Edgar Filing: AMERICAN NATIONAL FINANCIAL INC

1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarter Ended June 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, 7,079,415 shares as of August 1, 2001

FORM 10-Q

QUARTERLY REPORT

Quarter Ended June 30, 2001

TABLE OF CONTENTS

Page Number
-----------

Part I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

A. Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000 3

B. Condensed Consolidated Statements of Earnings
for the three-month and six-month periods ended
June 30, 2001 and 2000 4

C. Condensed Consolidated Statements of Comprehensive
Earnings for the three-month and six-month periods
ended June 30, 2001 and 2000 5

D. Condensed Consolidated Statement of Shareholders'
Equity for the six-months ended June 30, 2001 6

E. Condensed Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 2001
and 2000 7

F. Notes to Condensed Consolidated Financial Statements 9

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10

Item 3. Quantitative and Qualitative Market Risk Disclosures 13

Part II: OTHER INFORMATION

Item 2. Changes in Security 13

Item 4. Submission of Matter to Vote of Security Holders 14

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: August 9, 2001

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)

JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents ............................ $ 14,666 $ 9,450
Short-term investments, at cost, which approximates
fair market value .................................. 615 415
Accrued investment interest .......................... 145 145
Trade receivables, net of allowance for doubtful
accounts of $2,516 in 2001 and $2,118 in 2000 ...... 4,321 3,925
Notes receivables, net ............................... 1,760 2,141
Deferred tax asset ................................... 2,960 3,182
Prepaid expenses and other current assets ............ 963 819
-------- --------
Total current assets ........................... 25,430 20,077
Investment securities available for sale, at fair
market value ....................................... 10,313 10,533
Property and equipment, net .......................... 7,787 7,502
Title plants ......................................... 2,699 2,699
Deposits with the Insurance Commissioner ............. 133 133
Intangibles, net of accumulated amortization of $1,752
in 2001 and $1,471 in 2000 ......................... 12,115 12,397
-------- --------
Total assets ................................... $ 58,477 $ 53,341
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and other accrued expenses .......... $ 11,156 $ 5,998
Customer advances .................................... 3,645 3,087
Current portion of long-term debt .................... 560 555
Current portion of obligations under capital
leases with affiliates ............................. 104 113
Current portion of obligations under capital
leases with non-affiliates ......................... 140 135
Reserve for claim losses ............................. 2,493 2,431
Income tax payable ................................... 2,127 1,348
Due to affiliate ..................................... 2,588 2,294
-------- --------
Total current liabilities ...................... 22,813 15,961
Long-term debt ....................................... 3,066 3,528
Obligations under capital leases with affiliates ..... 774 823
Obligations under capital leases with non-affiliates . 981 1,052
-------- --------
Total liabilities .............................. 27,634 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, 7,079,415 in 2001
and 8,168,678 in 2000 .............................. -- --
Additional paid in capital ........................... 27,025 22,744
Retained earnings .................................... 9,843 9,409
Accumulated other comprehensive income (loss) ........ 202 (136)
Less treasury stock, 1,257,036 shares in 2001 and
15,257 shares in 2000, at cost ..................... (6,227) (40)
-------- --------
Total shareholders' equity ..................... 30,843 31,977
-------- --------
Total liabilities and shareholders' equity ..... $ 58,477 $ 53,341
======== ========

See accompanying notes to condensed consolidated financial statements

AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)

Revenues:
Net title service revenue -- related party .......... $20,017 $11,247 $34,774 $20,936
Escrow fees ......................................... 8,650 5,686 15,491 10,542
Other service charges ............................... 6,329 3,746 11,744 6,609
Investment income ................................... 289 237 1,575 518
------- ------- ------- -------
Total revenues ...................................... 35,285 20,916 63,584 38,605
======= ======= ======= =======

Expenses:
Personnel costs ..................................... 18,846 12,705 34,733 24,523
Other operating expenses includes $1,129 and $965
with affiliate for the three-month periods ended
June 30, 2001 and 2000, respectively, and $2,064
and $1,914 with affiliate for the six-month periods
ended June 30, 2001 and 2000, respectively ........ 8,406 5,674 15,236 10,974
Title plant rent and maintenance .................... 2,264 1,448 4,015 2,581
------- ------- ------- -------
Total expenses ................................ 29,516 19,827 53,984 38,078
======= ======= ======= =======

Earnings before income taxes ........................ 5,769 1,089 9,600 527
Income tax .......................................... 2,365 446 3,936 216
------- ------- ------- -------
Net earnings ........................................ $ 3,404 $ 643 $ 5,664 $ 311
======= ======= ======= =======

Basic earnings per share ............................ $ 0.44 $ 0.08 $ 0.71 $ 0.04
======= ======= ======= =======
Weighted average shares outstanding, basic basis .... 7,748 8,044 7,975 7,998
======= ======= ======= =======

Diluted earnings per share .......................... $ 0.41 $ 0.08 $ 0.67 $ 0.04
======= ======= ======= =======
Weighted average shares outstanding, diluted basis .. 8,386 8,044 8,503 7,998
======= ======= ======= =======
Cash dividends per share, actual .................... $ 0.10 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
Cash dividends per share after giving retroactive
effect to 10% stock dividend ...................... $ 0.10 $ 0.18 $ 0.19 $ 0.18
======= ======= ======= =======

See accompanying notes to condensed consolidated financial statements

AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2001 2000 2001 2000
------- ------ ------ -----
(UNAUDITED) (UNAUDITED)

Net earnings ..................................... $3,404 $ 643 $5,664 $ 311

Other comprehensive income -
Unrealized gain (loss) on investment, securities
available for sale(1) ........................ 13 (189) 583 (182)
------ ----- ------ -----
Comprehensive earnings ........................... $3,417 $ 454 $6,247 $ 129
====== ===== ====== =====

-----------------
(1) Net of income tax expense (benefit) of $7 and $(114), and $212 and $(107)
for the three-month and six-month periods ended June 30, 2001 and 2000,
respectively.

See accompanying notes to condensed consolidated financial statements

AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER TOTAL
---------------- ------------------ PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS (LOSS) EARNINGS EQUITY
------ ------ ------ ------ ---------- -------- --------------- -------------

BALANCE, DECEMBER 31, 2000...... 8,183,931 $ -- (15,257) $ (40) $22,744 $9,409 $ (136) $31,977
Exercise of stock options,
including associated
tax benefit................. 84,663 -- -- -- 294 -- -- 232

Unrealized gain on
investment securities
available for sale.......... -- -- -- -- -- -- 338 338

Stock dividends............... -- -- -- -- 3,769 (3,769) -- --

Cash dividends ($0.20 per
share)...................... -- -- -- -- -- (1,461) -- (1,461)

Issuance of shares............ 83,115 -- -- -- 218 -- -- 218

Purchase of treasury shares... -- -- (1,257,036) (6,187) -- -- -- (6,187)

Net earnings.................. -- -- -- -- -- 5,664 -- 5,664
--------- ---- ---------- ------- ------- ------ ----- -------
BALANCE, JUNE 30, 2001.......... 8,351,709 $ -- (1,272,293) $(6,227) $27,025 $9,843 $ 202 $30,781
--------- ---- ---------- ------- ------- ------ ----- -------

AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- -------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ....................................... $ 5,664 $ 311
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization .................... 1,356 1,242
Gain on sale of investments ...................... (1,004) (139)
Loss (Gain) on disposal of property and equipment 14 (9)

Changes in:
Accounts receivables, net ...................... (396) (497)
Interest receivable ............................ -- 77
Prepaid expenses and other assets .............. 26 (132)
Income taxes receivable and deferred
income taxes ................................. 1,001 1,449
Accounts payable and other accrued expenses .... 5,158 (936)
Reserve for claim loss ......................... 62 20
Due to affiliates .............................. 294 599
Customer advances .............................. 558 806
-------- -------
Total cash provided by operating activities .. 12,733 2,791
-------- -------

CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................. (1,543) (487)
Additions to notes receivable ...................... (126) (770)
Collections on notes receivable .................... 507 24
Proceeds from sales of investment securities ....... 1,562 5,437
Proceeds from short term investments ............... -- 829
Additions to short-term investments ................ (200) --
Acquisition of subsidiaries, net of cash received .. -- (2,747)
-------- -------

Total cash provided by investing activities .. 200 2,286
-------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 218 511
Payments on long-term debt ......................... (457) (477)
Payments of capital lease obligations .............. (124) (94)
Dividends paid ..................................... (1,461) (1,466)
Exercise of stock options .......................... 294 --
Repurchase of capital stock ........................ (6,187) --
-------- -------
Total cash used in financing activities ...... (7,717) (1,526)
-------- -------

Increase in cash and cash equivalents .............. 5,216 3,551
Cash and cash equivalents at the beginning of period 9,450 3,361
-------- -------
Cash and cash equivalents at end of period ......... $ 14,666 $ 6,912
======== =======

See accompanying notes to condensed consolidated financial statements

AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)

SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------ -------
(UNAUDITED)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest ..................................... $ 226 $ 222
Income taxes ................................. 3,096 --

PURCHASE OF SUBSIDIARIES:
Tangible assets acquired at fair value excluding
cash received ................................ $ -- $ 729
Cost in excess of net assets acquired .......... -- 4,905
Liabilities assumed at fair value .............. -- (750)
------ -------
Net cash used to acquire business .............. $ -- $ 4,884
------ -------

Non-cash investing activities:
Dividend declared and unpaid ................ $ 708 $ 733

See accompanying notes to condensed consolidated financial statements

8
9

Notes to Condensed Consolidated Financial Statements

Note A - Basis of Financial Statements

The financial information included in this report includes the accounts of
American National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation have been included. This report
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2000. Certain reclassifications have been made to
the 2000 Consolidated Financial Statements to conform to classifications used in
2001.

Note B - Stock Dividend

The Company's Board of Directors announced on May 24, 2001, the declaration of a
10% stock dividend payable on June 21, 2001 to shareholders of record on June 7,
2001. Fractional shares were cashed out and payments were made to shareholders
in lieu of fractional shares. All data with respect to earnings per share,
dividends per share and share information, including price per share where
applicable, have been retroactively adjusted to reflect the effects of the stock
dividend.

Note C - Cash Dividend

On June 26, 2001, the Company's Board of Directors declared a quarterly cash
dividend of $.10 per share, payable on July 17, 2001, to stockholders of record
on July 2, 2001.

Note D - Stock Repurchase

In a private transaction on June 7, 2001, the Company purchased 894,000 shares
of its common stock from Fidelity National Financial, Inc. for $4.9 million or
$5.45 per share.

Additionally, in the quarter ended June 30, 2001, the Company repurchased 89,650
shares of its common stock in open market transactions for $329,300 (an average
price per share of $3.67). The total number of shares purchased through June 30,
2001 pursuant to the Company's Stock Repurchase Program was 378,293 at a cost of
$1.4 million (an average price per share of $3.70).

Note E - 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 F - Compliance Reporting

The State Banking Department, State of Arizona ("State Banking Department")
commenced April 2, 2001 an examination of American Title Insurance of Arizona,
Inc. ("American of Arizona") as of and for the period ended February 28, 2001.

On May 16, 2001 the State Banking Department delivered their Report of
Examination indicating that American of Arizona, although having made
substantial improvement since its last examination, may still not have been in
compliance with certain state banking regulations.

9
10

On June 9, 2001, American of Arizona provided its response to the State Banking
Department. The Company has stated that it is committed to implement appropriate
measures to ensure future compliance. The Company does not anticipate any
further response from the State Banking Department and considers the matter
complete.

NOTE G - 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2001 2000 2001 2000
------- ------ ------ ------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)

Net earnings, basic and diluted basis ...... $3,404 $ 643 $5,664 $ 311
====== ====== ====== ======

Weighted average shares outstanding during
the period, basic basis .................. 7,748 8,044 7,975 7,998
Plus: Common stock equivalent shares assumed
from conversion of options ............... 638 -- 528 --
------ ------ ------ ------

Weighted average shares outstanding during
the period, diluted basis ................ 8,386 8,044 8,503 7,998
====== ====== ====== ======

Basic earnings per share ................... $ 0.44 $ 0.08 $ 0.71 $ 0.04
====== ====== ====== ======

Diluted earnings per share ................. $ 0.41 $ 0.08 $ 0.67 $ 0.04
====== ====== ====== ======

Note H -- 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 amortizations expense for the six months ended June 30, 2001 was
$281,000.

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 second quarter ended June 30, 2001 increased 68.7% to
$35.3 million from $20.9 million in the comparable 2000 period. Total revenues
for the six-month period ended June 30, 2001 increased 64.7% to $63.6 million
from $38.6 million for the same prior year period. The increase in total revenue
for the three-month and six-month periods is a result of the interest rate
decreases beginning in late 2000, caused by actions taken by the Federal Reserve
Board resulting in the significant increase in refinancing and resale
transactions and the increase of the Company's order count and premium volume.

10
11

Net Title Service Revenue. Net title service revenue increased $8.8 million, or
78.0% to $20.0 million from $11.2 million, and $13.8 million or 66.1% to $34.8
million from $20.9 million, for the three-month and six-month periods ended June
30, 2001, respectively, as the result of an increase in closed title orders and
the increase in the refinance business. For the three and six-month periods
ended June 30, 2001 the average fee per file decreased to $849 and $838 compared
with $954 and $915 in the comparable 2000 period. The fee per file decrease is
indicative of a change in the mix of title orders closing in a refinance driven
market compared to the higher fee per file resale business.

The following table depicts monthly title and escrow orders opened and closed
for the first and second quarter of 2000 and the first and second quarter of
2001.

Orders Orders
Month Opened Closed
----- ------ ------

January 2001 19,057 6,936
February 2001 19,958 8,147
March 2001 20,434 11,119
First Quarter 2001 59,449 26,202

April 2001 16,227 10,886
May 2001 15,851 11,900
June 2001 13,431 10,967
Second Quarter 2001 45,509 33,753

January 2000 8,317 4,788
February 2000 8,950 5,307
March 2000 9,911 6,556
First Quarter 2000 27,178 16,651

April 2000 8,428 5,635
May 2000 9,043 5,924
June 2000 8,801 6,182
Second Quarter 2000 26,272 17,741

Escrow Fees. Escrow fees for the second quarter of 2001 increased $3.0 million,
or 52.1% to $8.7 million. For the six months ended June 30, 2001, escrow fees
were $15.5 million, an increase of $4.9 million, or 47.0%. 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.

Other Service Charges. Other service charges relate partly to the level and mix
of business, as well as the performance of certain ancillary service businesses.
Other service charges for the second quarter of 2001 increased $2.6 million, or
69.0% to $6.3 million from $3.7 million in the comparable 2000 period. The
increase in the three-month period ended June 30, 2001 is attributed to the
Company's strategy to strengthen its ancillary service business. Other services
charges totaled $11.7 million for the six-month period ended June 30, 2001, an
increase of $5.1 million, or 77.7% from other service charges of $6.6 million
for the 2000 period. The Company continues to leverage its core title and escrow
businesses and national presence to successfully expand ancillary service
businesses.

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 second quarter of 2001 increased
$52,000 or 21.9% to $289,000 from $237,000 in the corresponding 2000 period. The
slight increase in investment and interest income earned in the second quarter
ended June 30, 2001 is primarily the result of an increase in average invested
assets. Investment and interest income for the six-month period ended June 30,
2001 totaled $1.6 million compared with $518,000 in the same 2000 period. The
significant increase of $1.1 million resulted from the gain on sale of a block
of equity securities at the quoted market price.

11
12

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. Personnel costs, as a percentage of total revenue, exclusive of
investment income, decreased to 53.9% for the three-month period ended June 30,
2001 compared with 61.4% for the corresponding period in 2000. The decrease in
personnel costs for the three-month period ended June 30, 2001 is the result of
the Company's ability to adjust staffing levels and respond as necessary to
prevailing market conditions. For the six-month periods ended June 30, 2001 and
2000, personnel expenses as a percentage of total revenue were 56.0% and 64.4%,
respectively. Personnel costs totaled $18.8 million and $12.7 million for the
three-month periods ended June 30, 2001 and 2000, respectively and $34.7 million
and $24.5 million for the six-month periods ended June 30, 2001 and 2000,
respectively. These expenses fluctuate with the level of orders opened and
closed and the mix of revenue.

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 expense decreased as a percentage of total revenue, exclusive of
investment income, to 24.0% in the three-month period ended June 30, 2001,
compared with 27.4% for the corresponding 2000 period. Other operating expenses
as a percentage of total revenue decreased to 24.6% for the six-month period
ended June 30, 2001 compared with 28.8% for the corresponding 2000 period. Other
operating expenses totaled $8.4 million and $5.7 million, for the three-month
periods ended June 30, 2001 and 2000, respectively. For the six-month periods
ended June 30, 2001 and 2000, other operating expenses totaled $15.2 million and
$11.0 million, respectively. 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 $2.3 million and $1.4 million for the three-month periods ended
June 30, 2001 and 2000, respectively, and $4.0 million and $2.6 million for the
six-month periods ended June 30, 2001 and 2000, respectively. Title plant rent
and maintenance expense slightly decreased as a percentage of total revenue,
exclusive of investment income, to 6.5% from 7.0% in the three-month periods
ended June 30, 2001 and 2000, respectively, and to 6.5% and 6.8% of total
revenues for the six-month periods ended June 30, 2001 and 2000. The decrease in
title plant expense is primarily a result of renegotiations within several
counties in California and Arizona resulting in maintaining consistent cost
reductions for the Company.

Income tax expense for both the three-month and six-month periods ended June 30,
2001 and 2000, as a percentage of earnings before income taxes was 41.0%. Income
tax expense 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 income, 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 Title Insurance of New York,
Inc. ("National") 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. Cash requirements for the development of National are expected to be
met from current cash balances and internally generated funds.

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 are 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 June 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
equivalent.

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.

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 2. Changes in Securities

The Company's Board of Directors announced on May 24, 2001, the declaration of a
10% stock dividend payable on June 21, 2001 to shareholders of record on June
27, 2001. Fractional shares were cashed out and payments were made to
shareholders in lieu of fractional shares. All data with respect to earnings per
share, dividends per share and share information including price per share where
applicable, have been retroactively adjusted to reflect the effects of the stock
dividend.

Item 4. Submission of Matter to Vote of Securities Holders

On June 26, 2001, the Company held its Annual Meeting of Shareholders pursuant
to a Notice and Proxy Statement dated May 8, 2001. At the meeting, shareholders
elected Michael C. Lowther, Carl A. Strunk, Barbara A. Ferguson and Matthew K.
Fong (7,441,540 for and 52,548 withheld); William P. Foley, II, Wayne D. Diaz
(7,441,356 for and 52,732 withheld); Bruce Elieff and Bruce L. Nelson (7,434,717
for and 59,373 withheld) as Directors recommended by management.