UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001
Commission File Number 0-24961
AMERICAN NATIONAL FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
California 33-0731548
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1111 E. Katella Avenue, Suite 220, Orange, California 92867
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(Address of principal executive offices) (Zip Code)
(714) 289-4300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common stock, no par value, 7,081,354 shares as of October 29, 2001
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2001
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
September 30, 2001 and December 31, 2000
B. Condensed Consolidated Statements of Earnings 4
for the three-month and nine-month periods ended
September 30, 2001 and 2000
C. Condensed Consolidated Statements of Comprehensive 5
Earnings for the three-month and nine-month periods
ended September 30, 2001 and 2000
D. Condensed Consolidated Statement of Shareholders' Equity 6
for the nine-months ended September 30, 2001
E. Condensed Consolidated Statements of Cash Flows 7
for the nine-month periods ended September 30, 2001 and 2000
F. Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Market Risk Disclosures 13
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 14
Items 2, 3, 4, and 5 of Part II have been omitted because they are not
applicable with respect to the current reporting period.
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL FINANCIAL, INC.
---------------------------------
(Registrant)
By: /s/ Carl A. Strunk
----------------------------
Carl A. Strunk
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Director Date: November 2, 2001
2
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(UNAUDITED)
Current assets:
Cash and cash equivalents ........................................................ $ 10,027 $ 9,450
Short-term investments, at cost, which approximates fair market value ............ 2,590 415
Accrued investment interest ...................................................... 271 145
Trade receivables, net of allowance for doubtful accounts of $2,679 in 2001 and
$2,118 in 2000 ................................................................. 3,510 3,925
Notes receivables, net ........................................................... 1,803 2,141
Deferred tax asset ............................................................... 2,733 3,182
Prepaid expenses and other current assets ........................................ 1,424 819
-------- --------
Total current assets ...................................................... 22,358 20,077
Investment securities available for sale, at fair market value ................... 17,684 10,533
Property and equipment, net ...................................................... 7,803 7,502
Title plants ..................................................................... 2,699 2,699
Deposits with the Insurance Commissioner ......................................... 133 133
Intangibles, net of accumulated amortization of $1,887 in 2001 and $1,471 in 2000 11,361 12,397
-------- --------
Total assets .............................................................. $ 62,038 $ 53,341
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses ...................................... $ 12,379 $ 5,998
Customer advances ................................................................ 4,016 3,087
Current portion of long-term debt ................................................ 563 555
Current portion of obligations under capital leases with affiliates .............. 100 113
Current portion of obligations under capital leases with non-affiliates .......... 143 135
Reserve for claim losses ......................................................... 2,616 2,431
Income tax payable ............................................................... 2,199 1,348
Due to affiliate ................................................................. 2,283 2,294
-------- --------
Total current liabilities ................................................. 24,299 15,961
Long-term debt ................................................................... 3,014 3,528
Obligations under capital leases with affiliates ................................. 748 823
Obligations under capital leases with non-affiliates ............................. 944 1,052
-------- --------
Total liabilities ......................................................... 29,005 21,364
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, 8,365,440 in 2001 and 8,183,931 in 2000 ........................ -- --
Additional paid in capital ....................................................... 27,057 22,744
Retained earnings ................................................................ 11,865 9,409
Accumulated other comprehensive income (loss) .................................... 539 (136)
Less treasury stock, 1,336,637 shares in 2001 and 15,257 shares in 2000, at cost . (6,428) (40)
-------- --------
Total shareholders' equity ................................................ 33,033 31,977
-------- --------
Total liabilities and shareholders' equity ................................ $ 62,038 $ 53,341
======== ========
See accompanying notes to condensed consolidated financial statements
3
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Revenues:
Net title service revenue -- related party ............... $18,670 $11,201 $53,444 $32,137
Escrow fees .............................................. 7,844 5,600 23,335 16,142
Ancillary service fees ................................... 4,285 3,625 12,620 9,485
Investment income ........................................ 338 248 1,913 765
Other revenue ............................................ 2,386 888 5,795 1,639
------- ------- ------- -------
Total revenues .................................... 33,523 21,562 97,107 60,168
------- ------- ------- -------
Expenses:
Personnel costs .......................................... 18,505 13,043 53,238 37,566
Other operating expenses includes $851 and $921
with affiliate for the three-month periods ended
September 30, 2001 and 2000, respectively, and $2,914
and $3,013 with affiliate for the nine-month periods
ended September 30, 2001 and 2000, respectively ..... 8,393 5,728 23,629 16,703
Title plant rent and maintenance ......................... 1,733 1,407 5,748 3,987
------- ------- ------- -------
Total expenses .................................... 28,631 20,178 82,615 58,256
------- ------- ------- -------
Earnings before income taxes ............................. 4,892 1,384 14,492 1,912
Income taxes ............................................. 2,055 567 5,991 784
------- ------- ------- -------
Net earnings ............................................. $ 2,837 $ 817 $ 8,501 $ 1,128
======= ======= ======= =======
Basic earnings per share ................................. $ 0.40 $ 0.10 $ 1.11 $ 0.14
======= ======= ======= =======
Weighted average shares outstanding, basic basis ......... 7,023 8,105 7,654 8,034
======= ======= ======= =======
Diluted earnings per share ............................... $ 0.36 $ 0.10 $ 1.02 $ 0.14
======= ======= ======= =======
Weighted average shares outstanding, diluted basis ....... 7,957 8,105 8,319 8,034
======= ======= ======= =======
Cash dividends per share, actual ......................... $ 0.125 $ 0.100 $ 0.325 $ 0.300
======= ======= ======= =======
Cash dividends per share after giving retroactive effect
to 10% stock dividend .................................. $ 0.125 $ 0.180 $ 0.315 $ 0.273
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements
4
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Net earnings .......................... $ 2,837 $ 817 $ 8,501 $ 1,128
Other comprehensive income -
Unrealized gain (loss) on investment,
securities available for sale (1) ... 337 (20) 675 (391)
------- ------- ------- -------
Comprehensive earnings ................ $ 3,174 $ 797 $ 9,176 $ 737
======= ======= ======= =======
(1) Net of income tax expense (benefit) of $198 and ($12), and $399 and ($230)
for the three-month and nine-month periods ended September 30, 2001 and
2000, respectively.
See accompanying notes to condensed consolidated financial statements
5
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TREASURY ACCUMULATED
COMMON STOCK STOCK ADDITIONAL OTHER TOTAL
---------------- -------------------- PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS (LOSS) EARNINGS EQUITY
----- ---- ------ ------- ------- -------- --------------- -------------
BALANCE, DECEMBER 31, 2000 . 8,184 $ -- (15) $ (40) $22,744 $ 9,409 $(136) $ 31,977
Exercise of stock options,
including associated
tax benefit ......... 98 -- -- -- 356 -- -- 356
Unrealized gain on
investment securities
available for sale .. -- -- -- -- -- -- 675 675
Effect of 10% stock
dividend ............ -- -- -- -- 3,739 (3,739) -- --
Cash dividends ($0.315
per share) .......... -- -- -- -- -- (2,306) -- (2,306)
Issuance of shares ....... 83 -- -- -- 218 -- -- 218
Purchase of treasury
shares .............. -- -- (1.322) (6,388) -- -- -- (6,388)
Net earnings ............. -- -- -- -- -- 8,501 -- 8,501
----- ---- ------ ------- ------- -------- ----- --------
BALANCE, SEPTEMBER 30, 2001 8,365 $ -- (1.337) $(6,428) $27,057 $ 11,865 $ 539 $ 33,033
----- ---- ------ ------- ------- -------- ----- --------
See accompanying notes to condensed consolidated financial statements
6
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ........................................................ $ 8,501 $ 1,128
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization ..................................... 2,023 1,874
(Gain) loss on sale of investments ................................ (1,004) 139
(Gain) loss on disposal of property and equipment ................. 14 (194)
Changes in:
Accounts receivables, net ...................................... 415 (833)
Interest receivable ............................................ (126) 71
Tax benefit associated with the exercise of stock options ...... 81 --
Prepaid expenses and other assets .............................. (15) (52)
Income taxes receivable and deferred income taxes .............. 1,300 2,147
Accounts payable and other accrued expenses .................... 6,244 53
Reserve for claim loss ......................................... 185 51
Due (from) to affiliates ....................................... (11) 96
Customer advances .............................................. 929 1,043
-------- -------
Total cash provided by operating activities ................ 18,536 5,523
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................. (2,092) (1,176)
Proceeds from sale of property and equipment ........................ -- 194
Additions to notes receivable ....................................... (214) (975)
Collections on notes receivable ..................................... 552 117
Purchase of investment securities ................................... (7,342) --
Proceeds from sales of investment securities ........................ 1,870 4,992
Purchase of short-term investment ................................... (2,175) --
Proceeds from short term investments ................................ -- 779
Acquisition of subsidiaries, net of cash received ................... -- (3,140)
-------- -------
Total cash provided by (used in) investing activities ...... (9,401) 791
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 218 664
Repayment of long-term debt ......................................... (506) (525)
Payments of capital lease obligations ............................... (188) 179
Dividends paid ...................................................... (2,169) (2,199)
Exercise of stock options ........................................... 275 --
Repurchase of capital stock ......................................... (6,188) --
-------- -------
Total cash used in financing activities .................... (8,558) (1,881)
-------- -------
Increase in cash and cash equivalents ............................... 577 4,433
Cash and cash equivalents at the beginning of period ................ 9,450 3,361
-------- -------
Cash and cash equivalents at end of period .......................... $ 10,027 $ 7,794
======== =======
See accompanying notes to condensed consolidated financial statements
7
AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
------ -------
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest ....................................................... $ 328 $ 125
Income taxes ................................................... 5,050 42
PURCHASE OF SUBSIDIARIES:
Tangible assets acquired at fair value excluding cash received .... $ -- $ 5,750
Cost in excess of net assets acquired ............................. --
Liabilities assumed at fair value ................................. -- (2,610)
------ -------
Net cash used to acquire business ................................. $ -- $ 3,140
------ -------
Non-cash investing activities:
Dividend declared and unpaid ................................... $ 881 $ 733
See accompanying notes to condensed consolidated financial statements
8
Notes to Condensed Consolidated Financial Statements
Note A -- Basis of Financial Statements
The financial information included in this report includes the accounts of
American National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with auditing standards generally
accepted in the United States of America and the instructions to Form 10-Q and
Article 10 of Regulation S-X. All adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation have been included. This
report should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
Certain reclassifications have been made to the 2000 Consolidated Financial
Statements to conform to classifications used in 2001.
Note B -- Cash Dividend
On September 26, 2001, the Company's Board of Directors declared a quarterly
cash dividend of $.125 per share, a 25% increase over previous quarterly
dividends, payable on October 22, 2001, to stockholders of record on October 8,
2001.
Note C -- Department of Insurance
In June 2001, auditors from the State of California Department of Insurance
commenced an examination of American Title Company ("ATC"). The examination is
in its preliminary stages and is currently anticipated to continue for the next
six months.
At this time, the Company does not believe that the result of this examination
will have a material impact on its financial position.
NOTE D -- Earnings Per Share
The Company presents "basic" earnings per share representing net earnings
divided by the weighted average shares outstanding (excluding all common stock
equivalents), and "diluted" earnings per share, representing the dilutive effect
of all common stock equivalents. The following table illustrates the computation
of basic and diluted earnings per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2001 2000 2001 2000
------ ------- ------ ------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)
Net earnings, basic and diluted basis ............................... $2,837 $ 817 $8,501 $1,128
====== ======= ====== ======
Weighted average shares outstanding during the period, basic basis .. 7,023 8,105 7,654 8,034
Plus: Common stock equivalent shares assumed from
conversion of options ............................................. 934 -- 665 --
------ ------- ------ ------
Weighted average shares outstanding during the period,
diluted basis ..................................................... 7,957 8,105 8,319 8,034
====== ======= ====== ======
Basic earnings per share ............................................ $ 0.40 $ 0.10 $ 1.11 $ 0.14
====== ======= ====== ======
Diluted earnings per share .......................................... $ 0.36 $ 0.10 $ 1.02 $ 0.14
====== ======= ====== ======
9
NOTE E -- Share and Per Share Restatement
On May 24, 2001, the Company declared a 10% stock dividend to shareholders of
record as of June 7, 2001, payable on June 21, 2001. The fair value of the
additional shares of common stock issued in connection with the stock dividend
was credited to additional paid in capital and a like amount was charged to
retained earnings.
All data with respect to earnings per share, dividends per share and share
information, including price per share where applicable, in the Condensed
Consolidated Financial Statements has been retroactively adjusted to reflect the
stock dividend.
NOTE F -- Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business
combinations be accounted for under the purchase method. The statement further
requires separate recognition of intangible assets that meet one of two
criteria. The statement applies to all business combinations initiated after
June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of 2001 at which
time amortization will cease and the Company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. While
the ultimate impact of the new accounting standards has yet to be determined,
goodwill amortization expense for the nine months ended September 30, 2001 was
$416,000.
NOTE G -- Settlement Agreement
During the third quarter 2001, American National Financial, Inc. entered into a
settlement agreement relating to a prior acquisition, resulting in a goodwill
reduction in the amount of $620,000, thereby reducing intangible assets on the
balance sheet.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. The reader should consult the risk factors
listed from time to time and other information disclosed in the Company's
reports on Forms 10-K and filings under the Securities Act of 1933, as amended.
Results of Operations
Total revenues for the third quarter ended September 30, 2001 increased 55.5% to
$33.5 million from $21.6 million in the comparable 2000 period. Total revenues
for the nine-month period ended September 30, 2001 increased 61.4% to $97.1
million from $60.2 million for the same prior year period. The increase in total
revenues for the three-month and nine-month periods is largely a result of
higher refinance activities related to interest rate decreases beginning in late
2000, caused by actions taken by the Federal Reserve Board. These actions
resulted in bringing interest rates to their lowest levels in approximately two
years, which is a 400 basis point reduction since January 1, 2001.
10
Net Title Service Revenue. Net title service revenue increased $7.5 million, or
66.7% to $18.7 million from $11.2 million, and $21.3 million or 66.3% to $53.4
million from $32.1 million, for the three-month and nine-month periods ended
September 30, 2001, respectively, this is the result of increases in both closed
resale orders and refinance orders. In both the three and nine-month periods
ended September 30, 2001 the average fee per file decreased to $948 and $913
compared with $1,013 and $962 in the comparable 2000 period. The fee per file
decrease is consistent with the mix of title orders closing in a refinance
driven market compared to the higher fee per file resale business.
The following table depicts quarterly title and escrow orders opened and closed
for the first, second and third quarter of 2000 and 2001.
Orders Orders
Quarter Opened Closed
------ ------
First Quarter 2001 ...... 59,449 26,202
Second Quarter 2001 ..... 45,509 33,753
Third Quarter 2001 ...... 41,353 30,474
First Quarter 2000 ...... 27,178 16,651
Second Quarter 2000 ..... 26,690 17,802
Third Quarter 2000 ...... 25,491 17,462
Escrow Fees. Escrow fees for the third quarter of 2001 increased $2.2 million,
or 40.1% to $7.8 million. For the nine months ended September 30, 2001, escrow
fees increased $7.2 million, or 44.6% to $23.3 million. Escrow fees are
primarily related to title insurance activity generated by the Company's direct
operations. The increase in escrow fees is primarily the result of market
conditions relating to refinance activity largely fueled by continued interest
rate decreases.
Ancillary Service Fees. Ancillary service fees relate partly to the level and
mix of business, as well as the performance of certain ancillary service
businesses. Ancillary service fees for the three-months ended September 30, 2001
increased $660,000, or 18.2% to $4.3 million from $3.6 million in the comparable
2000 period. The increase in the three-month period ended September 30, 2001 is
attributed to the Company's strategy to grow its ancillary service business.
Ancillary service fees for the nine-months ended September 30, 2001, increased
$3.1 million, or 33.1% to $12.6 million from $9.5 million for the 2000 period.
The Company continues to expand its ancillary service businesses by leveraging
its core title and escrow businesses and its national presence.
11
Investment Income. Investment and interest income are primarily a function of
securities markets and interest rates and the amount of cash available for
investment. The Company strengthened its balance sheet with the acquisition of
National Title Insurance of New York, Inc. ("National") and shifted to a fixed
income portfolio. Investment income in the three months ended September 30, 2001
increased $90,000 or 36.3% to $338,000 from $248,000 in the corresponding 2000
period. The increase in investment and interest income earned in the three
months ended September 30, 2001 primarily results from an increase in average
invested assets. Investment and interest income for the nine months ended
September 30, 2001 increased $1.1 million, or 144%, to $1.9 million from
$765,000 in the same 2000 period. The $1.1 million increase resulted from the
realized gain on sale of equity securities.
Other Revenue. Other revenue for the three months ended September 30, 2001 and
2000 increased $1.5 million, or 168.7% to $2.4 million from $888,000. Other
revenue for the nine months ended September 30, 2001 and 2000 increased $4.2
million, or 253.6% to $5.8 million from $1.6 million in the comparable 2000
period. The increase in the three-month and nine-month periods ended September
30, 2001 and 2000 is attributed to the Company's strategy to expand its National
agency presence.
The Company's operating expenses consist primarily of personnel and other
operating expenses, which are incurred as orders are received and processed. Net
title service revenue and certain other fees are not recognized as income until
the transaction closes. As a result, revenue lags approximately 60-90 days
behind expenses and therefore gross margins may fluctuate.
Personnel Costs. Personnel costs include base salaries, commissions and bonuses
paid to employees and are the most significant operating expense incurred by the
Company. These expenses fluctuate with the level of orders opened and closed and
the mix of revenue. Personnel costs, as a percentage of total revenue, exclusive
of investment income, decreased to 55.8% for the three months ended September
30, 2001 compared with 61.2% for the corresponding period in 2000. The
percentage decrease is the result of the Company's ability to handle increased
refinance activity without significant increase in staffing. For the nine months
ended September 30, 2001 and 2000, personnel expenses as a percentage of total
revenue, exclusive of investment income, decreased to 55.9% from 63.2%.
Other Operating Expenses. Other operating expenses consist of facilities
expenses, escrow losses, postage and courier services, data processing expense,
general insurance, trade and notes receivable allowance and depreciation. Other
operating expenses as a percentage of total revenue, exclusive of investment
income, decreased to 25.3% for the three months ended September 30, 2001
compared with 26.9% for the corresponding 2000 period. Other operating expenses
as a percentage of total revenue, exclusive of investment income, decreased to
24.8% for the nine months ended September 30, 2001 compared with 28.1% for the
corresponding 2000 period. The Company maintains aggressive cost control
programs in order to keep operating expenses consistent with levels of revenue;
however, certain fixed costs are incurred regardless of revenue levels,
resulting in quarter over quarter and year over year percentage fluctuations.
Title Plant Rent and Maintenance Expense. Title plant rent and maintenance
expense totaled $1.7 million and $1.4 million for the three-month periods ended
September 30, 2001 and 2000, respectively, and $5.7 million and $4.0 million for
the nine-month periods ended September 30, 2001 and 2000, respectively. Title
plant rent and maintenance expense decreased slightly as a percentage of total
revenue, exclusive of investment income, to 5.2% from 6.6% in the three-month
periods ended September 30, 2001 and 2000, respectively, and to 6.0% and 6.7% of
total revenues, exclusive investment income, for the nine-month periods ended
September 30, 2001 and 2000. The percentage decrease in both the three and
nine-month periods in title plant expense is primarily a result of
renegotiations with several providers in California and Arizona resulting in
consistent cost reductions for the Company.
12
Income Taxes. Income taxes for the three-months ended September 30, 2001 and
2000, as a percentage of earnings before income taxes was 42.0% and 41.0%.
Income taxes for the nine-months ended September 30, 2001 and 2000, as a
percentage of earnings before income taxes was 41.3% and 41.0%. Income taxes as
a percentage of earnings before income taxes remains consistent, however, any
future fluctuations could be attributable to the effect of state income taxes on
the Company's primary subsidiary, the wholly-owned underwritten title company,
and the ancillary service companies; a change in the amount and the
characteristics of net earnings, operating income versus investment income; and
the tax treatment of certain items.
Liquidity and Capital Resources
The Company's current cash requirements include debt service, debt relating to
capital leases, personnel and other operating expenses and taxes. The Company
believes that all anticipated cash requirements for current operations will be
met from internally generated funds. The Company's cash requirements include
expenses relating to the development of National business.
One source of the Company's funds is distributions from its subsidiaries. As a
holding company, the Company may receive 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 company collects premiums
and fees and pays underwriting fees and operating expenses. The underwritten
title company is restricted only to the extent of maintaining minimum levels of
working capital and net worth, but is not restricted by state regulations or
banking authorities in their ability to pay dividends and make distributions.
National is subject to regulations that restrict its ability to pay dividends or
make other distributions of cash or property to its parent company without prior
approval from the Department of Insurance of the State of New York. At September
30, 2001, the maximum amount of dividends which can be paid by National to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions. No dividends, including any dividends paid in the preceding twelve
months, which exceed 10% of the outstanding capital shares can be paid without
prior approval unless after deducting dividends National has surplus to
policyholders at least equal to the greater of 50% of its reinsurance reserves
or 50% of the minimum capital required. Additionally, dividends are further
limited to National's earned surplus.
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 company ("UTC") and
other subsidiary operations is invested primarily in short-term cash and cash
equivalents.
The short-term and long-term liquidity requirements of the Company, the
insurance company, UTC and ancillary subsidiaries are monitored regularly. The
Company and its subsidiaries forecast their daily cash needs and review their
short-term and long-term projected sources and use of funds, as well as the
asset, liability, investment and cash flow assumptions for future projects.
Item 3. Quantitative and Qualitative Market Risk Disclosures
There have been no material changes in the market risk described in our annual
report on Form 10-K for the year ended December 31, 2000.
Interest Rate Risk
The Company's fixed maturity investments and borrowings are subject to interest
rate risk. Increases and decreases in prevailing interest rates generally
translate into decreases and increases in fair values of those instruments.
Additionally, fair values of interest rate sensitive instruments may be affected
by the creditworthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions.
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Equity Price Risk
The carrying values of investments subject to equity price risks are based on
quoted market prices or management's estimates of fair value as of the balance
sheet date. Market prices are subject to fluctuation and, consequently, the
amount realized in the subsequent sale of an investment may significantly differ
from the reported market value. Fluctuation in the market price of a security
may result from perceived changes in the underlying economic characteristics of
the investee, the relative price of alternative investments and general market
conditions. Furthermore, amounts realized in the sale of a particular security
may be affected by the relative quantity of the security being sold.
Part II: OTHER INFORMATION
Item 1. In the ordinary course of business, the Company is involved
in various pending and threatened litigation matters related to
its operations, some of which include claims for punitive or
exemplary damages. Management believes that no actions depart
from customary litigation incidental to the business of the
Company and that the resolution of all such litigation will not
have a material adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.20 Employment Agreement by and between American National Financial,
Inc. and Carl A. Strunk, as of August 14, 2001.
(b) Reports on Form 8-K:
None.
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EXHIBIT INDEX
10.20 Employment Agreement by and between American National Financial,
Inc. and Carl A. Strunk, as of August 14, 2001.