0000892569-01-500865.txt : 20011107 0000892569-01-500865.hdr.sgml : 20011107 ACCESSION NUMBER: 0000892569-01-500865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL FINANCIAL INC CENTRAL INDEX KEY: 0001068843 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 330731548 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24961 FILM NUMBER: 1774185 BUSINESS ADDRESS: STREET 1: 1111 E. KATELLA AVENUE, SUITE 220 CITY: IRVINE STATE: CA ZIP: 92867 BUSINESS PHONE: 7142894300 MAIL ADDRESS: STREET 1: 1111 E. KATELLA AVENUE, SUITE 220 CITY: IRVINE STATE: CA ZIP: 92867 10-Q 1 a76733e10-q.txt FORM 10-Q FOR PERIOD ENDING SEPT. 30, 2001 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. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 33-0731548 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1111 E. Katella Avenue, Suite 220, Orange, California 92867 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 289-4300 ---------------------------------------------------------------- (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. 13 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. 14 EXHIBIT INDEX 10.20 Employment Agreement by and between American National Financial, Inc. and Carl A. Strunk, as of August 14, 2001. EX-10.20 3 a76733ex10-20.txt EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is executed as of August 23, 2001, by and between American National Financial, Inc. (ANFI), a California corporation and its successors (herein called the "Employer"), and Carl A. Strunk, an individual, residing at 123 Via Alicia, Santa Barbara, CA (herein called the "Employee"). The effective date of this Agreement ("Effective Date") shall be August 14, 2001. WITNESSETH: WHEREAS, the Employer wishes to employ the Employee and the Employee wishes to be employed by the Employer; and WHEREAS, the Employee is willing to accept employment, perform such services and duties, and serve the Employer for the compensation hereinafter set forth during the term of this Agreement and the Employer is willing to pay such compensation during such term. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and other good and valuable consideration, the parties hereto agree as follows: 1) Employment Term and Location of Employment. Subject to the conditions hereinafter set forth, the Employer shall employ the Employee and the Employee shall remain in the employment of, and serve the Employer for a period of three (3) years commencing the Effective Date ("The Term"). At the end of each year of this Agreement, the term of this Agreement shall automatically be extended for an additional one (1) year, unless ANFI or the Employee provide the other with written notice prior to the expiration of such year of their intent not to extend the term for an additional year; provided, however, that ANFI shall only be entitled to elect to not extend the term if ANFI or any of its subsidiaries fails to perform in accordance with the budgeted expectations for such entities in the year in which such extension relates. Such budgeted expectations shall be determined by the Board of Directors of ANFI in the exercise of reasonable discretion. Any notice to the Employee by ANFI not to extend the term shall set forth in reasonable detail the basis for the decision not to extend. The term of this Agreement, including any extensions thereof in accordance with this Section 1, shall hereinafter be referred to as the "Term." 2) Duties. The Employee agrees that, during the specified period of his employment, he shall use his best efforts, skills, and abilities to: (a)act as Employer's Chief Financial Officer; and (b)serve as a member of Employer's Board of Directors. 1 3) Devotion of Time. Employee agrees to devote his entire working time, to the business and affairs of the Employer during the term of this Agreement. Notwithstanding, Employer recognizes that Employee serves on the Board of Directors of Micro General Corporation and will continue to do so indefinitely. Employee will not participate in or accept any other business activities or involvements without the prior approval of the Board of Directors of ANFI. 4) Compensation During Employment. During the period of his employment under this Agreement, Employee's compensation and consideration for the performance of his services hereunder shall be as follows, all of which shall be paid or given by Employer: (a) Base Salary. Employee shall receive a base salary ("Base Salary") of $175,000 for first twelve (12) months of his employment, and $200,000 for each twelve (12) months thereafter, with such Base Salary paid ratably each month over each twelve (12) month period (after appropriate deductions for taxes, benefits and other customary items). Such base salary may be reviewed and increased at the discretion of the Chief Executive Officer. b) Incentive Compensation. Employee shall be entitled to receive Merit Compensation based on Employee's and the Company's performance during the preceding year as determined by the Chairman of the Board and the Board of Directors. c) The standard Company benefits enjoyed by the Company's other top executives. d) Company shall pay Employee's membership dues in a social and/or recreational club as deemed necessary and appropriate by Employee to maintain various business relationships on behalf of the Company; provided however, that the company shall not be obligated to pay for any of Employee's personal purchases and expenses at such clubs. e) Company shall provide medical and insurance coverage to employee and his dependants commencing on the date of the execution hereof and so long as this Agreement and all renewals of same are in force and effect. f) Supplemental disability insurance sufficient to provide two-thirds of pre-disability base salary as base salary has been defined in Section 4. The Company shall deduct from all compensation payable under this Agreement to Employee any taxes or withholdings the Company is required to deduct pursuant to state and federal laws or by mutual agreement between the parties. 5) Vacation, Holidays and Sick Time. Employee shall be entitled to paid vacation time for a period of time comparable to Employer's other executive employees and on terms comparable to Employer's other executive employees. Employees shall be entitled to the applicable number of paid sick days and holidays as determined by Employer for all employees of Employer. 2 6) Termination. Termination of this Agreement shall occur upon the earlier of the following events. (a) The expiration of the term of this Agreement; (b) Mutual written consent of all Parties hereto; (c) For Cause. The company may terminate this Agreement immediately for cause upon written notice to the Employee, in which event the Company shall be obligated to pay the Employee that portion of the minimum base compensation set forth in Section 4 due him through the date of termination. Cause shall be limited to gross and willful neglect of duties or criminal or other illegal activities as determined by a court of competent jurisdiction. (d) Without Cause. Either party may terminate this Agreement immediately without cause by giving written notice to the other. If the Company terminates hereunder, it shall pay to the Employee an amount equal to the product of (A) the Employee's minimum base annual salary rate in effect as of the date of termination plus the total bonus paid or payable to the employee for the most recently ended calendar year, multiplied by (B) the greater of the number of years (including partial years) remaining in the term of employment hereunder or the number 2. Such payment to be made in a lump sum on or before the fifth day following the date of termination or as otherwise directed by Employee. All options granted to the Employee which had not vested as of the date of termination hereunder shall vest immediately. The Company shall maintain in full force and effect, for the continued benefit of the Employee for the greater of the number of years (including partial years) remaining in the term of employment hereunder or the number 2, all employee benefit plans and programs in which the Employee was entitled to participate immediately prior to the date of termination provided that the Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Employee's participation in any such plan or program is prohibited, the Company shall, at the Company's expense, arrange to provide the Employee with benefits substantially similar to those which the employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is prohibited. If the Employee terminates hereunder, the Company shall be obligated to pay the Employee the minimum base compensation and a prorated minimum annual bonus as set forth in Sections 3 and 4 due him through the date of termination. (e) Disability. If the Employee fails to perform his duties hereunder on account of illness or other incapacity for a period of nine (9) consecutive months, the Company shall have the right upon written notice to the Employee to terminate this Agreement without further obligation by paying Employee the minimum base salary without offset for the remainder of the term of this Agreement in a lump sum or as otherwise directed by Employee. (f) Death. If the Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and the Employee's legal representatives 3 shall be entitled to receive the base salary for the remainder of the term of this Agreement and the minimum annual bonus without offset prorated throughout the date of termination in a lump sum or as otherwise directed by Employee's legal representative. (g) Effect of Termination. Termination for any cause shall not constitute a waiver of the Company's rights under this Agreement nor a release of employee from any obligation hereunder except his obligation to perform his day-to-day duties as an employee. 7) Severance payment. (a) The Employee may terminate his employment hereunder for "Good Reason," which for purposes of this Agreement shall mean a change in control of the Company. A "change in control" of the Company, for purposes of this Agreement, shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company other than a consolidation or merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger own more than 50% of the voting securities of the surviving corporation immediately after the merger, or (y) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (such as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, Fidelity National Financial, Inc. or any "person" who, on the date hereof, is a director or officer of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, or (iv) during any period of two (2) consecutive years during the Term or any extensions thereof, individuals, who, at the beginning of such period, constitute the Board of Directors, cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. The Employee may only terminate this 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. (b) If the Employee terminates his employment for Good Reason, or, if after a change in control of the Company, the Company shall terminate the Employee's employment in breach of this Agreement or pursuant to Section 6(d), then: (i) The Company shall pay the Employee his minimum base annual salary due him through the date of termination; (ii) In lieu of any further salary and bonus payments or other payments due to the Employee for periods subsequent to the date of 4 termination, the Company shall pay, as severance to the Employee, an amount equal to the product of (A) the Employee's base annual salary in effect as of the date of termination plus the Incentive Compensation Bonus, multiplied by (B) the number of years (including partial years) remaining in the Term or the number 1 (one), whichever is greater; (iii) All options granted to the Employee which had not vested as of the date of termination hereunder shall vest immediately; and (iv) The Company shall maintain in full force and effect, for the continued benefit of the Employee for the number of years (including partial years) remaining in the Term, all employee benefit plans and programs in which the Employee was entitled to participate immediately prior to the date of termination, provided that the Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Employee's participation in any such plan or program is prohibited, the Company shall, at its expense, arrange to provide the Employee with benefits substantially similar to those which the Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is prohibited. (c) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall any compensation or other payments received by the Employee after the date of termination reduce any payments due under this Section 7. (d) To the extent that any or all of the payments and benefits provided for in this Agreement and pursuant to any other agreements with Executive constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for this Section 8(d), would be subject to the excise tax imposed by Section 4999 of the Code, the aggregate amount of the payments and benefits under this Agreement shall be reduced such that the present value (as determined under the Code and applicable regulations) of all payments constituting "parachute payments", is equal to 2.99 times the Executive's "base amount" (as defined in the Code). 8) Complete Agreement. This Agreement together with any previously executed stock option agreement(s) contain the entire agreement of the parties and, except as specifically referred to herein, all prior obligations, proposals and agreements relating to the subject matter hereof have been merged herein except as otherwise set forth in the stock option agreement(s). This Agreement shall not be modified or amended except by agreement in writing duly executed by all the parties hereto. 9) Representations. Each party represents that neither the execution and delivery of this Agreement, nor the transactions and activities contemplated hereby, will violate any agreement or other arrangement by which such party is bound. Each party hereby 5 acknowledges that he and the other parties have not made any warranties, representations or assurances with respect to the subject matter of this Agreement except as are contained herein, and that in the execution hereof and in creating this Agreement, he has made such legal or factual inquiries or determinations ad he deems necessary or desirable and has relied thereon. 10) Headings. The article and section headings in no way define, limit, extend or interpret the scope of this Agreement or of any particular article or section hereof. 11) Additional Documents. Each party hereto agrees to execute with acknowledgment or affidavit, if required, any and all other documents and writings that may be necessary or expedient to achieve the purpose of this Agreement. 12) Number and Gender. When the context in which the words used in this Agreement indicate that such is the intent, words in the singular number shall include the plural and vise versa. References to any gender shall include any other gender as may be applicable under the circumstances. 13) Severability. In the event that any provision of this Agreement shall be held invalid, illegal, or unenforceable, the same shall not affect in any respect whatsoever the validity of any other provisions of this Agreement. 14) Binding on Successors. The provisions of this Agreement subject to the terms and conditions hereof, shall be binding upon and inure to the benefit of (i) Employer's successors and assigns, and (ii) Employee's heirs, executors, and administrators to the extent there are any obligations hereunder following Employees death. 15) Governing Law. This Agreement has been entered into in the State of California, and all questions with respect to the Agreement and the rights and liabilities of the parties hereto shall be governed by the laws of the State. Any action to enforce any rights or to pursue any claims under this Agreement and any related agreements shall be brought only in the Federal or State Courts in County of Orange, State of California and the Parties hereto expressly and irrevocably consent to personal jurisdiction and venue in such courts. 16) Time Period. Time is of the essence in this Agreement. 17) Rights and Remedies are Cumulative. The rights and remedies provided in this Agreement are cumulative, and the use of any one right or remedy by any party shall not preclude or waive such party's right to use any or all other remedies. Said rights and remedies are given in addition to any other rights which any party may have by laws, statute, ordinance, or otherwise. 18) Waiver. No consent or waiver, express or implied, by any party to or of any breach or default by the others in the performance of their obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other parties hereunder. Failure on the part of any party to complain of any act or failure to act of any of the other parties or to declare such other parties in default, irrespective of how long such failure to continues, shall not constitute a waiver by such party of his or its rights hereunder. 6 19) Counterparts. This Agreement may be executed simultaneously or in one or more counterparts, all of which, together, shall constitute one and the same instrument. 20) Corporate Authority. Each individual executing this Agreement on behalf of Employer represents and warrants that he is duly authorized to execute and deliver this Agreement on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the By-Laws of said corporation, and that this Agreement is binding upon Employer in accordance with its terms. 21) Notice. Any approval, disapproval, demand or other notice which any party may desire to give to another party must be in writing and may be given by personal delivery, telecopy, air courier or by mailing the same by registered or certified mail, return receipt requested, to the party hereinafter set forth, or such other address as the parties may hereafter designate: TO EMPLOYEE: Carl A. Strunk 123 Via Alicia Santa Barbara, CA 93105 TO EMPLOYER: American National Financial, Inc. 1111 E. Katella, Suite 220 Orange, CA 92867 22) Life Insurance. Employee shall be entitled to participate in any executive life insurance program and shall receive benefits in such program comparable to other employees of Employer at the same management level. 23) Joint Preparation. All parties to this Agreement have been represented by competent counsel. This Agreement has been jointly prepared by the Parties, and any uncertainties or ambiguities existing in it shall not be interpreted against any of the Parties under the presumptions of California Civil Code Section 1654, but rather shall be interpreted according to the rules generally governing the interpretation of contracts. Dated: August 23, 2001 EMPLOYER AMERICAN NATIONAL FINANCIAL, INC. By: -------------------------------------- Michael C. Lowther Its: Chief Executive Officer 7 Dated: ------------- EMPLOYER By: -------------------------------------- Carl A. Strunk 8