalents at beginning of year...................................... -- 7,223,635
------------- -------------
Cash and cash equivalents at end of year............................................ $ 4,396,902 $ 6,976,759
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest........................................................................ $ 338,374 $ 562,044
Income taxes.................................................................... $ 310,000 $ 4,045,853
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE>
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENTS
The condensed consolidated financial information includes the accounts of
American National Financial, Inc. and Subsidiaries (collectively, the "Company")
and has been prepared in accordance with generally accepted accounting
principles and the instruction of Article 10 of Regulation S-X. All adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation, have been included. Results for the nine months ended September
30, 1997 and 1998 are not necessarily indicative of the results that may be
expected for the entire year. This information should be read in conjunction
with the financial statements for the year ended December 31, 1997.
(2) COMPREHENSIVE INCOME
In June 1997, the 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 income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company has no other comprehensive
income and accordingly the Statement has no impact on the presentation of the
Company's financial statements.
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common shareholders 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 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. The number of weighted average shares outstanding
used in basic earnings per share was 2,984,804 and 2,889,995 for the nine months
ended September 30, 1997 and 1998, respectively. The number of weighted average
shares outstanding used in diluted earnings per share was 3,083,064 and
3,178,454 for the nine months ended September 30, 1997 and 1998, respectively.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Title Insurance of New York Inc.:
We have audited the accompanying balance sheet of National Title Insurance of
New York Inc. (a wholly-owned subsidiary of Fidelity National Insurance Company
of New York) as of December 31, 1997 and the related statements of operations,
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Title Insurance of New
York Inc. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Orange County, California
November 10, 1998
F-31
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value............................ $4,876,531
Short-term investments, at cost, which approximates fair value................ 20,000
Investments in real estate, net............................................... 458,439
Cash and cash equivalents....................................................... 611,211
Mortgage loans receivable, net.................................................. 103,361
Prepaid expenses and other assets............................................... 96,143
Title plants.................................................................... 50,200
-----------
Total assets $6,215,885
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued liabilities...................................... $ 226,954
Due to affiliate.............................................................. 190,045
Reserve for claim losses...................................................... 4,324,160
-----------
Total liabilities........................................................... 4,741,159
Stockholder's equity:
Common stock, $7.50 par value per share. Authorized 200,000 shares; issued and
outstanding 130,301 shares.................................................... 977,258
Additional paid-in capital...................................................... 599,717
Accumulated deficiency.......................................................... (187,009)
Net unrealized gains on investments, net of deferred taxes of $43,664........... 84,760
-----------
Total stockholder's equity.................................................... 1,474,726
-----------
Total liabilities and stockholder's equity.................................... $6,215,885
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
REVENUE:
Title insurance premiums......................................................................... $ 4,860,177
Interest and investment income................................................................... 318,074
Net realized investment losses................................................................... (129,846)
-------------
5,048,405
EXPENSES:
Agent commissions................................................................................ 4,351,188
Provision for claim losses....................................................................... 399,927
Other operating expenses......................................................................... 576,229
-------------
5,327,344
Loss before income taxes......................................................................... (278,939)
Income tax benefit............................................................................... (94,839)
-------------
Net loss......................................................................................... $ (184,100)
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL GAIN ON TOTAL
COMMON PAID-IN ACCUMULATED INVESTMENT STOCKHOLDER'S
STOCK CAPITAL DEFICIENCY SECURITIES EQUITY
---------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................... $ 977,258 $ 599,717 $ (2,909) $ 16,750 $ 1,590,816
Change in net unrealized gains on
investments................................ -- -- -- 68,010 68,010
Net loss..................................... -- -- (184,100) -- (184,100)
---------- ---------- ------------ ------------- -------------
Balance, December 31, 1997................... $ 977,258 $ 599,717 $ (187,009) $ 84,760 $ 1,474,726
---------- ---------- ------------ ------------- -------------
---------- ---------- ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss...................................................................... $ (184,100)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................... 23,410
Net change in reserve for claim losses...................................... 141,930
Net realized investment losses.............................................. 129,846
Changes in assets and liabilities
Net change in prepaid expenses and other assets............................. 160,813
Net change in accounts payable and accrued liabilities...................... 72,102
Net change in amounts due to affiliates..................................... (2,535,626)
Net change in income taxes.................................................. (204,886)
Other....................................................................... 33,454
----------
Net cash used in operating activities......................................... (2,363,057)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities available for sale............................. 2,184,624
Proceeds from sales of real estate............................................ 125,198
Proceeds from sales of short term investments................................. 4,515,210
Purchases of fixed maturities available for sale.............................. (1,603,669)
Purchases of short term investments........................................... (4,515,210)
Collections of mortgages receivable........................................... 7,176
Additions to mortgages receivable............................................. (150,211)
----------
Net cash provided by investing activities..................................... 563,118
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in cash and cash equivalents.......................... (1,799,939)
Cash and cash equivalents at beginning of year................................ 2,411,150
----------
Cash and cash equivalents at end of year...................................... $ 611,211
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
National Title Insurance of New York Inc. (the "Company") is a wholly-owned
subsidiary of Fidelity National Title Insurance Company of New York
("FNTIC-NY"), which in turn is a wholly-owned subsidiary of Fidelity National
Financial, Inc. ("FNFI"). The accompanying financial statements of the Company
have been prepared in conformity with generally accepted accounting principles
("GAAP").
DESCRIPTION OF BUSINESS
On April 1, 1996, FNTIC-NY acquired 100% of the issued and outstanding
common shares of the Company at its net book value. The transaction was
accounted for as a purchase.
The Company is primarily engaged in the business of issuing title insurance
policies in connection with real estate transactions. These services are
provided through the Company's independent agents who issue policies on behalf
of the Company. In 1997, the Company generated 95% of its title insurance
premiums in California. The Company's business is susceptible to economic
influences and their impact on the real estate market.
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 balance sheet for these
instruments approximate their fair value.
INVESTMENTS
Fixed maturity securities are purchased to support the investment strategies
of the Company, which are developed based on many factors including rate of
return, maturity, credit risk, tax considerations and regulatory requirements.
Fixed maturity securities are carried at fair value and are classified as
available for sale. Fair values for fixed maturity securities are based on
quoted market prices.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Investments in real estate is property acquired in satisfaction of debt and
is carried at the lower of cost or fair value less encumbrances. Depreciable
real estate is depreciated using the straight-line method, based on the
estimated remaining useful lives of the properties.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains (losses) on bonds, net of
applicable deferred income taxes (benefits), are excluded from income and
credited or charged directly to a separate component of stockholder's equity.
The carrying value for investments is reduced to estimated realizable value if
the decline in fair value is deemed other than temporary. Such reductions are
recognized as realized losses.
F-36
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are carried at their aggregate unpaid balances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments presented in the applicable notes
to the Company's financial statements are estimates of the fair values at a
specific point in time using available market information and appropriate
valuation methodologies. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts the Company could realize or settle currently. The Company does not
necessarily intend to dispose of or liquidate such instruments prior to
maturity.
TITLE PLANTS
Title plants are recorded at the cost incurred to construct or obtain and
organize historical title information to the point it can be used to perform
title searches. Costs incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained. Sales of title plants are reported at the
amount received net of the adjusted costs of the title plant sold. No cost is
allocated to the sale of copies of title plants unless the value of the title
plant is diminished.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes." Statement 109 provides that deferred tax assets and liabilities be
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.
RESERVE FOR CLAIM LOSSES
The Company's reserve for claim losses includes known claims as well as
losses the Company expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review by the Company as to the estimated amount
of the claim and the costs required to settle the claim. Reserves for claims
which are incurred but not reported are provided for at the time premium revenue
is recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. Major claims (greater than $500,000)
are evaluated and amounts greater than $500,000 are reserved for as they become
known because the unique circumstances surrounding most major claims make it
inherently impractical to predict the incidence and amount of such claims. The
occurrence of a significant major claim in any given period could
F-37
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have a material adverse effect on the Company's financial condition and results
of operations for such period.
If a loss is related to a policy issued by an independent agent, the Company
may proceed against the independent agent pursuant to the terms of the agency
agreement. In any event, the Company may proceed against third parties who are
responsible for any loss under the title insurance policy under rights of
subrogation.
REVENUE RECOGNITION
Title insurance premiums are recognized as revenue at the time of closing of
the related transaction.
AGENTS COMMISSIONS
Title insurance commissions earned by the Company's agents are recognized as
an expense concurrently with premium recognition.
OTHER OPERATING EXPENSES
During 1997, the Company had no employees and, as such, it incurred no
personnel costs or other operating expenses directly. Certain operating expenses
incurred by affiliates were allocated to the Company during 1997. Such expenses
are included in other operating expenses on the statement of operations. All
charges, including rent, depreciation, officer salaries, advertising, utilities,
accounting and legal costs have been specifically identified and charged to the
Company.
MANAGEMENT ESTIMATES
The preparation of these 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. Actual results could differ
from those estimates.
B. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S government and agencies...................... $ 2,834,993 $ 69,296 $ (9,655) $ 2,894,634
States and political subdivisions................ 1,653,418 62,914 -- 1,716,332
Corporate securities............................. 259,696 5,869 -- 265,565
------------ ----------- ----------- ------------
$ 4,748,107 $ 138,079 $ (9,655) $ 4,876,531
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-38
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
B. INVESTMENTS (CONTINUED)
The change in net unrealized gains (losses) on fixed maturities available
for sale for the period ended December 31, 1997 was $68,010.
The amortized cost and estimated fair value of fixed maturity securities,
which are classified as available for sale at December 31, 1997, by contractual
maturity, are shown as follows. Expected maturities may differ from contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties:
<TABLE>
<CAPTION>
AMORTIZED % OF
COST % OF TOTAL FAIR VALUE TOTAL
------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Maturity
One year or less..................................... $ 145,000 3.0 $ 145,300 3.0
After one year through five years.................... 2,808,536 59.7 2,894,634 59.4
After five years through ten years................... 1,794,571 37.3 1,836,597 37.6
After ten years...................................... -- -- -- --
------------ ----- ------------ ---------
Total.............................................. $ 4,748,107 100.0 $ 4,876,531 100.0
------------ ----- ------------ ---------
------------ ----- ------------ ---------
</TABLE>
Fixed maturity securities valued at approximately $1,335,200 were on deposit
with various governmental authorities at December 31, 1997, as required by law.
Interest and investment income consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents....................................................... $ 38,766
Fixed maturities................................................................ 266,078
Short-term investments.......................................................... 5,315
Mortgage loans receivable....................................................... 7,915
------------
$ 318,074
------------
------------
</TABLE>
During the period ended December 31, 1997, gross realized gains on sales of
fixed maturity securities considered available for sale were $7,131 and gross
realized losses were $11,484.
C. MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Mortgage loans, secured by various deeds of trust,
Installments due monthly including interest rates
Ranging from 7.75% to 8.0%.................................................... $ 118,361
Allowance for doubtful receivables............................................ (15,000)
------------
$ 103,361
------------
------------
</TABLE>
The allowance for doubtful receivables is primarily related to promissory
notes at December 31, 1997. Interest income is not recognized on the Company's
non-performing mortgages receivable.
F-39
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
C. MORTGAGE LOANS RECEIVABLE (CONTINUED)
The fair values of mortgage loans receivable approximate book value.
D. REAL ESTATE
Real estate consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Investment in real estate:
Commercial property........................................................... $ 508,439
Land.......................................................................... 90,000
------------
598,439
Reserve for real estate....................................................... (140,000)
------------
$ 458,439
------------
------------
</TABLE>
E. INCOME TAXES
In April 1996, the Company entered into a formal tax allocation agreement
with FNFI whereby if the Company has taxable income, the Company would pay FNFI
a monthly amount equal to the GAAP tax provision established for Federal and
state income taxes. If the Company has a taxable loss, FNFI will pay to the
Company an amount equal to the tax benefits received by FNFI from the inclusion
of the Company in the consolidated Federal and state income tax returns, even if
the Company could not have utilized its losses and/or credits on a separate
return basis.
Income tax benefit, which is provided at the Federal statutory rate,
consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current......................................................................... $ (36,814)
Deferred........................................................................ (58,025)
------------
$ (94,839)
------------
------------
</TABLE>
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.
F-40
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
F. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance............................................................... $4,182,232
Title claim loss provision related to:
Current year................................................................ 340,212
Prior years................................................................. 59,715
------------
Total title claim loss provision.............................................. 399,927
Title claims paid, net of recoupments related to:
Current year................................................................ (28,659)
Prior years................................................................. (229,340)
Total title claims paid, net of recoupments................................... (257,999)
------------
Ending balance.................................................................. $4,324,160
------------
------------
</TABLE>
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly.
G. COMMITMENTS AND CONTINGENCIES
The Company is, in the ordinary course of business, subject to claims made
under, and from time are named as defendants in legal proceedings relating to,
policies of insurance they have issued or other services performed on behalf of
insured policyholders and other customers. The Company believes that the
reserves reflected in its financial statements are adequate to pay losses and
loss adjustment expenses which may result from such claims and proceedings;
however, such estimates may be more or less than the amount ultimately paid when
the claims are settled.
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 have not been included in the
accompanying financial statements. At December 31, 1997, the Company held
approximately $310,260 of such assets in trust and has a contingent liability
relating to proper disposition of these balances for its customers.
H. STOCKHOLDER'S EQUITY
The Company is limited in the amount of dividends which can be paid to
stockholders without the prior approval of the Insurance commissioner of the
State of New York. The total amount of dividends and distributions is limited to
statutory surplus as regards policyholders excluding common stock, less fifty
percent of the statutory premium reserve as of the last date of the preceding
year and capital contributions received in the latest five year period.
Additionally, dividends are further limited to the Company's earned statutory
surplus. In accordance with Department regulations, the Company agreed not to
pay dividends or distributions in the first two years of its ownership by
FNTIC-NY without prior approval, of the Department. The Company cannot pay
dividends due to the accumulated deficiency in stockholder's equity.
F-41
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
H. STOCKHOLDER'S EQUITY (CONTINUED)
The statutory surplus and statutory income of the Company was $1,918,375 and
$138,990 as of December 31, 1997, respectively.
In May 1998, the Company received a cash capital contribution of $1,150,000
from its parent.
The Company is regulated by New York Department of Insurance. Regulatory
examinations usually occur at three year intervals. The Company's examination is
currently in progress for the period ended December 31, 1997. The Company has
not received a preliminary report as the examination is currently in process.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1998, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, is $6.7 million.
I. RELATED PARTY TRANSACTIONS
Certain operating and claims processing expenses were paid by certain
subsidiaries of FNFI on the Company's behalf under cost reimbursement
agreements. These expenses are charged to the Company based on actual costs
incurred. Such expenses amounted to $576,229 in 1997.
J. SUBSEQUENT EVENTS
On March 18, 1998, the FNFI announced that it had entered into an agreement
to sell the Company to American Title Company, subject to regulatory approval
and certain other conditions. The purchase price of $3,250,000 is structured at
a premium to book value. The transaction is pending regulatory approval.
F-42
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value............................................... $ 5,036,079
Short-term investments, at cost, which approximates fair value................................... 1,019,058
Investments in real estate, net.................................................................. 317,249
Cash and cash equivalents.......................................................................... 577,682
Trade receivables (less allowance of $15,096)...................................................... 3,020
Mortgage loans receivable, net..................................................................... 169,405
Prepaid expenses and other assets.................................................................. 112,197
Title plants....................................................................................... 50,200
-------------
Total assets..................................................................................... $ 7,284,890
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued liabilities......................................................... $ 88,223
Due to affiliate................................................................................. 441,362
Reserve for claim losses......................................................................... 4,160,204
-------------
Total Liabilities.............................................................................. 4,689,789
Stockholder's equity:
Common stock, $7.50 par value per share. Authorized 200,000; issued and outstanding 130,301
shares........................................................................................... 977,258
Additional paid-in capital......................................................................... 1,749,717
Accumulated deficiency............................................................................. (235,752)
Net unrealized gains on investments................................................................ 103,878
-------------
Total stockholder's equity....................................................................... 2,595,101
-------------
Total liabilities and stockholder's equity....................................................... $ 7,284,890
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
REVENUE:
Title insurance premiums.......................................................... $ 4,709,665 $ 249,687
Interest and investment income.................................................... 115,829 233,264
Net realized investment losses.................................................... (5,694) (4,352)
------------- -------------
4,819,800 478,599
EXPENSES:
Agent commissions................................................................. 4,226,820 178,675
Provision for claim losses........................................................ 374,444 48,102
Other operating expenses.......................................................... 327,387 325,675
------------- -------------
4,928,651 552,452
Loss before income taxes.......................................................... (108,851) (73,853)
Income tax benefit................................................................ (37,009) (25,110)
------------- -------------
Net loss.......................................................................... $ (71,842) $ (48,743)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (71,842) $ (48,743)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 18,846 13,690
Net change in reserve for claim losses.......................................... 234,118 (163,956)
Net realized investment loss.................................................... 5,694 4,352
Changes in assets and liabilities
Net change in prepaid expenses and other assets................................. 182,514 (15,512)
Net change in accounts payable and accrued liabilities.......................... 38,280 (138,731)
Net change in amounts due to affiliates......................................... (2,691,963) 251,317
Other........................................................................... (39,694) 132,780
------------- -------------
Net cash provided by (used in) operating activities............................... (2,324,047) 35,197
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities available for sale................................. 2,184,625 2,138,437
Proceeds from sales of real estate................................................ 125,198 --
Proceeds from sales of short term investments..................................... -- 3,997,052
Purchases of fixed maturities available for sale.................................. (454,625) (2,284,561)
Purchases of short term investments............................................... (999,208) (4,996,110)
Collections of mortgage loans receivable.......................................... 6,862 1,970
Additions to mortgage loans receivable............................................ (124,960) (68,014)
Investments in real estate........................................................ -- (7,500)
------------- -------------
Net cash provided by (used in) investing activities............................... 737,892 (1,218,726)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from parent.................................................. -- 1,150,000
------------- -------------
Net decrease in cash and cash equivalents....................................... (1,586,155) (33,529)
Cash and cash equivalents at beginning of year.................................... 2,411,150 611,211
------------- -------------
Cash and cash equivalents at end of year.......................................... $ 824,995 $ 577,682
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
NATIONAL TITLE INSURANCE OF NEW YORK INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
A. BASIS OF FINANCIAL STATEMENTS
The accompanying financial statements includes the accounts of National
Title Insurance of New York, Inc. (the "Company") and has been prepared in
accordance with generally accepted accounting principles and the instruction of
Article 10 of Regulation S-X. All adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation, have been included.
Results for the nine months ended September 30, 1997 and 1998 are not
necessarily indicative of the reuslts that may be expected for the entire year.
B. COMPREHENSIVE INCOME
Other comprehensive income consists of unrealized holding gains on
investments arising during the period. Comprehensive loss for the nine months
ended September 30, 1997 and 1998 was $3,001 and $29,625, respectively.
F-46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF ANY OFFER TO BUY THE SECURITIES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 12
Reorganization............................................................ 12
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Capitalization............................................................ 17
Selected Consolidated Financial and Operating Data........................ 18
Unaudited Pro Forma Combined Condensed Financial Information.............. 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business.................................................................. 32
Management................................................................ 43
Principal Shareholders.................................................... 50
Certain Transactions...................................................... 51
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 55
Legal Matters............................................................. 57
Experts................................................................... 57
Available Information..................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[CRUTTENDEN ROTH INCORPORATED LOGO]
[JOSEPTHAL & CO. LOGO]
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
It is estimated that the following expenses will be incurred in connection
with the proposed offering hereunder. All of such expenses will be borne by the
Company:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC filing fee.................................................................... $ 5,620
Legal fees and expenses........................................................... 268,000*
Accounting fees and expenses...................................................... 175,000*
Blue sky fees and expenses (including counsel fees)............................... 10,000*
Printing expenses................................................................. 75,000*
Nonaccountable Expense Allowance.................................................. 240,000*
Insurance premiums................................................................ 24,000
Miscellaneous..................................................................... 2,380*
----------
TOTAL........................................................................... $ 800,000*
----------
----------
</TABLE>
- ------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the Registrant and its officers and directors, and by the
Registrant of the Underwriters for certain liabilities arising under the
Securities Act or otherwise.
The Registrant's Articles of Incorporation provide that the liability of the
Registrant's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Registrant for breach of a director's duties to the
Registrant or its shareholders subject to certain limitations in Section 204 of
the California Corporations Code described below.
The Articles also provide that the Registrant is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Registrant's Bylaws or through agreements with
such agents or both, for breach of duty to the Registrant and its shareholders,
in excess of the indemnification otherwise permitted by Section 317 of the
California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.
Section 317 of the California Corporations Code provides that a corporation
may indemnify an agent who is, or who is threatened to be made a party to any
proceeding (as that term is defined therein) for actions taken in their
corporate capacity upon a determination that such agent acted in good faith and
in a manner which such agent believed to be in the best interest of the
corporation. In addition, Section 317 provides for mandatory indemnification of
an agent who is successful on the merits in defense of any such proceeding.
Indemnification is prohibited under this section (with certain express
exceptions) in any circumstances where it appears that it would be inconsistent
with (i) any provision of the corporation's articles of incorporation or bylaws,
any resolution of the shareholders or any agreement in effect at the time of the
alleged cause of action asserted in the proceeding; and (ii) any condition
expressly imposed by a court in approving a settlement.
In addition, the ability of a corporation to indemnify its agents and to
eliminate the liability of a director for monetary damages is further limited by
Section 204 of the California Corporations Code which
II-1
<PAGE>
provides that a corporation may not provide for indemnification of agents or
eliminate the liability of a director for monetary damages for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law; (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director; (iii) for any
transaction from which a director derived an improper personal benefit; (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders; (v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders; (vi) with respect to certain transactions, or
the approval of transactions in which a director has a material financial
interest; and (vii) expressly imposed by statute, for approval of certain
improper distributions to shareholders or certain loans or guarantees.
The Bylaws of the Registrant provide that the Registrant shall indemnify
each of its agents (as defined in Section 317 of the California Corporations
Code) to the fullest extent permissible under the California Corporations Code
against expenses, judgments, fines, settlements and other amounts, actually and
reasonably incurred by such person by reason of such person's having been made
or having been threatened to be made a party to a proceeding. The Bylaws further
provide that the Registrant shall advance the expenses reasonably expected to be
incurred by such agent in defending against any such proceeding upon receipt of
the agent's undertaking to return repay such amounts to the Registrant if it is
determined that the agent was not entitled to indemnification.
The Registrant has entered into agreements to indemnify its directors in
addition to the indemnification provided for in the Articles of Incorporation
and Bylaws. Among other things, these agreements provide that the Registrant
will indemnify, subject to certain requirements, each of the Registrant's
directors for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the Registrant, on account of
services by such person as a director or officer of the Registrant, or as a
director or officer of any other company or enterprise to which the person
provides services at the request of the Registrant.
The above provisions may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Registrant and its shareholders. At present, there is no
litigation or proceeding pending involving a director of the Registrant as to
which indemnification is being sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification by any
director.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1997, the Registrant issued 3,026,400 shares of common stock to its
founding shareholders in connection with the initial capitalization of the
Registrant. The founding shareholders paid $0.40 per share in this transaction.
These securities were issued to the Registrant's founding shareholders, who were
also employees of the Registrant, pursuant to Section 4(2) of the Securities
Act.
In July 1997, the Registrant issued options to purchase 332,904 shares of
common stock to William P. Foley, II, the Chairman of the Board of Directors.
The options are exercisable for a period of five years at an exercise price of
$0.66 per share. These securities were issued in a private transaction to a
single accredited investor pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
II-2
<PAGE>
In November 1998, the Company issued 2,099,996 shares of Common Stock to
FNFI in exchange for 40% of the outstanding shares of common stock of ATC and
subject to the other terms of the Reorganization. These securities were issued
in a private transaction pursuant to Section 4(2) of the Securities Act and Rule
506 promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Form of Representative's Warrant Agreement.+
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.+
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.+
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.+
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.+
2.5 Stock Purchase Agreement dated August 9, 1997 by and between Pacific Coast
Title of Santa Barbara County and American Title Company.+
2.6 Stock Exchange Agreement dated August 21, 1998 between the Registrant and
Fidelity National Financial, Inc.+
3.1 Amended and Restated Articles of Incorporation.+
3.2 Bylaws of the Registrant, as amended.+
4.1 Form of Common Stock Certificate.
5.1 Opinion of Rutan & Tucker, LLP.
10.1 1998 Stock Incentive Plan, together with form of Nonqualified Stock Option
Agreement and form of Incentive Stock Option Agreement.+
10.2 Employment Agreement between the Registrant and Michael C. Lowther.+
10.3 Employment Agreement between the Registrant and Wayne D. Diaz.+
10.4 Employment Agreement between the Registrant and Dennis R. Duffy.+
10.5 Employment Agreement between the Registrant and Barbara Ferguson.+
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity National
Title Insurance Company and American Title Company.+
10.7 Issuing Agency Agreement dated August 25, 1997 between Fidelity National
Title Insurance Company and Santa Barbara Title Company.+
10.8 Credit Agreement dated August 7, 1997 between the Registrant and Imperial
Bank.+
10.9 Note dated August 7, 1997 of the Registrant in favor of Imperial Bank.+
10.10 Addendum to Note dated August 7, 1997 between the Registrant and Imperial
Bank.+
10.11 Standard Sublease dated January 28, 1998 between American Title Company
and Fidelity National Financial, Inc.+
10.12 Form of Indemnification Agreement.+
10.13 Title Plant Lease Agreement dated July 1, 1997 between Fidelity National
Title Insurance Company and American Title Company.+
21 List of Subsidiaries of Registrant.+
23.1 Consent of KPMG LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed as Exhibit
5.1).+
24 Power of Attorney.+
27 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
(b) The following financial statement schedules are filed herewith:
SCHEDULE I -- Balance Sheet of American National Financial, Inc. (Parent
Company only) as of December 31, 1997 and related Statements
of Operations and Retained Earnings and Cash Flows for the
year ended December 31, 1997, and accompanying notes.
SCHEDULE II -- Valuation and Qualifying Accounts of American National
Financial, Inc. and Subsidiaries for the year ended December
31, 1997 and of American National Financial, Inc.
(Predecessor) for the year ended December 31, 1996 and the
six months ended June 30, 1997.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 24 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person thereof in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, California, on
January 22, 1999.
<TABLE>
<S> <C> <C>
AMERICAN NATIONAL FINANCIAL, INC.
By: /s/ MICHAEL C. LOWTHER
-----------------------------------------
Michael C. Lowther,
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL C. LOWTHER Chief Executive Officer
- ------------------------------ and Director (Principal January 22, 1999
Michael C. Lowther Executive Officer)
Executive Vice President
* and Chief Financial
- ------------------------------ Officer (Principal January 22, 1999
Carl A. Strunk Financial and Accounting
Officer)
*
- ------------------------------ Director January 22, 1999
William P. Foley, II
*
- ------------------------------ Director January 22, 1999
Wayne D. Diaz
*
- ------------------------------ Director January 22, 1999
Dennis R. Duffy
*
- ------------------------------ Director January 22, 1999
Bruce Elieff
*
- ------------------------------ Director January 22, 1999
Barbara A. Ferguson
*
- ------------------------------ Director January 22, 1999
Robert Majorino
- ------------------------------ Director January 22, 1999
Matthew K. Fong
*By: /s/ MICHAEL C. LOWTHER
-------------------------
Michael C. Lowther
ATTORNEY-IN-FACT
II-5
<PAGE>
SCHEDULE I
AMERICAN NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 26,313
Receivables from subsidiary................................................... 900,000
Deferred tax asset............................................................ 127,108
----------
Total current assets........................................................ 1,053,421
Property and equipment, net................................................... 667,888
Investment in subsidiary...................................................... 6,435,562
----------
Total assets................................................................ $8,156,871
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 11,792
Accounts payable to subsidiary................................................ 549,732
Current portion of long-term debt............................................. 936,672
----------
Total current liabilities................................................... 1,498,196
Long-term debt.................................................................. 5,535,828
----------
Total liabilities........................................................... 7,034,024
----------
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, 2,910,416
shares...................................................................... --
Additional paid in capital.................................................... 414,284
Retained earnings............................................................. 708,563
----------
Total shareholders' equity.................................................. 1,122,847
----------
Total liabilities and shareholders' equity.................................. $8,156,871
----------
----------
</TABLE>
See accompanying notes to financial statements
S-1
<PAGE>
SCHEDULE I
(continued)
AMERICAN NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
Other service charges......................................................... $ 94,697
Expenses:
Other operating expenses...................................................... 826,750
---------
Losses before income tax expense and equity in earnings of subsidiaries......... (732,053)
Provision for income taxes...................................................... 127,108
---------
Losses before equity in earnings of subsidiaries................................ (604,945)
Equity in earnings of subsidiaries.............................................. 1,313,508
---------
Net earnings.................................................................... $ 708,563
---------
---------
Basic net earnings per share.................................................... $ 0.24
Diluted net earnings per share.................................................. $ 0.23
Retained earnings, beginning of year............................................ $ --
Net earnings.................................................................. 708,563
---------
Retained earnings, end of year.................................................. $ 708,563
---------
---------
</TABLE>
See accompanying notes to financial statements.
S-2
<PAGE>
SCHEDULE I
(continued)
AMERICAN NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings.................................................................. $ 708,563
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation and amortization............................................... --
Equity in earnings of subsidiaries.......................................... (1,313,508)
Changes in:
Income taxes payable...................................................... (127,108)
Accounts payable.......................................................... 539,470
Compensation expense--stock options....................................... 414,284
----------
Total cash provided by operating activities............................. 221,701
----------
Cash flows from investing activities:
Purchase of property and equipment............................................ (195,388)
Purchase of investment in subsidiary.......................................... (6,000,000)
----------
Total cash used in investing activities................................. (6,195,388)
----------
Cash flows from financing activities -- borrowings.............................. 6,000,000
----------
Total cash provided in financing activities............................. 6,000,000
----------
Increase in cash and cash equivalents................................... 26,313
Cash and cash equivalents at beginning of year.................................. --
----------
Cash and cash equivalents at end of year........................................ $ 26,313
----------
----------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest.................................................................... $ 412,466
----------
Income taxes................................................................ $ 245,000
----------
----------
</TABLE>
See accompanying notes to financial statements.
S-3
<PAGE>
SCHEDULE I
(continued)
AMERICAN NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) AMERICAN
American National Financial, Inc. (the "Company") transacts substantially
all of its business through its subsidiaries. The Parent Company Financial
Statements should be read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
(2) NOTES PAYABLE
The Company has a $6,000,000 note payable to a financial institution that
bears interest at the institution's prime lending rate (8.5% at June 30, 1998)
and is due in November 2002. The note requires monthly payments in the amount of
$33,334 beginning in May 1998. Interest is payable monthly. The note is
collateralized by a first priority lien on all the Company's assets and all of
its outstanding common stock. The Company is also required to maintain tangible
net worth of at least $200,000 and working capital of at least $250,000 on a
quarterly basis. As of December 31, 1997, the Company is out of compliance with
certain covenants related to minimum tangible net worth and capital expenditure
restrictions. The financial institution has waived its right to recall the debt
with respect to those two violations. In April 1998, the Company voluntarily
prepaid $1 million on the note.
The Company also has a $472,500 note payable to the same financial
institution that bears interest at the institution's prime lending rate (8.50%
at December 31, 1997) and is due in full in December 1999 with interest payable
monthly. The note is collateralized by a deed of trust of the office building.
Future fixed principal maturities of these notes payable are as follows for
the years ending December 31, excluding the variable payment:
<TABLE>
<S> <C>
1998............................................................ $ 266,672
1999............................................................ 872,508
2000............................................................ 400,008
2001............................................................ 400,008
2002............................................................ 4,533,304
---------
$6,472,500
---------
---------
</TABLE>
The carrying value of the Company's notes payable approximates fair value.
(3) SUPPLEMENTARY CASH FLOW INFORMATION
The Company acquired certain property for use in operations in December 1997
for cash of $195,388 and a note in the amount of $472,500. A dividend in the
amount of $900,000 was declared by American Title Company in December 1997,
which is reflected as a receivable from subsidiary at December 31, 1997.
S-4
<PAGE>
SCHEDULE II
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COL. C
------------------------
COL. B ADDITIONS COL. E
----------- ------------------------ COL. D ----------
COL. A BALANCE AT CHARGED TO ----------- BALANCE AT
- ------------------------------------------------ BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Trade receivables allowance..................... -- 553,039 837,005(2) 289,595(1) 1,100,449
Amortization of intangibles..................... -- 180,870 76,479(2) -- 257,349
</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) Balances from July 1, 1997 acquisition of American Title Company and
subsidiaries by American National Financial, Inc.
S-5
<PAGE>
SCHEDULE II
ANFI PREDECESSOR
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COL. B COL. C COL. E
COL. ------------ ------------------------- COL. D ---------
A BALANCE CHARGED --------------- BALANCE
- -- AT BEGINNING TO COSTS OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD AND EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD
- -- ------------ ------------ ---------- --------------- ---------
<C> <C> <C> <C> <C>
Year
ended
December
31,
1995
Allowance
for
doubtful
accounts... -- 220,358 -- -- --
Year
ended
December
31,
1996
Allowance
for
doubtful
accounts... $ -- 406,323 478,827(1) -- $ 885,150
Accumulated
amortization
of
intangibles.. -- 112,000 -- -- 112,000
Six
months
ended
June
30,
1997
Allowance
for
doubtful
accounts... $885,150 348,512 -- 421,733(2) $ 811,929
Accumulated
amortization
of
intangibles.. $112,000 91,426 -- $ 203,426
</TABLE>
- ------------------------
(1) Represents amounts on the August 31, 1996 balance sheet of FNFI divisions
acquired by American Title Company.
(2) Represents uncollectible accounts written off.
S-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Representative's Warrant Agreement.+
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.+
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.+
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.+
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.+
2.5 Stock Purchase Agreement dated August 9, 1997 by and between Pacific Coast Title of Santa
Barbara County and American Title Company.+
2.6 Stock Exchange Agreement dated August 21, 1998 between the Registrant and Fidelity National
Financial, Inc.+
3.1 Amended and Restated Articles of Incorporation.+
3.2 Bylaws of the Registrant, as amended.+
4.1 Form of Common Stock Certificate.
5.1 Opinion of Rutan & Tucker, LLP.
10.1 1998 Stock Incentive Plan, together with form of Nonqualified Stock Option Agreement and form
of Incentive Stock Option Agreement.+
10.2 Employment Agreement between the Registrant and Michael C. Lowther.+
10.3 Employment Agreement between the Registrant and Wayne D. Diaz.+
10.4 Employment Agreement between the Registrant and Dennis R. Duffy.+
10.5 Employment Agreement between the Registrant and Barbara Ferguson.+
10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity National Title Insurance Company
and American Title Company.+
10.7 Issuing Agency Agreement dated August 25, 1997 between Fidelity National Title Insurance
Company and Santa Barbara Title Company.+
10.8 Credit Agreement dated August 7, 1997 between the Registrant and Imperial Bank.+
10.9 Note dated August 7, 1997 of the Registrant in favor of Imperial Bank.+
10.10 Addendum to Note dated August 7, 1997 between the Registrant and Imperial Bank.+
10.11 Standard Sublease dated January 28, 1998 between American Title Company and Fidelity National
Financial, Inc.+
10.12 Form of Indemnification Agreement.+
10.13 Title Plant Lease Agreement dated July 1, 1997 between Fidelity National Title Insurance
Company and American Title Company.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
21 List of Subsidiaries of Registrant.+
23.1 Consent of KPMG LLP.
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed as Exhibit 5.1).+
24 Power of Attorney+
27 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
<PAGE>
2,000,000 SHARES
AMERICAN NATIONAL FINANCIAL, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
February __, 1999
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO. INC.
As Representatives of the several Underwriters
c/o Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92612
Gentlemen:
American National Financial, Inc., a California corporation (the
"Company"), addresses you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,000,000 shares of its authorized and unissued Common Stock, no par value
(the "Firm Shares"), to the several Underwriters. In addition, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, the Company proposes to grant to the Underwriters an option to
purchase up to 300,000 additional shares of the Company's Common Stock (the
"Option Shares"), as provided in Section 4 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. The Company also proposes to sell to you, individually and not in
your capacity as Representatives, warrants (the "Representatives' Warrants")
to purchase 125,000 shares of Common Stock of the Company (the
"Representatives' Warrant Stock"), which sale will be consummated in
accordance with the terms and conditions of the Representatives' Warrant
Agreement (the "Representatives' Warrant Agreement"), the form of which is
filed as an exhibit to the Registration Statement described below. All
shares of Common Stock of the Company to be outstanding after giving effect
to the sales contemplated hereby, including the sale of the Shares, are
hereinafter referred to as "Common Stock." Unless the context otherwise
requires, references herein to the "Company" include American National
Financial, Inc., together with its predecessor and subsidiaries described in
the Prospectus (hereinafter defined).
<PAGE>
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each of the
Underwriters that:
(a) A registration statement on Form S-1 (File
No. 333-62353) with respect to the Shares, the Representatives' Warrants and the
Representatives' Warrant Stock, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement and such amended
prospectuses subject to completion as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement and
such amended prospectuses subject to completion as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus subject to completion (the "Preliminary Prospectuses") have been
delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information previously omitted from the
registration statement pursuant to Rule 430A(a) of the Rules and Regulations
pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations
or as part of a post-effective amendment to the registration statement
(including a final form of prospectus). If the registration statement relating
to the Shares has not been declared effective under the Act by the Commission,
the Company will prepare and promptly file an amendment to the registration
statement, including a final form of prospectus. The term "Registration
Statement" as used in this Agreement shall mean such registration statement,
including financial statements, schedules and exhibits, in the form in which it
became or becomes, as the case may be, effective (including, if the Company
omitted information from the registration statement pursuant to Rule 430A(a) of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration Statement at
the time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations), except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus on file with the Commission at the time
the Registration Statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus, at the time of filing
thereof, has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included
-2-
<PAGE>
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus, and any amendments
or supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that none of the representations and warranties
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21 of the Registration Statement. The Company
and each of its subsidiaries has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company and each of its subsidiaries is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company taken as a whole; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is not in
material violation of its charter or bylaws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties or assets may be bound, except for any such
violations or defaults which, individually or in the aggregate, would not have a
material adverse effect of the condition (financial or otherwise), earnings,
operations or business of the Company taken as a whole; and the Company is not
in violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestc or
foreign, having jurisdiction over the Company or over its properties or assets.
(d) The Company holds such permits, licenses, consents,
exemptions, franchises, authorizations and other approvals from insurance
departments and other governmental or regulatory authorities (including, without
limitation, insurance licenses from the insurance regulatory agencies of the
various states or other jurisdictions where it conducts business), and has made
all filings with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals, including,
without limitation, under any applicable environmental laws, as are necessary to
own, lease, license and operate its respective properties and to conduct its
business, and the Company has fulfilled and performed all material obligations
necessary to maintain such authorizations and insurance licenses. Each such
authorization and insurance license is valid and in full force and effect and
the Company is in compliance with all of the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such authorization or insurance license or
result in any other impairment of the rights of the holder of any such
authorization or insurance license; such authorizations and insurance licenses
contain no restrictions that are burdensome to the Company; and no insurance
regulatory agency or body has issued
-3-
<PAGE>
any order or decree impairing, restricting or prohibiting the payment of
dividends by any of the Company's subsidiaries to the Company.
(e) The Company has full legal right, power and authority
to enter into this Agreement and the Representatives' Warrant Agreement and to
perform the transactions contemplated hereby and thereby. Each of this
Agreement and the Representatives' Warrant Agreement has been duly authorized,
executed and delivered by the Company and is a valid and binding agreement on
the part of the Company, enforceable in accordance with its terms, except as
rights to indemnification under this Agreement or the Representatives' Warrant
Agreement may be limited by applicable law and except as the enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
Representatives' Warrant Agreement and the consummation of the transactions
herein or therein contemplated will not violate any provisions of the charter,
bylaws or other organizational document of the Company and will not result in a
breach or violation of any of the terms and provisions of, or constitute, either
by itself or upon notice or the passage of time or both, a default under any
bond, debenture, note or other evidence of indebtedness, or under any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which its
properties or assets may be bound, or any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties or assets.
(f) No consent, approval, authorization, license, waiver,
registration or order of, or qualification with, any governmental body or
authority, regulatory or administrative agency (including, without limitation,
any insurance regulatory body or agency), governmental commission, court or
tribunal (or any department, bureau or division thereof) or any arbitral body
having jurisdiction over the Company is required for (i) the execution and
delivery of this Agreement or the Representatives' Warrant Agreement; (ii) the
consummation by the Company of the transactions contemplated herein and therein
and in the Registration Statement; (iii) the valid authorization, issuance, sale
and delivery of the Shares or the execution, delivery and performance of this
Agreement; or (iv) for the use of proceeds to be received by the Company from
such sale in the manner described under the caption "Use of Proceeds" contained
in the Prospectus and in any Preliminary Prospectus, except such as may be
required under the Act, the Exchange Act, or under state or other securities,
Blue Sky or insurance laws, or such approvals from various state insurance
departments that have been obtained, all of which requirements have been
satisfied in all material respects.
(g) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, or any of its officers or any of its properties, assets or rights
before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its officers or properties
or otherwise that (i) is reasonably likely to result in any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company or might materially and adversely affect
its properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed; and there are no
agreements, contracts, leases or documents of the Company of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations or by the Securities Exchange Act of 1934 (the
"Exchange Act") or the rules and regulations of the Commission thereunder that
have not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
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(h) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms to the statements
relating thereto contained in the Registration Statement and the Prospectus (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Shares and the Option Shares have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of shareholders exists with respect to any of the Firm
Shares or Option Shares or the issuance and sale thereof other than those that
will automatically expire upon the consummation of the transactions contemplated
on the Closing Date. No further approval or authorization of any shareholder,
the Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, the
Rules and Regulations or under state or other securities or Blue Sky laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights under the Act and the Rules and
Regulations.
(i) KPMG LLP, which has expressed its opinion with respect
to the financial statements of the Company filed with the Commission as a part
of the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations. The audited financial statements of the Company, together with the
related schedules and notes, and the unaudited financial information, included
in the Registration Statement and Prospectus, fairly present the financial
position and the results of operations of the Company at the respective dates
and for the respective periods to which they apply. Such financial statements
of the Company, together with the related schedules and notes, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods as certified by KPMG LLP. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(j) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, except as
specifically disclosed or contemplated therein, there has been no (i) material
adverse change in the condition (financial or otherwise), earnings, operations
or business of the Company, (ii) transaction entered into by the Company that is
material to the Company, (iii) obligation, direct or contingent incurred by the
Company that is material to the Company, (iv) change in the capital stock or
outstanding indebtedness of the Company that is material to the Company,
(v) dividend or distribution of any kind declared, paid or made on the capital
stock of the Company, or (vi) loss or damage (whether or not insured) to the
property of the Company which has a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company.
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<PAGE>
(k) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations or business of
the Company, (ii) the agreements to which the Company is a party described in
the Registration Statement are valid agreements, enforceable by the Company,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and, to
the best of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of such
agreements, and (iii) the Company has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
Except as set forth in the Registration Statement and Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted and as described in the Registration Statement and the Prospectus.
(l) The Company has timely filed all federal, state, local
and foreign tax returns required to be filed by it and has paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the best of
the Company's knowledge, is reasonably likely to be asserted against the
Company, which might have a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company, and all tax
liabilities are adequately provided for on the books of the Company.
(m) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for its business including, but not limited to, insurance
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect; the Company
has not been refused any insurance coverage sought or applied for; and the
Company does not have any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations or business of the Company.
(n) To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent. No
collective bargaining agreement exists with any of the Company's employees and,
to the best of the Company's knowledge, no such agreement is imminent.
(o) Except as disclosed in or specifically contemplated by
the Prospectus, the Company owns or possesses adequate rights to use all patent
rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses,
service marks and trade names that are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent rights,
trade secrets, mask works, know-how, trademarks, copyrights, licenses, service
marks or trade names; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent rights, trade secrets, mask works, know-how,
trademarks, copyrights, licenses, service marks or trade names which, singly or
in the aggregate, in the event of an unfavorable decision, ruling or finding,
would have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
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<PAGE>
(p) The Common Stock is registered pursuant to
Section 12(g) of the Exchange Act and is approved for quotation on the Nasdaq
National Market, and the Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor
has the Company received any notification that the Commission or the National
Association of Securities Dealers, Inc. ("NASD") is contemplating terminating
such registration or listing.
(q) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(r) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(s) The Company has not at any time during the last five
(5) years (i) made any unlawful contribution to any candidate for foreign office
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(t) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization in violation of law or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
-7-
<PAGE>
(u) The Company has provided to counsel for the
Underwriters a complete and accurate list of all shareholders of the Company and
the number and type of securities held by each shareholder. The Company has
provided to counsel for the Underwriters true, accurate and complete copies of
all of the agreements pursuant to which its officers, directors,
director-nominees and shareholders have agreed to such restrictions (the
"Lock-up Agreements").
(v) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in material compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
that are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its best knowledge, the Company is not
likely to be required to make future material capital expenditures to comply
with Environmental Laws and (iv) no property which is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated site
under applicable state or local law.
(w) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, including without limitation cash receipts,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(x) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers,
directors or director-nominees of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(y) The Representatives' Warrants have been duly and
validly authorized by the Company and upon delivery to you in accordance with
the Representatives' Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(z) The Representatives' Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representatives'
Warrants and when issued upon payment of the exercise price therefor will be
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
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<PAGE>
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE UNDERWRITERS.
The information set forth in the last paragraph on the front cover page (insofar
as such information relates to the Underwriters), in the second paragraph on
page 2, concerning stabilization and over-allotment by the Underwriters, and in
third and eighth paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ ____________ per share (the
"Purchase Price"), the respective number of Firm Shares as hereinafter set
forth. The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of Firm Shares which is set forth opposite the name
of such Underwriter in Schedule A hereto (subject to adjustment as provided in
Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made through
the facilities of The Depositary Trust Company ("DTC"), for the respective
accounts of the several Underwriters, against payment to the Company of the
Purchase Price therefore by wire transfer of Federal or other funds immediately
available in New York City. The time and date of delivery and payment for the
Firm Shares shall be 7:00 A.M., California time, on the third (3rd) full
business day following the first day that Shares are traded (or at such time and
date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date." The certificates for the Firm Shares to be so
delivered will be made available to you at such office or such other location as
you may reasonably request for checking at least one (1) full business day prior
to the Closing Date and will be in such names and denominations as the
Representatives may request, such request to be made at least two (2) full
business days prior to the Closing Date.
On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 300,000 Option
Shares from the Company at the Purchase Price. Such option may be exercised by
the Representatives on behalf of the several Underwriters on one or more
occasions in whole or in part during the forty-five (45) day period after the
date on
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<PAGE>
which the Firm Shares are initially offered to the public, by giving written
notice to the Company. The number of Option Shares to be purchased by each
Underwriter upon the exercise of such option shall be the same proportion of the
total number of Option Shares to be purchased as the number of Firm Shares
purchased by such Underwriter (set forth in Schedule A hereto) bears to the
total number of Firm Shares purchased by the several Underwriters (set forth in
Schedule A hereto), adjusted by the Representatives in such manner as to avoid
fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 4 shall be made through the facilities of the DTC for
the respective accounts of the several Underwriters against payment of the
Purchase Price therefore by wire transfer of Federal or other funds immediately
available in New York City. Such delivery and payment shall take place at such
place as may be agreed upon by the Representatives (i) on the Closing Date, if
written notice of the exercise of such option is received by the Agent at least
three (3) full business days prior to the Closing Date, or (ii) on a date which
shall not be later than the fifth (5th) full business day following the date the
Company receives written notice of the exercise of such option, if such notice
is received by the Company less than three (3) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location as you may
reasonably request for inspection at least two (2) full business days prior to
the date of payment and delivery and will be in such names and denominations as
you may request, such request to be made at least three (3) full business days
prior to such date of payment and delivery.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the Purchase Price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Firm Shares or Option Shares, as the case may be,
to be purchased by such Underwriter or Underwriters. Any such payment by you
shall not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder.
Upon exercise of any option provided for in this Section 4, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may reasonably request in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements, the performance of any of the covenants or agreements of the
Company or the compliance with any of the conditions herein contained in each
case in all material respects.
The Company is advised by the Representatives that the several
Underwriters intend to make an initial public offering (as such term is
described
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<PAGE>
in Section 12 hereof) of their respective portions of the Shares as soon after
the execution and delivery of this Agreement as in the Representatives' judgment
is advisable and initially upon the terms set forth in the Prospectus. After
the initial public offering, the several Underwriters may, in their discretion,
vary the public offering price.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; it will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the rules and regulations of the Commission
thereunder and the provisions of this Agreement.
(b) The Company will advise you promptly after it shall
have received notice or obtained knowledge of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use reasonable efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such
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<PAGE>
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares, except that the Company shall not be required in
connection therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to so
execute a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be reasonably
required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
copies of the Registration Statement (three of which will be signed and which
will include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act (three of which will
include all exhibits) all in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
shareholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof
and for so long as the Company is subject to Section 13 or 15 of the Exchange
Act, the Company will furnish to its shareholders as soon as practicable after
the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's shareholders,
(ii) concurrently with furnishing to its shareholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of shareholders' equity, and of cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to shareholders, (iv) as soon
as they are available, copies of all reports and financial statements furnished
to or filed with the Commission, any securities exchange or the NASD, (v) every
material press release and every material news item or article in respect of the
Company or its affairs which was generally released to shareholders or prepared
by the Company, and (vi) any additional information of a public nature
concerning the Company or its business which you may reasonably request. During
such five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and a
registrar (which may be the same entity) for its Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be
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<PAGE>
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), and, in the judgment of the Representatives, a public offering
price of $________ or more per share is available, then the Company shall (i)
reimburse the Representatives in full for its out-of-pocket expenses, including
without limitation, its legal fees and disbursements incurred prior to the
termination; (ii) pay all Blue Sky filing fees and expenses, including Blue Sky
legal fees and disbursements; (iii) indemnify and hold harmless the
Representatives for any expenses incurred by the Company in connection with the
transactions contemplated by this Agreement, including but not limited to
printing expenses and its accounting and legal fees; (iv) not sell any of its
capital stock to the public through another underwriter for a period of at least
twelve (12) months, or if it does so, then the Company shall pay to you $200,000
in addition to the amounts paid to you pursuant to subparagraphs (i), (ii) and
(iii) above, which the Company and you agree is fair compensation to the
Representatives for services performed with respect to the transactions
contemplated hereby; and (v) in the event the Company enters into an agreement
to be acquired or merges, sells all or substantially all of the assets or
otherwise effects a corporate reorganization with any other entity (a "Corporate
Transaction") and, as a result, the public offering contemplated hereby is
abandoned, (x) pay you a cash fee of $250,000, which the Company and you agree
is fair compensation to you for services performed with respect to the public
offering contemplated hereby (such cash fee to be in addition to the amounts
paid to you pursuant to subparagraphs (i), (ii) and (iii) above) or (y) engage
you as the Company's exclusive financial advisor with respect to the Corporate
Transaction and upon request of the Company, you shall act as the Company's
investment banker in connection with any such acquisition and shall render such
services as are customary in connection therewith, in consideration for standard
and customary fees.
(j) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
if reasonably requested by you, forthwith prepare, and, if permitted by law,
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period (as hereinafter defined), the
Company will not, without the prior written consent of the Representatives,
effect the Disposition (as hereinafter defined) of, directly or indirectly, any
Securities other than (i) the sale of the Firm Shares and the Option Shares
hereunder and, (ii) the Company's issuance of options or Common Stock under the
Company's presently authorized stock option plans or restricted stock plans
(collectively, the "Option Plans").
(l) The Company will not release any of its officers,
directors or director-nominees or other shareholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
Cruttenden Roth Incorporated.
6. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto with the SEC and the NASD; the printing of this Agreement, the Agreement
Among Underwriters, the
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Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; all Blue Sky fees and expenses, including related fees and
disbursements of the Representatives' counsel; fifty percent (50%) of all other
fees and disbursements of the Representatives' counsel; the fees and
disbursements of counsel and accountants for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of counsel for the
Underwriters related to such qualification); the Company's road show costs and
expenses, the cost of preparing bound volumes of the documents relating to the
public offering of Common Stock contemplated hereby; and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder.
(ii) In addition to its other obligations under
Section 6(a)(i) hereof, if the Shares are sold pursuant to this Agreement, the
Company will pay to the Representatives a nonaccountable expense allowance equal
to 1 1/2% of the aggregate sales price of the Shares to the public. This
nonaccountable expense allowance with respect to the Firm Shares shall be paid
to you on the Closing Date and the nonaccountable expense allowance with respect
to the Option Shares shall be paid to you on the closing of the sale to you of
such Option Shares. The $50,000 previously paid to the Representatives by the
Company shall be credited against this nonaccountable expense allowance.
(iii) In addition to its other obligations under
Section 8 hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's five (5) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under
Section 8(b) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(b) hereof, they will
reimburse the Company on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which
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are not made to the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 6(a)(iii) and 6(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted pursuant to the Code of Arbitration Procedure
of the NASD in Orange County, California (or as close geographically to Orange
County, California as is reasonably practical). Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in
Sections 6(a)(iii) and 6(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 8(a) and 8(b) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(d)
hereof.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., California time, on the date of this Agreement, or
such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge of the Company
or any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issuance, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such documents and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) You shall be satisfied that since the respective dates
as of which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock of the Company
other than pursuant to the exercise of outstanding options and warrants
disclosed in the Prospectus or any material change in the indebtedness of the
Company, (ii) except as set forth or contemplated by the Registration Statement
or the Prospectus, no material verbal or written agreement or other transaction
shall have been entered into by the Company, which is not in the ordinary course
of business, (iii) no loss or damage (whether or not insured) to the property of
the Company shall have been sustained which materially and adversely affects the
condition (financial or otherwise), business, results of operations or prospects
of the Company, (iv) no legal or governmental action, suit or proceeding
affecting the Company which is material to the Company or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened, other than any such action, suit or proceeding which
is disclosed in the Prospectus, and (v) there shall not have been any material
change in the condition (financial or otherwise), business,
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management, results of operations or prospects of the Company which makes it
impractical or inadvisable in the judgment of the Representatives to proceed
with public offering or purchase the Common Shares as contemplated hereby.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, an opinion
of Rutan & Tucker, LLP, counsel for the Company, dated the Closing Date or such
later date on which Option Shares are purchased, addressed to the Underwriters
(and stating that it may be relied upon by Underwriters' Counsel in rendering
its opinion pursuant to Section 7(d) of this Agreement) and with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) The Company and each of its subsidiaries has been
duly incorporated and is validly existing and in good standing under
the laws of the jurisdiction of its incorporation;
(ii) The Company and each of its subsidiaries has full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration
Statement;
(iii) The Company and each of its subsidiaries is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in
good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business
of the Company taken as a whole. To such counsel's knowledge, Company
has no subsidiaries or other than as listed in Exhibit 21 to the
Registration Statement;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization"; all outstanding shares of capital stock of
the Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, have not been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
without limiting the foregoing, to such counsel's knowledge, there are
no preemptive or other rights to subscribe for or purchase any of the
Shares;
(v) The certificates evidencing the Shares to be
delivered hereunder are in due and proper form under California law
and when duly countersigned by the Company's transfer agent and
registrar and delivered to you against payment of the agreed
compensation in accordance with this Agreement, the Firm Shares and
the Option Shares, represented thereby will be duly and validly issued
and fully paid and nonassessable, and will not have been issued in
violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders and will conform in all respects to the description
thereof in the Registration Statement;
(vi) the Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
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(vii) The Company has the corporate power and authority
to enter into the Representatives' Warrant Agreement and to issue,
sell and deliver to the Representatives the Representatives' Warrants
to be issued and sold by it thereunder;
(viii) Each of this Agreement, the Representatives'
Warrant Agreement and the Representatives' Warrants has been duly
authorized by all necessary corporate action on the part of the
Company and has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid
and binding agreement of the Company, enforceable in accordance with
its terms, except insofar as indemnification provisions may be limited
by applicable law and to which counsel need not express any opinion
and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements and schedules included in the Registration Statement as to
which such counsel need express no opinion), as of the effective date
of the Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations;
(xi) The statements in the Registration Statement and
Prospectus under the captions "Business - Government Regulations,"
"Management," "Certain Transactions," "Description of Capital Stock"
and "Shares Eligible For Future Sale," and in the Registration
Statement in Item 14 insofar as they constitute matters of law or
legal conclusions or are descriptions of contracts, agreements or
other documents are accurate and complete in all material respects and
fairly present the information contained therein;
(xii) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required to
be presented by the Act and the applicable Rules and Regulations and
the Company is not in violation of its charter or bylaws, or other
organizational documents;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement that are not described or referred to
therein or filed as required;
(xiv) The execution and delivery of this Agreement and
the Representatives' Warrant Agreement and the performance by the
Company of its obligations hereunder and thereunder will not
(a) result in any violation of the Company's charter, bylaws or other
organizational documents, or (b) result in a material breach or
violation of any of the terms and provisions of, or constitute a
material default under, any material bond,
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debenture, note or other evidence of indebtedness, or under any
material lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the
Company is a party or by which its properties are bound, or any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company or over any of its properties or operations;
(xv) To counsel's best knowledge, no consent, approval,
authorization or order of or qualification with any court, government
or governmental agency or body having jurisdiction over the Company or
over any of its properties or operations is necessary in connection
with the consummation by the Company of the transactions contemplated
in this Agreement and the Representatives' Warrant Agreement, except
such as have been obtained under the Act or such as may be required
under state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of
a character required to be disclosed in the Registration Statement or
the Prospectus by the Act or the Rules and Regulations or by the
Exchange Act or the applicable rules and regulations of the Commission
thereunder, other than those described therein;
(xvii) The Representatives' Warrants have been duly and
validly authorized by the Company and upon delivery to you in
accordance with the Representatives' Warrant Agreement will be duly
issued and legal, valid and binding obligations of the Company;
(xviii) The Representatives' Warrant Stock to be issued by
the Company pursuant to the terms of the Representatives' Warrant have
been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms of the Representatives' Warrant
Agreement, will be duly and validly issued and fully paid and
nonassessable, and to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right of shareholders;
(xix) To such counsel's knowledge, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company that have not been waived; and
(xx) The offer and sale of all securities of the
Company made within the last three years as set forth in Item 15 of
the Registration Statement were exempt from the registration
requirements of the Securities Act, pursuant to the provisions set
forth in such Item, and from the registration or qualification
requirements of all relevant state securities laws.
(xxi) The Company has satisfied the conditions for use
of Form S-1 as set forth in the General Instructions thereto.
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(xxii) No transfer taxes are required to be paid in
connection with the sale and delivery of the Shares to the
Underwriters.
(xxiii) The Company is not subject to regulation as an
"investment company" under the Investment Company Act of 1940, as
amended.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel that leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are
purchased, the Registration Statement and any amendment or supplement thereto,
when such documents became effective or were filed with the Commission (other
than the financial statements and supporting schedules included in the
Registration Statement as to which such counsel need express no comment)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the Closing Date or any later date on which the Option
Shares are purchased, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States upon opinions of local
counsel, and as to questions of fact upon representations or certificates of
officers of the Company, and of government officials, in which case its opinion
is to state that they are so relying and that they have no knowledge of any
material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, an opinion
of Stradling Yocca Carlson & Rauth, in form and substance satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from KPMG LLP, addressed to the Company and the Underwriters, dated the
Closing Date or such later date on which Option Shares are purchased, as the
case may be, confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three (3) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such
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letter, or to reflect the availability of more recent financial statements, data
or information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations or business of the Company from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from KPMG LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth its opinion with respect to its examination of the
balance sheets of the Company as of December 31, 1997 and December 31, 1996 and
related statements of operations, shareholders' equity, and cash flows for the
years ended December 31, 1997 and 1996, and (iii) address other matters agreed
upon by KPMG LLP and you. In addition, you shall have received from KPMG LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of its examination of the Company's financial statements as of September
30, 1998, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed on behalf of the
Company by its President and Chief Financial Officer, to the effect that, and
you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied, in all
material aspects, with all the agreements and satisfied all the
conditions on its part to be performed or satisfied, in all material
respects, at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to their knowledge, are pending or
threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information
required to be included therein by the Act and the Rules and
Regulations or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, and in
all material respects conformed to the requirements of the Act and the
Rules and Regulations or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus that has not been so set forth; and
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(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations or business of the
Company, (b) any transaction that is material to the Company, (c) any
obligation, direct or contingent incurred by the Company, that is
material to the Company, (d) any change in the capital stock or
outstanding indebtedness of the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock
of the Company, or (f) any loss or damage (whether or not insured) to
the property of the Company which has a material adverse effect on the
condition (financial or otherwise), earnings, operations or business
of the Company.
(h) The Company shall have obtained and delivered to you an
agreement from each officer, director and director-nominee of the Company, and
each beneficial owner of five percent or more of the Common Stock immediately
after the offering contemplated hereby, an agreement in writing prior to the
date hereof and in form and substance satisfactory to the Representatives that
such person will, (i) for a period of 180 days from the date hereof (the
"Lock-up Period"), directly or indirectly, neither (A) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by such person or with respect to which
such person has or hereafter acquires the power of disposition, nor (B) enter
into any swap or any other arrangement, agreement or any transaction that
transfer to another, in whole or in part, directly or indirectly, any of the
economic consequences of ownership of the Common Stock, whether any transaction
described in clause (A) or (B) above is settled by delivery of Common Stock or
other securities, in cash or otherwise, or (ii) during the Lock-up Period not
file any registration statement under the Securities Act, or make any demand for
or exercise any right with respect to the registration of any securities of the
Company, in either case without the prior written consent of Cruttenden Roth
Incorporated. Each such person shall also agree during the Lock-up Period and
during the 180-day period immediately following the Lock-up Period (A) not to
make any sales or other dispositions of Common Stock in excess of the number of
shares which such person is permitted to sell pursuant to Rule 144 under the
Securities Act, and (B) in any event, to make all sales or other dispositions of
Common Stock through Cruttenden Roth Incorporated. Each such person will have
also agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. Furthermore, the Company
shall have used its best efforts to obtain Lock-up Agreements to the above
effect from all other beneficial owners of the Common Stock.
(i) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request, including
certificates of officers of the Company as to the
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accuracy of the representations and warranties of the Company, as to the
performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
(j) The Representatives' Warrant Agreement shall have been
entered into by the Company and you, and the Representatives' Warrants shall
have been issued and sold to you pursuant thereto.
(k) The Shares at the Closing Date shall have been duly
listed for trading on the Nasdaq National Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, or any failure of the Company to perform its
obligations hereunder or under law, and (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
agrees to reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company as
described in Section 3 hereof, and, PROVIDED FURTHER, that the indemnity
agreement provided in this Section 8(a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 5(d)
hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
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(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company as described in Section 3 hereof, and agrees to reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; PROVIDED,
HOWEVER, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party which pose a conflict of interest for such counsel, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified parties
under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; PROVIDED that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
-23-
<PAGE>
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims
that are the subject matter of such indemnification.
(d) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company is responsible for the remaining portion,
PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(d) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls the Underwriters or the Company within the meaning
of the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 8, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.
8A. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless
Josephthal & Co. Inc., in its capacity as qualified independent underwriter
("QIU"), against any losses, claims, damages or liabilities, joint or several,
to which the QIU may become subject, under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of the Company herein contained,
or any failure of the Company to perform its obligations hereunder or under law,
(ii) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any claim, action, suit or
proceeding relating to or arising out of the initial offering and sale of the
Shares by the Underwriters as contemplated by the Prospectus and agrees to
reimburse the QIU for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred. The indemnity agreement in
this Section 8A(a)
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<PAGE>
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls the QIU within the meaning of the
Act or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Promptly after receipt by the QIU under this Section 8A
of notice of the commencement of any action, the QIU shall, if a claim in
respect thereof is to be made against the Company under this Section 8A, notify
the Company in writing of the commencement thereof but the omission so to notify
the Company will not relieve the Company from any liability which it may have to
the QIU otherwise than under this Section 8A. In case any such action is
brought against the QIU, and the QIU notified the Company of the commencement
thereof, the Company will be entitled to participate therein and, to the extent
that the Company shall elect by written notice delivered to the QIU promptly
after receiving the aforesaid notice from the Company, to assume the defense
thereof, with counsel reasonably satisfactory to the QIU (who shall not in the
case of clause (ii) of Section 8A(a), except with the consent of the QIU, be
counsel to the Company). Upon receipt of notice from the Company to the QIU of
the Company's election so to assume the defense of such action and approval by
the QIU of counsel, the Company will not be liable to the QIU under this Section
8A for any legal or other expenses subsequently incurred by the QIU in
connection with the defense thereof, other than reasonable costs of
investigation. The Company shall not, without the prior written consent of the
QIU, effect any settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened proceeding in respect of
which the QIU is or could have been a party and indemnification could have been
sought hereunder by the QIU, unless such settlement, compromise or judgment (i)
includes an unconditional release of the QIU from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act by or on behalf of the QIU.
(c) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 8A but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that this Section 8A provides for indemnification in such case, or if
such indemnification is otherwise unavailable to or insufficient to hold
harmless Josephthal, in its capacity as QIU, under subsection (a) above in
respect of any losses, claims, damages or liabilities (or action in respect
thereof) referred to therein, then the Company shall contribute to the
aggregate amount of such losses, claims, damages or liabilities to which the
QIU may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the QIU on the other from the offering of the Shares, it being
understood and agreed that, as between the Company on one hand and the QIU on
the other, the Company is the sole beneficiary of the initial offering and
sale of the Shares contemplated by the Prospectus. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the QIU failed to give the notice required under
subsection (b) above, then the Company shall contribute to such amount paid
or payable by the QIU in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the QIU on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the QIU on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received
by the Company, as set forth in the table on the cover page of the
Prospectus, bear to the fees received by the QIU in connection with this
offering in its capacity as QIU. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand
or the QIU on the
-25-
<PAGE>
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and the QIU agree that it would not be just and equitable if contribution
pursuant to this subsection (c) were determined by PRO RATA allocation or any
other method of allocation that does not take account of equitable
considerations referred to above in this subsection (c). The amount paid or
payable by the QIU as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above in this subsection (c)
shall be deemed to include any legal or other expenses reasonably incurred by
the QIU in connection with investigating, or defending any such action or
claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
contribution agreement in this Section 8A(c) shall extend upon the same terms
and conditions to, and shall inure to the benefit of, each person, if any,
who controls the QIU within the meaning of the Act or the Exchange Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Sections 6, 8
and 8A hereof shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any Underwriter or any controlling
person within the meaning of the Act or the Exchange Act, or by or on behalf of
the Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be postponed for a
further twenty-four (24) hours, if necessary, to allow the Company the privilege
of finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective number
of Firm Shares to be purchased by the remaining Underwriters and substituted
underwriter or underwriters shall
-26-
<PAGE>
be taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, the Company shall not be liable to any
Underwriter (except as provided in Sections 6, 8 and 8A hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 6, 8 and 8A hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., California time, on the second full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 6 and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the Closing Date or on or prior to any
later date on which Option Shares are purchased, as the case may be, (i) if the
Company shall have failed, refused or been unable to perform any agreement on
its part to be performed, or (ii) because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
or (iii) if additional material governmental restrictions, not in force and
effect on the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally established on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market, or trading in securities generally shall have been suspended on either
such exchange or the Nasdaq National Market, or if a banking moratorium shall
have been declared by federal, New York or California authorities, or (iv) if
the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as to interfere materially with the
conduct of the business and operations of the Company regardless of whether or
not such loss shall have been insured, or (v) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets as in your reasonable judgment makes it inadvisable or
impracticable to proceed with the offering, sale and delivery of the Shares, or
(vi) if there shall have been an outbreak or escalation of hostilities or of any
other insurrection or armed conflict or the declaration by the United States of
a national emergency which, in the reasonable opinion of the Representatives,
makes it impracticable or inadvisable to proceed with the public offering of
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<PAGE>
the Shares as contemplated by the Prospectus. Any termination pursuant to any
of subparagraphs (ii) through (vi) above shall be without liability of any party
to any other party except as provided in Sections 7 and 9 hereof. In the event
of termination pursuant to subparagraph (i) above, the Company shall also remain
obligated to pay costs and expenses pursuant to Sections 7 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von
Karman, Suite 100, Irvine, California 92715, telecopier number (949) 852-9603,
Attention: Shelly Singhal; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 17911 Von Karman, Suite 200, Irvine, California 92614, telecopier
number (949) 622-4700, Attention: Michael C. Lowther.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or corporation, other than the parties hereto and their respective executors,
administrators, successors and assigns, and their controlling persons within the
meaning of the Act or the Exchange Act, and the officers and directors referred
to in Section 8 hereof, any legal or equitable right, remedy or claim in respect
of this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or corporation.
No purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase. The Agreement
constitutes the entire agreement and understanding of the parties with respect
to the subject matter hereof.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you on behalf of each of the several Underwriters.
14. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
AMERICAN NATIONAL FINANCIAL, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
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<PAGE>
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO. INC.
On behalf of each of the several Underwriters
named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm
Shares
To Be
Purchased
Underwriters
---------
<S> <C>
Cruttenden Roth Incorporated . . . . . . . . . . . . . . . . . . . .
Josephthal & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
---------
</TABLE>
-31-
<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
LU
[LOGO] AMERICAN NATIONAL FINANCIAL, INC.
---------------------------------
Serving the American Dream
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING
THE STATE OF CALIFORNIA TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 027717 10 7
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
AMERICAN NATIONAL FINANCIAL, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SIGNATURE] [SEAL] [SIGNATURE]
Secretary President
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and
upon the holders thereof as established by the Articles of Incorporation of
the Corporation and by any certificate of determination, and the number of
shares constituting each class or series and the designations thereof, may be
obtained by any shareholder of the Corporation upon written request and
without charge from the Secretary of the Corporation at its corporate
headquarters.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ___________________Custodian___________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act____________________________________________
(State)
UNIF TRF MIN ACT -- _____________Custodian (until age______________)
(Cust)
_________________________under Uniform Transfers
(Minor)
to Minors Act___________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________________
X ______________________________________
X ______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By ____________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
January 22, 1999
American National Financial, Inc.
17911 Von Karman Avenue, Suite 240
Irvine, CA 92614
Gentlemen:
At your request, we have examined the form of Registration Statement on
Form S-1 (the "Registration Statement") which has been filed by American
National Financial, Inc. (the "Company") with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"),
for the purpose of registering 2,000,000 shares of Common Stock of the
Company (including 300,000 shares of Common Stock which may be purchased by
the Underwriters to cover over-allotments, if any), a warrant to purchase
125,000 shares of Common Stock (the "Warrant") and the shares underlying the
Warrant.
We have examined the proceedings relating to the issuance of your
presently outstanding shares of Common Stock and are also familiar with
proceedings taken and proposed to be taken in connection with the issuance
and sale of securities in the manner set forth in the Registration Statement,
as amended.
Subject to the completion of the proceedings contemplated in connection
with the foregoing matters, we are of the opinion that all of the securities
included in the Registration Statement for sale by the Company have been duly
authorized and, when issued and sold in the manner set forth in the
Registration Statement will, upon such issuance and sale, be validly and
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Respectfully submitted,
Rutan and Tucker LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
American National Financial, Inc.:
The audit referred to in our report dated August 26, 1998 relating to the
consolidated financial statements of American National Financial, Inc. as of
and for the year ended December 31, 1997, included the related financial
statement schedules as of and for the year ended December 31, 1997, included
in the registration statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audit. In our
opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
The audit referred to in our report dated August 26, 1998 relating to the
financial statements of ANFI Predecessor included the related financial
statement schedules as of December 31, 1996, and for each of the years in the
two-year period ended December 31, 1996 and the six months ended June 30,
1997, included in the registration statement. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement
schedules based on our audit. In our opinion, such financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We consent to the use of our reports included herein and to the references to
our firm under the heading "Experts" in the prospectus.
KPMG LLP
Orange County, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
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